Jul 11, 2019 in Exploratory

Microeconomics

Microeconomics is a branch of economics that investigates how individual parts of the economy make decisions to allocate scarce resources. It examines how the decision made affects the supply and demand for goods and services. This paper discusses supply and demand model as the core unit in microeconomics. Elasticity is a central concept in the theory of supply and demand. In this context, elasticity refers to how supply and demand respond to various factors, including price as well as other stochastic principles. Supply and demand model is an economic model of determining price in the market (Wikipedia, Supply and Demand)

Demand is the willingness and ability of a buyer to purchase a particular good or service at a given price in a particular time. Demand schedule is the set of alternative quantities and prices. Quantity demanded is the quantity that is demanded at a given and specific price. Demand curve specifies the range of quantities of goods or services that a customer is willing to purchase at each particular price. It follows the law of demand which states that there is an inverse relationship between price (P) and quantity demanded (Q). It assumes all determinants of demand other than the price of the good in question, such as income, personal tastes, the price of substitute goods, and the price of complementary goods, remain the same.

The demand curve is generally downward-sloping. There may be rare examples of goods that have upward-sloping demand curves. Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods (an inferior but staple good) and Veblen goods (goods made more fashionable by a higher price).

An increase in demand from p0 to p1 causes the quantity demanded change or fall from Q0 to Q1. As prices reduces from p1 to p0, the quantity increases to Q0. The demand curve has a negative gradient because it embodies the law of demand, when the price goes up the consumer is willing to buy less of the goods.

Demand is affected by a number of factors namely price, income, personal tastes, the price of substitute goods, and the price of complementary goods. When price rises the quantity demanded falls and if it falls the quantity rises if all other factors are held constant. If consumer’s income increases he or she may spend much in buying of the commodity even though the prices are high and when their income reduces even though  the prices are down they won’t be able to purchase more goods, this leads to abnormal demand curve.

There are two changes in the demand curve: movement in demand and shift in demand curve. A change in the quantity demanded of good X is a movement along the demand curve for good X (up or down). It can only result from a change in the price of good X. it is as below

A change in demand is a shift of the entire demand curve. The change in demand occurs when there is a change in a shift factor. It occurs when price is constant and due to changes in shift factors quantity demanded changes respectively. A shift in demand curve is shown below.

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Below is a table showing the effects of shift factors on the demand curve:

SHIFT FACTOR

INCREASE OR DECREASE

SHITF DIRECTION

INCOME.

NORMAL GOODS

INFERIOR GOODS

INCREASE

 

RIGHTWARD

LEFTWARD

PREFERENCES

INCREASE

DECREASE

RIGHTWARD

LEFTWARD

PRICE  OF RELATED GOODS:

SUBSTITUTE GOODS:

COMPLEMENTARY GOODS:

INCREASE

 

RIGHTWARD

LEFTWARD

EXPECTATIONS:

 

HIGHER FUTURE PRICE:

LOWER FIUTURE PRICE:

RIGHTWARDS

LEFTWARDS

NUMBER OF BUYERS

MORE BUYERS:

LESS BUYERS:

RIGHTWARDS

LEFTWARDS

 

   A change in demand shifts the whole curve while change in quantity demanded moves a new quantity on the same demand curve. Demand comes come directly from unlimited wants and needs (savvides).

Supply is the willingness and the ability of the producer to produce a product or a service at each particular price. In supply willingness is not essential but ability is limited by production costs, range of quantities and goods at a given time period. The quantity supplied is the amount supplied at a specific price. The law of supply states that as the price of a good increases, producers are willing to produce more of the good.

Supply schedule is a table illustrating the relationship between supply and quantity supplied. Supply curve is a graph of plotted and connected points in a supply schedule. It has a positive slope and it follows the law of supply. It shows the minimum price that sellers would be willing to deliver goods to the market. Below is a typical of normal supply curve.

increase in price from p1 to p0 attracts suppliers and hence they are willing to supply much to the market.  Supply is also characterized by shifts in supply curve caused by changes by non price factors which includes: change in production technology, change of number of sellers in the market, taxes/ subsides and legal restrictions, future price expectations of sellers, and weather & other exogenous factors. These factors affect the position of the supply curve but not its slope.

The diagram below shows a shift in supply curves when price is constant.

As per Abowd there are different types of elasticity: Price elasticity of demand: how sensitive is the quantity demanded to a change in the price of the good (Wikipedia, Price elasticity of demand ).

Price elasticity of supply: how sensitive is the quantity supplied to a change in the price of the good. Elasticity of supply is the measure used to show the responsiveness of quantity supplied to change as per different factors (Wikipedia, Price elasticity of supply).

Price elasticity of supply is the numerical measure of the responsiveness of the supply of a given good to change in the price of that good. The determinants of PES are: Availability of raw materials, length and complexity of production, time taken by the producer to respond to price change, a producer who has excess capacity quickly responds to price changes in his market assuming other factors constant, and inventories- producer who has a supply of goods or available storage capacity can quickly increase supply to market (micfrohelp).

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