ECON | 315 | Intermediate Bus Microeco 3 | lecture notes

Chapter 2.docx

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= f(P

, P

, M, H)

The demand funcon explicitly recognizes that the quality of a good consumed depends on its

price and on demand shiﬅers

Linear Demand Funcon – a representaon of the demand funcon in which the demand for a given

good is a linear funcon of process, income levels, and other variables inﬂuencing demand

= α

+ α

M + α

The α

are ﬁxed numbers that the ﬁrms research department or an economic consultant typically

provides to the manager

Example: A ﬁrms markeng manager was provided with an esmate of the demand funcon for the

ﬁrms product

= 12,000 - 3P

+ 4P

- 1M + 2A

where A

is the amount spent on adversing,

supposed good X sells for $200 per unit, good Y sells for $15 per unit, the company ulizes 2000

units of adversing and consumer income is $10,000

How much of good X do consumers purchase, are goods X and Y substutes or complements

and is good X a normal or an inferior good?

= 12,000 – (3)(200) + (4)(15) – (1)(10,000) + (2)(2,000) = 5,460 units

Since the coeﬃcient of P

in the demand equaon is > 0 we know that with a $1 increase in the

price of good Y will increase the consumpon of good X but 4 units and are thus substutes

Since the coeﬃcient of M in the demand equaon < 0 we know that with a $1 increase in

income will decrease the consumpon of good X by 1 unit and thus good X is an inferior good

Since a demand curve is the relaon between price and quanty, a representave demand curve holds

everything but price constant; to obtain this formula insert values of the demand shiﬅs into the

demand funcon but leaving P

in the equaon to allow for various values

Example:

= 12,000 – (3)(P

) + (4)(15) – (1)(10,000) + (2)(2,000) which simpliﬁes to

= 6,060 -3P

Inverse Demand Funcon – price on the leﬅ-hand side and everything else on the right-hand side which

reveals how much consumers are willing and able to pay for each addional unit of good X

Consumer Surplus – the value consumers get from a good but do not have to pay for

This concept is important to managers because it tells how much extra money consumers would

be willing to pay for a given amount of a purchased product and can use the noon to

determine the total amount consumers would be willing to pay or mulunit packages

The area above the price paid for a good but below the demand curve

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Market Supply Curve – a curve indicang the total quanty of a good that all producers in a compeve

market would produce at each price, holding input prices, technology, and other variables

aﬀecng supply constant

Change in Quanty Supplied – changes in the price of a good lead to a change in the quanty supplied of

that good; corresponds to a movement along a given supply curve

The fact that the market supply curve slopes upward reﬂect the inverse law of supply – as the price of a

good rises(falls) and other things remain constant, the quanty supplies of the good rises (falls)

Producers are willing to produce more output when the price is high than when it is low

Change in Supply – changes in variables other than the price of a good, such as input prices or

technological advances, lead to a change in supply; corresponds to a shiﬅ of the enre supply

curve

Input Prices – as producon costs change, the willingness of producers to produce output at a given

price changes

As the price of an input rises, producers are willing to produce less output at each given price;

decrease in the supply is depicted as a leﬅward shiﬅ in the supply curve

Technology or Government Regulaons – changes that make it possible to produce a given output at a

lower cost has the eﬀect of increasing supply

Natural disasters that destroy exisng technology and governmental regulaons, such as

emission standards that have an adverse eﬀect on business, shiﬅ the supply curve to the leﬅ

Number of Firms – as addional ﬁrms enter an industry, more and more output are available at each

given price which is reﬂected by a rightward shiﬅ in the supply curve

As ﬁrms leave an industry, fewer units are sold at each price and the supply decreases (shiﬅs to

the leﬅ)

Substutes in Producon – many ﬁrms have technology that are readily adaptable to several diﬀerent

products, switching to a diﬀerent producon line will shiﬅ the supply curve as well

Excise Tax - tax on each unit of output sold where the tax revenue is collected from the supplier which

shiﬅs the supply curve up by the amount of the tax and producers are willing to sell less aﬅer

the tax than before

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