ECF1100 Week 2 Sem1 2022

Introduction

  • Course: ECF1100 Microeconomics

  • University: Monash Business School

  • Instructor: Dr. George Rivers

Week 2 Overview

Topic & Readings

  • Topic: Market forces of supply and demand

  • Reference Chapter: Chapter 4

Review of Week 1

  • Key Concepts:

    • Scarcity

    • Choices

    • Trade-offs

    • Opportunity Cost

    • Comparative Advantage

    • Specialization

    • Economies of Specialization

    • Creating Value

Learning Objectives

  • Understand factors influencing demand for goods/services.

  • Understand factors influencing supply of goods/services.

  • Explain market equilibrium and illustrate with graphs.

  • Use demand and supply graphs to predict price and quantity changes.

Market Definition

  • A market consists of a group of buyers and sellers of a particular good or service.

    • Buyers: Determine demand

    • Sellers: Determine supply

Quantity Demanded

  • Definition: Amount of a good buyers are willing and able to purchase at a given price.

Law of Demand

  • Principle: Holding other factors constant:

    • A decrease in product price leads to an increase in quantity demanded.

    • An increase in product price leads to a decrease in quantity demanded.

Demand Curves

Example: Catherine's Demand Curve for Ice-Cream

  • Prices and Corresponding Quantities:

    • $3.00 -> 1 Ice-Cream

    • $2.50 -> 2 Ice-Creams

    • $2.00 -> 3 Ice-Creams

    • $1.50 -> 4 Ice-Creams

    • $1.00 -> 5 Ice-Creams

Individual vs Market Demand

Demand Schedule:

  • Catherine's Demand:

    • $0.00 = 12 -> Total: 19 at $0.00 (Catherine + Nicholas)

    • $0.50 = 10

  • Market Demand Schedules: Total quantities calculated by adding individual demands.

WTP and Consumer Surplus

  • Willingness to Pay (WTP): Maximum a buyer will pay for a good, indicating value.

  • Consumer Surplus: Difference between WTP and the actual price paid.

Shifts in Demand

Key Variables:

  • Prices of Related Goods:

    • Substitutes: A price decrease in one decreases demand for the other (e.g., movies vs DVDs).

    • Complements: A price decrease in one increases demand for the other (e.g., Xbox and games).

  • Income:

    • Normal Goods: Demand increases with income (e.g., overseas holiday).

    • Inferior Goods: Demand decreases with income (e.g., second-hand furniture).

  • Tastes and Expectations influence demand.

Shifts vs Movements Along the Demand Curve

  • Shifts in demand occur due to factors like preferences or income changes.

  • Movements occur with price changes of the product.

Quantity Supplied

  • Definition: Volume of a good sellers are willing to sell at a specific price.

Law of Supply

  • Principle: Holding everything else constant:

    • A price increase results in an increase in quantity supplied.

    • A price decrease results in a decrease in quantity supplied.

Individual Supply vs Market Supply

Supply Schedule:

  • Tony's Supply:

    • $0.00 -> 0

    • $0.50 -> 0

    • $1.00 -> 1

    • $2.50 -> 4

Producer Surplus

  • Definition: Amount seller is paid minus the lowest price they are willing to accept (seller's cost).

Shifts in Supply

Key Variables:

  • Input Prices

  • Technology

  • Expectations

  • Number of Sellers

Market Equilibrium

  • Definition: Situation where demand equals supply, resulting in a stable price.

  • Example Price: $2.00, where quantity demanded equals quantity supplied.

Market Disequilibrium

  • Surplus: Quantity supplied > quantity demanded.

  • Shortage: Quantity demanded > quantity supplied.

Steps for Analyzing Changes in Equilibrium

  1. Determine if demand or supply curve shifts.

  2. Identify the direction of the shift.

  3. Analyze changes in equilibrium price and quantity.

Demand and Supply Changes

Example Demand Increase

  • Hot weather increases ice-cream demand leading to higher price and quantity sold.

Example Supply Decrease

  • A bushfire reduces ice-cream supply leading to higher price but lower quantity sold.

Simultaneous Changes

  • Effects on price and quantity differ based on the size of shifts in demand and supply.