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    Micro Week1

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    Yohanes Anggoro
    This document provides an overview of microeconomics concepts related to supply and demand. It discusses how supply increases with price and demand decreases with price. It explains how the market reaches equilibrium where quantity supplied equals quantity demanded. The document also covers consumer behavior topics like indifference curves, budget constraints, and how consumers maximize utility subject to their budget. Finally, it provides some example questions and answers to illustrate key microeconomics concepts.

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    © All Rights Reserved
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    Micro Week1

    Uploaded by

    Yohanes Anggoro
    15 views23 pages
    This document provides an overview of microeconomics concepts related to supply and demand. It discusses how supply increases with price and demand decreases with price. It explains how the market reaches equilibrium where quantity supplied equals quantity demanded. The document also covers consumer behavior topics like indifference curves, budget constraints, and how consumers maximize utility subject to their budget. Finally, it provides some example questions and answers to illustrate key microeconomics concepts.

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    Micro_Week1

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    This document provides an overview of microeconomics concepts related to supply and demand. It discusses how supply increases with price and demand decreases with price. It explains how the market reaches equilibrium where quantity supplied equals quantity demanded. The document also covers consumer behavior topics like indifference curves, budget constraints, and how consumers maximize utility subject to their budget. Finally, it provides some example questions and answers to illustrate key microeconomics concepts.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    15 views23 pages

    Micro Week1

    Uploaded by

    Yohanes Anggoro
    This document provides an overview of microeconomics concepts related to supply and demand. It discusses how supply increases with price and demand decreases with price. It explains how the market reaches equilibrium where quantity supplied equals quantity demanded. The document also covers consumer behavior topics like indifference curves, budget constraints, and how consumers maximize utility subject to their budget. Finally, it provides some example questions and answers to illustrate key microeconomics concepts.

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    © All Rights Reserved
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    Download as pdf or txt
    of 23

    Microeconomics for Policy

    Muhammad Yudha Pratama

    1 March 2023

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 1 / 23


    The Basics of Supply and Demand

    Section 1

    The Basics of Supply and Demand

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 2 / 23


    The Basics of Supply and Demand

    Themes of Microeconomics

    Microeconomics deals with the behavior of individual economic


    units—consumers, firms, workers, and investors—as well as the
    markets that these units comprise.
    Trade-offs and Choices–Consumers, Firms, and Workers.
    Prices and Market–One good or service market
    Competitive versus noncompetitive market

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 3 / 23


    The Basics of Supply and Demand

    Supply
    The higher the price, the more that firms are able and willing to produce
    and sell. Other variables affecting the supply will shift the supply curve.

    QS = QS (P)

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 4 / 23


    The Basics of Supply and Demand

    Demand
    The lower the price, the more consumers that are willing to buy. Other
    variables affecting the demand will shift the demand curve.

    QD = QD (P)

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 5 / 23


    The Basics of Supply and Demand

    The Market Mechanism

    The market will clear (Adam Smith called this “invisible hand”) the surplus
    or the shortage of the goods such that quantity supplied equals quantity
    demanded.

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 6 / 23


    The Basics of Supply and Demand

    Elasticities of Supply and Demand

    Price elasticity of demand and supply

    ∆Q/Q ∆Q P
    Ep = (%∆Q)/(%∆P) = =
    ∆P/P ∆P Q

    Completely inelastic supply or demand has a vertical curve, while infinitely


    elastic supply or demand has a horizontal curve.

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 7 / 23


    The Basics of Supply and Demand

    Short-run versus Long-run Elasticities

    Short-run and long-run differ in the time frame. Durable goods has a more
    flatter (more elastic) short-run demand curve compared to the long-run
    demand curve. Non-durable goods has a more elastic long-run curve than
    short-run curve.

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 8 / 23


    Consumer Behaviour and Individual Demand Curve

    Section 2

    Consumer Behaviour and Individual Demand Curve

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 9 / 23


    Consumer Behaviour and Individual Demand Curve

    Consumer Preferences–Indifference curve


    The indifference curve represents the combination of market baskets that
    provide a consumer the same level of satisfaction.

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 10 / 23


    Consumer Behaviour and Individual Demand Curve

    Marginal Rate of Substitution


    The amount of one good that a consumer will give up to obtain more of
    another where the consumer is indifferent.

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 11 / 23


    Consumer Behaviour and Individual Demand Curve

    Budget Constraint
    A budget line describes the combinations of goods that can be purchased
    given the consumer’s income and the prices of the goods.

    PF F + PC C = I

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 12 / 23


    Consumer Behaviour and Individual Demand Curve

    Consumer Choice
    The satisfaction is maximized when

    MRS = PF /Pc

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 13 / 23


    Consumer Behaviour and Individual Demand Curve

    Derivation of Consumer’s Demand

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 14 / 23


    Exercises

    Section 3

    Exercises

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 15 / 23


    Exercises

    Question 1

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 16 / 23


    Exercises

    Answer 1

    a. price elasticity of demand when the price is $80:


    ∆Q P −2 80 −2 100
    ∆P Q = 20 20 = −0.4. When the price is $ 100 is: 20 18 = −0.56
    ∆Q P 2 80
    b. price elasticity of demand when the price is $80: ∆P Q = 20 16 = 0.5.
    2 100
    When the price is $ 100 is: 20 18 = 0.56
    c. Equilibrium price and quantity are $100 and 18 million units,
    respectively.
    d. The Ceiling price will cause a shortage of 4 million units

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 17 / 23


    Exercises

    Question 2

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 18 / 23


    Exercises

    Answer 2
    a. The demand and supply functions are QD = a + bP and QS = c + dP.
    From the elasticities, we could get the slopes:
    ∆QD P
    ϵD =
    ∆P QD
    5
    b = −0.4
    15.75
    ,
    b = −1.26
    Using the same way for the supply curve, we have d = 1.575. For the
    constant a and c, we could plug in to the linear function:
    15.75 = a − 1.26(5), so a = 22.05, and the equation for demand is
    QD = 22.05 − 1.26P 15.75 = c + 1.575(5), so c = 7.875, and the
    equation for supply is QS = 7.875 + 1.575P

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 19 / 23


    Exercises

    Answer 2

    b. We could use the average price and quantity instead of point elasticity:

    ∆Q P̄ −7.75 3.5
    ϵD = = = −0.46
    ∆P Q̄ 3 19.625

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 20 / 23


    Exercises

    Question 3

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 21 / 23


    Exercises

    Answer 3
    a and b The budget line is 100D + 400F = 4000 or D + 4F = 40

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 22 / 23


    Exercises

    Answer 3

    c. Jane can afford the utility of 800 but she cannot afford utility of 1200.
    d. The utility maximizing choice:
    PF
    MRS =
    PD
    MUF 10D D
    MRS = = =
    MUD 10F F
    D
    =4
    F

    Substituting D = 4F into the budget function D + 4F = 40 yields F = 5


    and D = 20.

    Muhammad Yudha Pratama Microeconomics for Policy 1 March 2023 23 / 23

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