Transcript Microeconomics: Theory and Applications David Besanko and

Lecture # 02-b
Demand and Supply
Lecturer: Martin Paredes
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Motivation
Definition of Competitive Markets
The Market Demand Curve
The Market Supply Curve
Equilibrium
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Example: World market for corn in the 1990’s
 Historical price: $2.00 per bushel
 1995: Prices rose to $2.70 per bushel
 Long term contracts based on this price
 1996: Prices rise to $4.50 per bushel
 Litigation to annul contracts
 Reasons:
 Weather
 Asian economic boom
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Example: World market for corn in the 1990’s
 1998: prices return to $2.00 per bushel
 Reasons:
 Increased acreage
 Asian economic cool-down
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Definition: Competitive markets are characterized
by:
 Small and numerous sellers
 Small and numerous buyers
 All agents take the market price as given.
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Definition: The Market Demand function tells us
how the quantity of a good demanded by the
sum of all consumers in the market depends on
various factors.
Qd = f (p,po,I,…)
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Definition: The Demand Curve plots the
aggregate quantity of a good that consumers are
willing to buy at different prices, holding
constant other demand drivers such as
 prices of other goods
 consumer income
 quality.
Qd = Q (p)
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Example: Demand for New Automobiles in Europe
Price (thousands of euros)
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5.3
Quantity (millions of
automobiles per year)
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Example: Demand for New Automobiles in Europe
Price (thousands of euros)
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Demand curve for automobiles in Europe
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5.3
Quantity (millions of
automobiles per year)
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Note:
 We always graph P on vertical axis and Q on
horizontal axis…
 …but we write demand as Q as a function of P
 If P is written as function of Q, it is called the
inverse demand.
Normal Form:
Qd = 100 - 2P
Inverse Demand:
P = 50 - Qd/2
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Definition: The Law of Demand Curve states that
the quantity of a good demanded decreases
when the price of this good increases.
 Empirical regularity
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The demand curve shifts when factors
other than own price change…
 If the change increases the willingness of
consumers to acquire the good, the demand
curve shifts right
 If the change decreases the willingness of
consumers to acquire the good, the demand
curve shifts left
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A move along the demand curve for a
good can only be triggered by a change in
the price of that good.
A shift in the demand curve for a good
can be triggered by a change in any other
factor
A change that affects the consumers’
willingness to pay for the good.
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