Micro-Economics

Supply and Demand

Dr. Valeria Andreoni

andreov@hope.ac.uk

Recommended Reading:
1) Griffiths, A., Wall, S., 2011, Economics for Business
and Management. London: Pearson Education Ltd
2) Sloman, J., Sutcliffe, M., 2004. Economics for
Business. FT- Prentice Hall
3) Parkin M., 2008. Economics. Addison-Wesley
4) Samuelson, P.A., Nordhaus, W.D., 2005. Economics.
McGraw-Hill
5) Perkins, D, Radelet, S, Lindauer, D., 2006. Economics
of Development. New York: W.W. Norton

Economics:
Micro Economics: analyse the behaviour of individual
entities such as markets, firms and household
A. Smith: The Wealth of Nations (1776)

Macro Economics: analyse the overall performance of

the economy
J.M. Keynes: General Theory of Employment,
Interest and Money (1936)

Economics - Definition
Economics is the study
of how societies use scarce resources
to produce goods and services and distribute
them among different people
Scarce resources:
Natural resources: Land, oil, gas, materials
Human resources: Labour, capacities, abilities
Monetary resource: Money, capital
Production activity: combine scarce resources (input) to obtain goods
and services (output)
Distribution: who can use the goods and services? distribution is an
ethical issue

Economic Problems
1. What combination of goods to produce?
resources are scarce which goods have to be produced?
satisfaction + maximum utility)

Since
(needs

2. How to produce them?

How to produce goods and services by:
minimizing the resources used
maximising the quantity of goods and services produced

3. How much and how to distribute to each person?

How to decide who have to consume the goods and services produced?

Trade-Off
Economy is defined by the existence of Trade-Off
between:
-Utility (satisfaction)
-Costs
-Availability of resources, good and services, money
-.
Economy is matter of CHOICES and COMPROMISES

The Economic Agents

Businesses : to produce goods and services
Households: to consume good and services and
provide labour

Government: to provide services to society

(business and household) tax and spending

The Circular Flow of Economy

Tax

Tax

Government
Services

Services
Price
Goods, Services

Businesses

Households
Labour
Salaries

Natural Environment

Natural
Resource

Summary of Microeconomics contents

1.Consumer theory:
Low of demand
Low of supply
Equilibrium
Elasticity

2. Consumer choices:
Households budget
Utility
Equilibrium

3. Market organization:
Free market
Monopoly
Oligopoly

4. Market failures:
Externalities
Property rights

Demand and Supply

Assuming a competitive market:
market regulated by the low of demand and supply with many buyers
and many sellers, where no single buyer or
seller can influence the price
The demand and supply identify:
how people respond to prices
how prices are determined

Price: the number of that we have to pay to bay a good or

service (absolute price)
Relative price: Ratio of one price to another. Price of a good
and services in term of price of another.

Demand
If you demand something then you:
Want it: are the unlimited desires or wishes that people have for goods and
services
Can afford it: be able to pay Scarcity

Quantity demanded: is the amount of goods and services that a

consumer buy during a given period of time
Demand curve: relationship between the market price of a good and
the quantity demanded
Law of demand:
When the price of a commodity is raised buyers tend to buy less
of the commodity
When the price is lowered, quantity demanded increases

Demand
Law of demand:
When the price of a
commodity is raised
buyers tend to buy
less of the commodity
When the price is
lowered, quantity
demanded increases

Law of Demand
Why does a higher price reduce the quantity demanded:
Substitution Effect: when the price of a good rises, consumers will
substitute other similar goods for it
Income Effect: a hither price reduces the quantity demanded

Market Demand: is found by adding together the quantities demanded

by all individuals at each price
What determine the Market Demand? It can shift
1.Average income
2.Related goods
3.Preferences

Supply
The supply side of the market involves the terms on which businesses
produce and sell their products

Supply curve: for a commodity shows the relationship between its

market price and the amount of that commodity that producers are
willing to produce and sell, other things held constant

Law of supply:
When the price of a commodity is raised sellers tend to sell more
of the commodity
When the price is lowered, the quantity that is offered decrease

Supply
Law of supply:
When the price of a
commodity is raised
sellers tend to sell
more of the
commodity
When the price is
lowered, the quantity
that is offered
decrease

Law of Supply
What determine changes in supply?

1.The price of productive resources

2.The price of related goods produced
3.Expected future prices
4.The number of suppliers
5.Technologies
Px

Qx

Equilibrium in Supply and Demand:

The Market Equilibrium comes at that price and quantity where the
forces of supply and demand are in balance
At the equilibrium price, the amount that buyers want to buy is just equal to
the amount that sellers want to sell
Equilibrium: when the forces of supply and demand are in balance there is no
reason for price to rise or fall, as long as other things remain unchanged
In Equilibrium:
1. the quantity supplied
is = to the quantity
demanded

Px

Qx

2.The price paid by

consumers is = to the
price asked by business