ECON1101: Microeconomics 3 Supply and Demand Demand shifts right – equilibrium price and

University of New South Wales Market - Where buyers and sellers can facilitate quantity both rise
exchange of goods Supply shifts right – equilibrium price goes down,
1 Thinking as an Economist Demand curve – downward sloping because of quantity goes up
Economics – Study of choices under conditions of substitution effect, income effect and reservation 4 Elasticity
scarcity – how they’re made and their results
prices Price elasticity of demand/supply - % change
Micro - Individual consumers and firms; Macro -
Supply curve – upward sloping because of low in Q demanded/supplied for 1% change in P
Aggregate economy ∆ / ∆ 1
Cost benefit principle – Take action if benefit > hanging fruit and rising opportunity costs = × = ×
∆ / ∆
cost
: Inelastic, : Unit elastic, : Elastic,
Economic surplus – Benefit - cost
: Perfectly inelastic, : Perfectly elastic
Scarcity principle – having more of one good
means having less of another
Opportunity cost – Cost of not taking the next
best option
Pitfalls: 1. Absolute amounts vs proportions 2.
Ignoring opportunity costs 3. Sunk costs 4. Average
vs marginal costs and benefits
2 Comparative Advantage: the Basis for
Equilibrium – System at
Trade
rest, nobody wants to
Absolute advantage – Can perform task with less
change behaviour Elasticity of demand affected by – Substitutes,
resources
Demand shifts right due budget share
Comparative Advantage – Can perform task with
Elasticity of supply affected by – Number of
lower opportunity cost to drop in price of
producers, mobility of inputs, production period
Specialisation according to comparative advantage complement, rise in price length
and trade gives maximum output of substitute, increased Elasticity of demand is – 1 at mid-point of
PPC – Downward sloping because of scarcity, bow
preference by buyers, demand curve, <1 to left, >1 to right
shaped for a many person economy because of low
increased population of Cross price elasticity of demand - % change in
hanging fruit, shifts due to economic growth,
buyers and expectation of future higher prices (and Q demanded for %1 change in price of DIFFERENT
population growth, new resources and better
vice versa) good.
technology
Supply shifts right due to decrease in costs of Complement - < 0, Substitute - > 0
productive factors, improvement in technology, 5 Perfect Competition
Law of demand – Quantity demanded goes down
increase in number of suppliers and expectation of
as price goes up and vice versa
lower prices (and vice versa) Need - something that you cannot live without, e.g.
food and water
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