# Microeconomics - Lecture 1 (The Demand and Supply Model)

 Four core ideas in economics 1) People face Tradeoffs2) Opportunity Cost: what you give up to get3) Thinking at the margin (step forward/back)4) People respond to incentives Positive analysis vs. Normative analysis Positive: attempt to describe/predict model outcome Normative: attempt to prescribe what should be done Types of variables: Exogenous Endogenous Exogenous: values are given (or assumed) outside the model. Changes create a shock Endogenous: values are determined within the model Basic Assumptions 1) Scarcity: resources are limited2) Choice: if we have more of x; less of y3) Individual Optimizing Behavior: relevant actors make decisions to maximize some goal4) substitution: agents are actually willing to make the choices that scarcity requires. Demand and supply Model (Perfectly competitive market) Assumption:1) Everyone is a price taker - no one large enough to affect market price2) Easy entry and exit into the market3) firms sell identical products4) Full information about price and quality5) cost of trading are low Demand function Qd = f(Pi;Pj,I,0,info,E,e) price of good, price of related, income, tastes, info, expectations about the future, other factors Demand Schedule Maps the quantity of a good that will be demanded at each price, holding fixed all other factors that influence demand The Law of Demand When the price of any good or service increases (decreases), consumers will purchase less (more) of that good or service What is demand 1) if you show me the price, I'll tell you the quantity 2) if you tell me the quantity, I'll tell you my willingness to pay for the last unit (marginal value) Marginal Value is the change in the total value created by the change in quantity of the control variable Demand vs. Demand Qty When price changes, the quantity demanded changes - movement along the demand schedule. When any other shifter changes -the entire demand schedule shifts Elasticity of A with respect to B % change in A / % change in B or(Change in A)/(Change in B) * (B/A)Think in % Elasticity is a measure of sensitivity of one variable to a change in another. Elasticity is a characteristic of a specific observed point Common Elasticities Price elasticity of demandCross elasticity of demandIncome elasticity of demandPrice elasticity of supply Price Elasticity of linear demand Perfectly Inelastic = 0Inelastic greater than 0 and less than -1unitary = -1elastic less than -1perfectly elastic = infinity Determinants of the Elasticity of Demand 1) Uniqueness of the product2) Awareness of substitutes3) Difficulty of comparison    -must be used before learn attributes    -fixed cost of buying cause switching cost      and deter sampling    -difficult to compare across     heterogeneous brands4) short vs. long run5) durable good Supply function Qs = f(Pi;Pk,T,E,n) price of the good, price of production inputs, production technology, expectations about the future, number of sellers The supply curve and law of supply 1) If you tell me the price, I'll tell you the quantity I would like to supply 2) If you tell me quantity, I'll tell you the minimal price I'm willing to sell the last unit for - marginal cost Horizontal summation Market demand & supply curves are calculated as total quantity demanded / supplied, summed over all customers/firms, for any given price Market Equilibrium situation in which there is no pressure for price or quantity to change. Once in equilibrium, there is no incentive to hcange Efficiency If MV(Q) > MC(Q) the efficient to produce and consume more  If MV(Q) < MC(Q) efficient to produce and consume less Efficient MV(Q) = MC(Q) Authormiles85233 ID212753 Card SetMicroeconomics - Lecture 1 (The Demand and Supply Model) DescriptionMicroeconomics - supply and demand Updated2013-04-11T01:45:57Z Show Answers