Comprehensive Slide Micro 1
Comprehensive Slide Micro 1
Comprehensive Slide Micro 1
) (
'
Q
TB
Q
TB
MB
Alfred Marshall
(1842 - 1924)
British economist
One of the greatest
microeconomist
Chapter 2
DEMAND AND SUPPLY
Content
+ Demand
+ Supply
+ Market equilibrium
I. Demand
1. Definitions
2. The law of demand
3. Demonstrating demand
4. Determinants in demand function
5. Movement and shift of demand curve
I. Demand
1. Some definitions
- Demand (D): The quantity of goods and services that consumer is
willing to buy and afford to buy at various price level in a certain time,
ceteris paribus.
- Quantity demanded (Q
D
): The quantity of goods and services
that consumer is willing to buy and afford to buy at a price level in a
certain time, ceteris paribus.
- Individual demand
- Market demand
I. Demand
2. The law of demand
P
Q
D
P
Q
D
I. Demand
3. Demonstrating demand
- Demand schedule
- Demand curve
- Demand function
P = - aQ
D
+ b
Q
D
= - aP + b
Q
D
= f (P
x,
P
y,
I, T, E, N)
P
Q
P
1
P
2
Q
1
Q
2
A
B
I. Demand
4. Determinants in demand function
4.1. Price of related goods (P
Y
)
- Substitutes goods: A and B are substitutes if the
usage of A can be replaced by the usage of B,
provided that the initial consumption target is
unchanged
P
S
Q
S
Q
R
P
S
Q
S
Q
R
I. Demand
4. Determinants in demand function
4.1. Price of related goods (P
Y
)
- Complementary goods: A and B are complementary if the usage
of A must go together with the usage of B to ensure the initial
utility of both goods
P
C
Q
C
Q
R
P
C
Q
C
Q
R
King Camp Gillett (1855 - 1932)
I. Demand
4. Determinants in demand function
4.2. Income of consumer (I)
I Q
D
I
Q
D
I Q
D
I Q
D
Normal goods
Inferior goods
I. Demand
4. Determinants in demand function
4.2. Income of consumer (I)
- Engel curve: Attitude
toward any goods
depends on buyers
income, not on goods
quality
I
Q
I
1
I
2
I
3
Q
1
Q
3
Q
2
Inferior
Normal
I*
I. Demand
4. Determinants in demand function
4.3. Taste of consumer (T)
4.4. Expectation of consumer (E)
4.5. Number of consumer (N)
I. Demand
4. Determinants in demand function
4.3. Taste of consumer (T)
Gender
Age
Culture
Religion
.
I. Demand
5. Movement and shift of the demand curve
- Movement: P
X
- endogenous variable
- Shift: The rest determinants exogenous
variables
P
P
Q
Q
P
1
P
2
Q
1
Q
2
P
Q
1
Q
2
A
B
Questions
1. Chicken and fish are substitutes goods.
a. The decrease in chickens price causes a
movement in fishs demand curve
b. The increase in chickens price causes a left shift in
fishs demand curve
II. Supply
1. Some definitions
2. The law of supply
3. Tools to demonstrate supply
4. Determinants in supply function
5. Movement and shift of supply curve
II. Supply
1. Some definitions
- Supply (S): The quantity of goods and services that
supplier is willing to supply and able to supply at various price
level in a certain time, ceteris paribus.
- Quantity supplied (Q
S
): The quantity of goods and
services that supplier is willing to supply and able to supply at
a price level in a certain time, ceteris paribus.
- Individuals supply (firms supply)
- Market supply
II. Supply
2. The law of supply
P Q
S
P Q
S
II. Supply
3. Tools to demonstrate supply
- Supply schedule
- Supply curve
- Supply function
P = aQ
S
+ b
Q
S
=aP + b
Q
S
= f (P
x
, P
i,
G, Te, E, N)
P
Q
P
1
P
2
Q
1
Q
2
II. Supply
4. Determinants in supply function
4.1. Price of inputs (P
i
)
4.2. Governments policies
4.3. Technology
4.4. Expectation
4.5. Number of supplier
P
i
C
Profit Q
S
P
i
C Profit
Q
S
II. Supply
5. Movement and shift of the supply curve
- Movement: P
X:
endogenous variable
- Shift: The rest factors exogenous variables
-
P
P
2
P
1
Q
1
Q
2
P
P
1
Q
1
Q
2
Q Q
S
S
1
S
2
A
B
III. Market equilibrium
1. Equilibrium status
2. Surplus and shortage
3. Price controlling
III. Market equilibrium
1. Equilibrium status
- Status in which quantity
demanded equals to
quantity supplied
- - Merger demand schedule
and supply schedule
P = -aQ
D
+ b
P = cQ
S
+ d
E (P
E,
Q
E
)
- Intersection of (S) and (D)
-
D
S
E P
E
Q
E
P
Q
III. Market equilibrium
2. Surplus and shortage
- Shortage
+ P
2
< P
E
+ Q
S
< Q
D
=> shortage
+ Appear markets
pressure to make P
2
return to the equilibrium
price
Shortage
Shortage
P
E
P
2
Q
S
Q
D
Q
E
III. Market equilibrium
2. Surplus and shortage
- Surplus:
+ P
1
> P
E
+ Q
S
> Q
D
=> surplus
+ Appear markets
pressure to make P
2
return to the equilibrium
price
Surplus
Surplus
P
E
P
1
Q
D
Q
S
Q
E
III. Market equilibrium
3. Price controlling
- Controlled by the Government
- Ceiling price (P
C
)
+ The highest price allowed
in the market
+ For the sake of buyer
+ Appear shortage
+ Governments responsibility
E
P
E
Q
E
Q
S
Q
D
(G)
P
C
III. Market equilibrium
3. Price controlling
- Floor price (P
F
)
+ The lowest price allowed
in the market
+ For the sake of supplier
+ Appear surplus
+ Governments responsibility
P
E
Q
E
P
F
Q
D
Q
S
(G)
Quantity
Price
10%
?%
A
B
How to
calculate the
change?
ELASTICITY
Contents
Elasticity of demand
Elasticity of supply
Elasticity of demand
*Price elasticity of demand (E
D
P
)
*Income elasticity of demand (E
D
I
)
*Cross elasticity of demand (E
D
Py
)
Elasticity of demand
Price elasticity of demand (E
P
D
)
- The percentage changed in quantity
demanded resulting from 1% change in price
-
P
Q
E
D
P
%
%
Elasticity of demand
Price elasticity of demand (E
P
D
)
Point elasticity
E.g: Demand curve: P = 18 2Q and point A (P=6,
Q=6)
What is price elasticity of demand at point A
P
P
Q
Q
:
Q
P
Q
Q
P
P
Q
P
. ' .
) (
P
Q
E
D
P
%
%
E
D
P
= -1/2 . 6/6= -1/2
Conclusion:
-
-
Elasticity of demand
Price elasticity of demand (E
P
D
)
Arc elasticity
Eg: At price P=7.000VND, consumer buys 10kilos of
pork/ month. At price P= 6.000 VND, consumer buys
15kilos/ month. What is price elasticity of demand?
2
2
2 1
2 1
2 1
2 1
P P
P P
Q Q
Q Q
E
D
P
AB
Elasticity of demand
Conclusion: Price elasticity of demand
always:
- Unit free and negative value
- Usually use absolute value
Elasticity of demand
Price elasticity of demand
(E
P
D
)
/E/ < 1: Inelastic demand
- steep demand curve
- large change in price, small
change in quantity demanded
- Consumers are not very sensitive
to the change in price
- the goods is hard to replace
or necessity
P
Q
P
1
P
2
Q
2
Q
1
Elasticity of demand
Price elasticity of demand (E
P
D
)
/E/ > 1: Elastic demand,
- flat demand curve
- small change in price, large
change in quantity demanded
- Consumers are very sensitive
to the change in price
- the goods is easy to replace
P
Q
P
1
P
2
Q
2
Q
1
Elasticity of demand
Price elasticity of demand (E
P
D
)
/E/ = 1: Unitary-elastic demand
- slope down demand curve
- %change in price equal to %
change in quantity demanded
Elasticity of demand
Price elasticity of demand (E
P
D
)
/E/ = 0: Perfectly Inelastic demand
- Demand curve is parallel to the
vertical axis
- Change in price doesnt affect
quantity demanded
- Consumers are not sensitive
to the change in price
- The good is irreplaceable
P
Q
Elasticity of demand
Price elasticity of demand
(E
P
D
)
/E/ = : Perfectly elastic
demand
- Demand curve is parallel to
the horizontal axis
- Change in price affects totally
on quantity demanded
- Consumers are perfectly
sensitive to the change in price
- The good is in the perfect
competition market
Elasticity of demand
Price elasticity of demand (E
P
D
)
Factors effecting on E
P
D
- The availability of substitutes goods
- More substitute: E>1, less substitute: E<1
- The characteristic of the goods
- Necessities: E<1, Innecessities: E>1
- The time needed to find out the substitutes goods
- Long time: E>1, Short time: E<1
- The ratio of the spending in total income
- Big ratio: E>1, Small ratio: E<1
Elasticity of demand
* The relationship
between E
P
D
,
P and
TR
E<1 E=1 E>1
P
P
Elasticity of demand
Price elasticity of demand (E
P
D
)
The relationship between
E
P
D
,
P and TR
/E/<1: P TR
P
1
P
2
Q
1
Q
2
Minus
Plus
A
B
O
Elasticity of demand
* The relationship
between E
P
D
,
P and
TR
E<1 E=1 E>1
P
P
TR
TR
Elasticity of demand
Price elasticity of demand (E
P
D
)
* The relationship between E
P
D
,
P and TR
/E/>1: TR when P
Minus
Plus
Elasticity of demand
The relationship
between E
P
D
,
P and
TR
E<1 E=1 E>1
P
P
TR
TR
TR =
const
TR =
const
TR
TR
Elasticity of demand
Income elasticity of demand (E
I
D
)
- The percentage changed in quantity
demanded resulting from 1% change in
income
-
- E
I
D
<0: Inferior goods
- E
I
D
>0: Normal goods
- E
I
D
>1: Luxury goods
Q
I
Q
I
Q
E
I
D
I
. '
%
%
) (
Elasticity of demand
Cross-elasticity of demand (E
Py
D
)
- The percentage changed in quantity demanded
resulting from 1% change in price of related goods
E
Py
D
> 0 : Substitutes goods
E
Py
D
< 0 : Complements goods
E
Py
D
= 0 : Independent goods
-
Q
P
Q
P
Q
E
Y
P
Y
D
P
Y Y
. '
%
%
Elasticity of supply
Price elasticity of supply (E
P
S
)
- The percentage changed in quantity supplied
resulting from 1% change in price
-
P
Q
E
S
S
P
%
%
Elasticity of supply
E=0: Perfectly inelastic supply
E<1: Inelastic supply
E>1: Elastic supply
E=1: Unitary elastic supply
E=: Perfectly elastic supply
Elasticity of supply
Factors affecting on elasticity of supply:
- Time needed to find substitutes resources for
inputs
- Availability of inputs
Questions:
1. If 10% increase in As price leads to 2% increase in total
revenue, A is elastic demand
2. Decrease in gasolines price makes the demand curve of
motorbikes (D1) shift to the right to (D2) and this (D2) is more
elastic than (D1) at any quantity level (in absolute value)
3. All points in a demand curve has the same value of
slope and price elasticity of demand (point elasticity)
4. Food is less elastic demand than Kinh Do soft cake
5. Per-unit tax imposed on producer of good, which
demand is more elastic than supply will makes that
producer bear the smaller part in total tax amount in
comparison with consumers part.
CHAPTER 4
THEORY ON CONSUMERS BEHAVIOR
Content
Theory on consumers utility
The principle of diminishing marginal utility
Consumers surplus
Consumers preferences
Budget constraint
Maximizing utility (Optimal decision with budget
constraint)
I. Theory on consumers utility
1. Some definitions
1.1. Utility (U)
- The benefit or satisfaction a person gets
from consuming goods or services
- An abstract concept
- Unit free
- Depends on consumers perception
(subjectivity)
I. Theory on consumers utility
1. Some definitions
1.2. Total utility (TU)
- The total benefit or satisfaction a person gets from
the consumption of goods and services
- Depends on the persons level of consumption
more consumption generally gives more total utility
I. Theory on consumers utility
1. Some definitions
1.3. Marginal utility (MU)
- The change in total utility resulting from the change in the
quantity of consumed goods and/ or services
) (
'
Q
TU
Q
TU
MU
,
where:
Q = output
L = labour input
K = capital input
and = labour and capital's share of output.
I. Theory on production
According to Cobb& Douglas:
US economys production function
from 1899 - 1912:
Q = L
0.25
K
0.75
conclusion:
I. Theory on production
3. Production in short-run
- Average Product of an input (AP) : is equal to total
product divided by the quantity of the input
employed
- Average Product of labour (AP
L
)
- Average Product of capital (AP
K
)
i
X
Q
AP
L
Q
AP
L
K
Q
AP
K
I. Theory on production
3. Production in short-run
- Marginal Product of a input (MP) is the increase in total
product divided by the increase in the quantity of the input
employed, holding the quantity of all other inputs constant
- Marginal Product of labour (MP
L
)
- Marginal Product of capital (MP
K
)
) (
'
Xi
i
Q
X
Q
MP
) (
'
L L
Q
L
Q
MP
) (
'
K K
Q
K
Q
MP
I. Theory on production
What is the
relationship
between MP
and AP?
Capital
(K)
Labour
(L)
Output
(Q)
AP
L
MP
L
4 0 0
4 1 70
4 2 150
4 3 75
4 4 288
4 5
4 6
4 7 52
}
}
52
10
Capital
(K)
Labour
(L)
Output
(Q)
AP
L
MP
L
4 0 0 0 -
4 1 70 70
4 2 150 75
4 3 225 75
4 4 288 72
4 5 340 68
4 6 354 59
4 7 364 52
70
}
}
}
}
}
}
}
80
75
63
52
14
10
I. Theory on production
3. Production in short-run
- The law of diminishing marginal returns: occurs
when the marginal product of an additional input
(e.g. worker) is less than the marginal product of
previous input (i.e. previous worker)
II. Theory on cost
1. Cost in short-run
1.1. Fixed cost, variable cost, total cost
- Fixed cost (FC): the cost of a fixed input, independent with
the output level
- Examples:
C
Q
FC
FC
II. Theory on cost
1. Cost in short-run
1.1. Fixed cost, variable cost, total cost
- Variable cost (VC): the cost of a variable input, varies with
the output level
- Examples:
C
Q
VC
II. Theory on cost
1. Cost in short-run
1.1. Fixed cost, variable
cost, total cost
- Total cost (TC): is the sum of
total fixed cost and total
variable cost
TC = VC + FC
C
Q
FC
FC
VC
TC
II. Theory on cost
1. Cost in short-run
1.2. Average cost
- Average fixed cost (AFC):
is total fixed cost per unit of
output
AFC
C
Q
Q
FC
AFC
II. Theory on cost
1. Cost in short-run
1.2. Average cost
- Average variable cost (AVC):
is total variable cost per unit
of output
- Note: Average curves (except
AFC) are U-shaped
AVC
Q
VC
AVC
C
Q
II. Theory on cost
1. Cost in short-run
1.2. Average cost
- Average total cost (ATC): is
total cost per unit of output
C
Q
AFC
AVC AFC
Q
TC
ATC
AVC
ATC
II. Theory on cost
1. Cost in short-run
1.3. Marginal cost (MC): is
the change in total cost
results from a unit
increase in output
MC intersects AVC and ATC at
their minimum points
C
Q
AVC
ATC
MC
AVC
min
ATC
min
) ( ) (
' '
Q Q
VC TC
Q
TC
MC
MAX
: MR=MC
In perfect competition: MR = P
MAX in perfect competition
:
P=MC
MC
P=MR
P*
Q* Q
P
5. Break-even, shut down point
= TR TC = Q (P - ATC)
P> ATC
min
> 0 profit
P= ATC
min
= 0 break-even point
P< ATC
min
< 0 loss
AVC
min
< P < ATC
min
continue producing
P < AVC
min
shut down
PERFECT COMPETITION
PERFECT COMPETITION
5. Break-even, shut
down point
P> ATC
min
TR = P*AQ*O
TC = OCBQ*
= P*ABC
MC
P=MR
P*
Q* Q
P
A
O
ATC
B
C
max
PERFECT COMPETITION
5. Break-even, shut
down point
P= ATC
min
TR = P*AQ*O
TC = P*AQ*O
= 0
Q*: break-even point
MC
P=MR
P*
Q* Q
P
A
O
ATC
PERFECT COMPETITION
MC
P=MR
P*
Q* Q
P
5. Break-even, shut
down point
P< ATC
min
TR = P*AQ*O
TC = OCBQ*
- = P*ABC
C
B
O
A
-
ATC
PERFECT COMPETITION
MC
P=MR
P*
Q* Q
P
5. Break-even, shut
down point
AVC
min
< P < ATC
min
TR = P*AQ*O
TC = OCBQ*
* Continue: Lose - = P*ABC
* Stop: Lose FC = BCEF
FC > -
Continue producing
B
C
A
E
F
AVC
ATC
PERFECT COMPETITION
5. Break-even, shut down
point
P < AVCmin
TR = P*AQ*O
TC = OCBQ*
* Continue: Lose - = P*ABC
* Stop: Lose FC = BCEF
FC < -
Stop producing
(shut down point)
MC
P=MR
P*
Q* Q
P
AVC
ATC
F
A
O
E
C
B
6. Supply curve
- Coinciding with MC,
but from AVC
min
MC
P=MR
P*
Q* Q
P
PERFECT COMPETITION
AVC
PERFECT COMPETITION
7. Producers surplus
(PS)
- The area below price
line and above marginal
cost curve
PS = TR VC
= + FC
PS
P
Q
Q*
P*
P=MR
MC
EXERCISE
Total cost function of a perfect competition firm is:
TC = Q
2
+ Q + 100
a. At P = 27$, state out Q* and
MAX
b. State out the break-even point of this firm
c. At P = 9$, should this firm close its business?
d. Show this firms supply curve
MONOPOLY
1. Definition
- A type of market where there is only one supplier
and the product is unique
- Examples:
2. Reasons of monopoly
- Economy of scales
- Stipulated by government
- Owning patterns, license.
- Monopoly in inputs
- Monopoly in location
MONOPOLY
MONOPOLY
CULLIAN
3.106 carat
Found in 1905
Largest in the world
MONOPOLY
MONOPOLY
3. Demand and marginal
revenue curves
- Demand curve: downward
sloping and relatively steep
- Marginal revenue curve:
downward sloping, is twice
as steep as the slope of the
demand curve (and the
same intercept)
P = -aQ + b
MR = -2aQ + b
P
Q
D
MR
MONOPOLY
4. Maximizing
profit
MAX
: MR=MC
P
Q
D MR
MC
Q*
m
P*
m
max
: MR=MC
ATC
MAX
MONOPOLY
P
Q
D MR
MC
Q*
m
P*
m
P*
c
Q*
c
P*
m
>>P*
c
Q*
m
<<Q*
c
max
: MR=MC
MONOPOLY
5. Supply curve of a monopolist
P changes, Q is constant P is constant, Q changes
P
Q
D
1
MR
1
MC
P
D
1
MR
1
MC
MR
2
D
2
Q*
P*
1
P*
2
P*
MR
2
D
2
Q*
1
Q*
2
- No 1:1 relationship between price and
quantity
- No functional relationship between price
and quantity
- No supply curve in monopoly
MONOPOLY
5. Supply curve of a monopolist
MONOPOLY
6. Market power
- Found in 1934 by Abba Lerner
(0 L 1)
- In perfect competition: P = MC L = 0
- The higher value of L is, the stronger market power a firm
can gain
P
MC P
L
EXERCISE
A monopolist is facing with a demand curve:
P = 18 2Q
and total cost function: TC = Q
2
a. State out P*, Q* and *
MAX
b. Government imposes 3$/ unit tax on producer. What is
new P**, Q** and **
MAX
c. Government imposes a fixed tax amount of 10$ on
producer. Compare P***, Q*** and ***
MAX
with P*, Q*
and *
MAX
in question a
Definition
- A type of market where there are a lot of suppliers
but their products are relatively different
- Example:
Demand and marginal revenue curves
- Demand curve: Downward sloping (each firm is a
mini-monopolist) but more elastic than
monopolists demand curve
- Marginal revenue curve: downward sloping, has
twice the slope of the demand curve
Imperfect competition
Monopolistic competition
Imperfect competition
Monopolistic competition
Maximizing profit
MAX
: MR=MC
P
Q
D MR
MC
Q*
P*
max
: MR=MC
ATC
MAX
Imperfect competition
Oligopoly
Definition:
- A type of market where there are some suppliers
but holding total or at least a very large part of
market share
- Example:
Characteristics:
- Firms depends closely on each other join in a
game and competitors act as players
- Firms are relatively powerful in market
- Entry barrier is relatively high
- Firm can either be cartelized or leading-price
Imperfect competition
Oligopoly
Cartelized (public collusion):
- Firms may merger and act as a monopolist help
reduce competing cost
- Cartel will agree about price and quantity, then
allocate quota for each member
- Harmony among members is in top priority
- Transparency in information is importance to avoid
members fraudulent
OREC???
Imperfect competition
Oligopoly
Price leadership (Non-public collusion)
- Occurs when cartelization is illegal
- One firm will act as leader and sets up price, the
others are followers
- The leader must be strong enough to punish the
others, which do not follow his price, by pushing to
the lowest level so that that firm will go bankruptcy
Imperfect competition
Oligopoly
A kinked demand curve
Oligopolies never compete
each other by price
Q
P
D
1
D
2
MR
1
MR
2
MC
1
MC
2
Q*
P*
Imperfect competition
Oligopoly Game theory Prisoners dilemma
A
Acknowledge
Does not
acknowledge
B
Acknowledge
A: -5, B: - 5
A: - 10, B: 0
Does not
acknowledge
A: 0, B: - 10
A: -2, B: -2