APPLICATION

OF MICROECONOMICS THEORY
AS ABASIS FOR UNDERSTANDING
THE KEY ECONOMIC VARIABLES

AFFECTING THE BUSINESS

Chapter 5
MICROECONOMICS
focuses on the behavior and purchasing
decisions of individual and firms.
• Market price is determined based on demand
and supply
• Goods and services are distributed through a
system of prices.
• Rationing refers to an artificial control on the
distribution of the supply and demands of
commodities.
DEMAND
the quantity of a good or service that
consumers are willing and able to purchase at
a range of prices at a particular time.
Demand Curve
80
70
Market Demand for Product X 60
50
P 40
Price per unit Quantity Demanded R 30
I 20
P 70 P40 4,000 8,000 C 10

60 30 5,000 12,000 E 0
0 4000 8000 12000 16000 20000 24000
50 20 6,000 20,000 Quantity

QUANTITY
DEMAND CURVE SHIFT
A demand curve shifts when demand variables
other than price change.
FACTORS AFFECTING THE DEMAND FOR A
PRODUCT OTHER THAN ITS PRICE:

1. Consumer income and wealth

2. Price of other goods and services
3. Price of complement products
4. Consumer tastes
5. Group boycott
6. Size of the market
7. Expectations of price increase
THE ELASTICITY OF DEMAND
Price Elasticity of demand is defined as the
relationship between Percent change in Quantity
Demanded and Percent Change in Price
• ELASTIC
if a small rise in price causes consumers to choose a much
smaller amount of a product. The quantity demanded is highly
sensitive to a change in price.
• INELASTIC
if a substantial increase in price results only in a small
reduction in quantity demanded. It indicates flexibility or little
consumer response to variation in price.
 TYPES OF ELASTICITY OF DEMAND
a. Perfectly inelastic b. Relatively inelastic
Despite an increase A percent increase
in price, consumers in price result in a
still purchase the smaller percent
same amount reduction in sales.
c. Unitary elasticity d. Relatively elastic
The percent change in - A percent increase in price
quantity demanded is equal leads to a larger percent
to the percent change in reduction in purchases.
price.
 e. Perfectly elastic

Consumer’s will buy all

of farmer Juan’s corn at the
market price, but none will be
sold above the market price
SUPPLY
• Law of Supply is a principle that states that, there
will be a direct relationship between the price of a
good and the amount of it offered for sale.
Supply Curve
100
0 Qua…

Market Demand for Product X

P
Price per unit Quantity Demanded R
I
P 70 P40 30,000 8,000 C
E
60 30 20,000 4,000
50 20 14,000 2,000

QUANTITY
SUPPLY CURVE SHIFT
-Occurs when supply
variables other than price
change. As an example, if
the costs to produce the
product increase, the
supply curve would shift
upward and to the left.
FACTORS AFFECTING THE SUPPLY FOR A
PRODUCT OTHER THAN ITS PRICE:

1. Price of other goods and services

2. Number of producers
3. Government price controls
4. Price Expectations
5. Government Subsidies
6. Change in production costs or technological
advances
THE ELASTICITY OF SUPPLY
Elasticity of Supply measures the percentage change in the
quantity supplied of a product resulting from a change in the
product price. The elasticity of supply is calculated as follows:

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑

E=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

• Supply is said to be elastic if E> 1, unitary elastic if E= 1, and inelastic

if E< 1.
• Elastic supply means that, a percentage increase in price will create a
larger percentage increase in supply.
MARKET EQUILIBRIUM AND PRICING
• A market is an abstract concept that encompasses the forces
generated by the buying and selling decisions of economic
participants
• Equilibrium is a state of balance between conflicting
forces, such as, supply and demand. The intersection of
supply and demand.
The graph illustrate the
concept of supply and
demand. The intersection
of supply and demand
where,
supply= demand
• Short-run market equilibrium
is a time period of insufficient length to permit
decision makers to adjust fully to a change in
market condition.
• Long-run market equilibrium
is a time period of sufficient length to enable
decision makers to adjust fully to a market change.
Impact on Equilibrium Shifts in the
Supply And Demand Schedule
1. Market price will bring conflicting force of
supply and demand into balance.
2. Supply and demand will be in balance in the
long-run equilibrium and that the opportunity
cost = market price.
3. An increase (decrease) in demand rise (fall)
of price increase (decrease) of supply.
Short-run Total Cost:
• Variable Cost (VC)
• Average Fixed Cost (AFC)
• Average Variable Cost (AVC)
• Marginal Cost (MC)
• Average Total Cost (ATC)
• Fixed Cost (FC)
4. An increase (decrease) in supply rise (fall)
of price increase (decrease) of demand.
5. The constraint of time temporarily limits the
ability of consumers to adjust to changes in
prices.
6. When a price is fixed below the market
equilibrium, shortage will result.
7. When a price is fixed below the market
equilibrium, shortage will result.
Long-run Total Cost:

1. Constant returns to scale

2. Increasing returns to scale

3. Decreasing returns to scale

PROFITS
A financial gain.

Two Types of Profits:

1. Normal profit
The amount of profit necessary to compensate the owners for their
capital and/or managerial skills. It is just enough profit to keep the firm in
business in the long-run.
2. Economic profit
The amount of profit in excess of normal profit.
 Marginal Product
- is the additional output obtained from
employing one additional unit of a resource.
• Marginal revenue product
- the change in total revenue from employing one
additional unit of resource.
• The least cost formula is:

MP of Input A = MP of Input B = MP of Input C = MP of Input D

Price of Input A Price of Input B Price of Input C Price of Input D
 Happy
Birthday
Jen!