Demand-Supply.

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IBEapuntes

Microeconomía

1º Grado en Empresa Internacional

Facultad de Economía y Empresa

Universidad de Barcelona

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No se permite la explotación económica ni la transformación de esta obra. Queda permitida la impresión en su totalidad.
 Block 2. Demand, Supply and Market Equilibrium

No se permite la explotación económica ni la transformación de esta obra. Queda permitida la impresión en su totalidad.
The demand: We buy G&S for satisfying needs. They give us an utility. If we put this two concepts
(needs and utility) together is the Demand.

Utility: ability to satisfy needs.

We can distinguish between:

Total Utility: 100% utils.
Average total utility: Total utility/q
Marginal utility: ▲ total utility/ ▲ of q=1. Decreasing marginal law. Determines the willingness to
pay has to be higher than the price.

When the price, the quantity decreases. When the price decrease the quantity increases.

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The Demand Function

Partial Equilibrium (Alfred Marshall)

Q D =f (P ,P ,Income,Tastes, Quality, Design, Expectations)= Normal goods and services.

f(P )Price-Demand P1
f(P )Cross-Demand P2
f ( I ) Income-Demand or Engel’s function 1

Giffen goods: In the real world they don’t exist. A Giffen good is a good for which demand
increases as the price increases, and falls when the price decreases. A Giffen good has an upward-
sloping demand curve, which is contrary to the fundamental law of demand which states that
quantity demanded for a product falls as the price increases, resulting in a downward slope for the
demand curve. A Giffen good is typically an inferior product that does not have easily available
substitutes.

Normal goods:

Income: when Income increases, el q increases. “CAETERIS PARIBUS”

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 Normal Income. Q= f(m) is positive. The gross demand for the substitutes products increase.
(Positive relation)

Inferior Income: is a good whose demand increases when the consumer's income decreases and
whose demand decreases as the consumer's income increases. For example, secondhand cars are

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cheaper. Q= f(m) negative. That’s the case of complementary goods and services.(negative relation)

Independent Goods and Services

There are 3 kind of goods:

Substitute: They are substitute if they satisfy the same need.

Complementary: When we need to buy together satisfy one need.

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Independent: Goods that satisfy needs and they are not related.

The Demand Function

Q D =f (Price product,Price related product,Income,Tastes,Quality,Design,Expectations,

#population, law).

If the population increases, the demand quantity increase.

In the demand function we only consider the price and quality.

Movement Along the Demand Curve (when the price changes, if the price increases the demand
decreases).

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 Versus Shift of the Demand Curve (increase in
demand and decrease in demand).

A from B, movement along the Demand curve.

The rest of the variable remain constant. An
increase of the demand when we analyze the
rest of the variables.The price of the substitute
is higher or the complementary is lower.

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A decrease in demand, when the demand shift

of the Demand curve. Normal products
decrease of the income. Inferior an increase of
the income. The price of the complementary
goods increase.

At the same price, the demand quantity is

going to increase.

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A increase of the demand when:

Price substitutes: If the price of the Pepsi

increase I will buy coca-cola.

Price complementary: Price decrease

Normal goods: Increase of the demand

function

Inferior goods:Decrease of the demand

function

Fashion: Increase of the demand function.

Demand quantity doesn’t imply a aberration of the demand function. A variation of the demand
function implies a variation of the demand quantity.

The variation of the demand curve its because the other variables, not for the price. At the same
price the demand quantity is higher.

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 THE MARKET DEMAND: To calculate we have to add the individual demand quantity.

Only in the case of a private goods, the market

demand is the horizontal addition.

At 6 dollars, we have to add 2, 1 and 3. If the

price decrease the demand quantity increases.
When the price is 4 dollars is 4,2 and 6.

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The Supply function

QS=f (P1 ,P2 ,P INPUTS, technology , expectatives, ... )

QS=f(P1)

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We have to use and compare the cost of production and the price, and the relationship is positive.

The Supply Schedule and the Supply Curve. Movement Along the Supply Curve (price
movement) Versus Shift of the Supply Curve (increase in supply and decrease in supply)

Movement A to C: change of the supply function

CONSUMER SURPLUS:

Equilibrium price is the market equilibrium.The individual demand and the market demand the
price is the same.

Consumer surplus: Difference willingness to pay and the equilibrium price. When we consider the
market we’ll consider all the consumer surplus.

The difference between the price I would like to pay and the price I have to pay.
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 Thanks to the market dynamism is winning the consumers and the producers. We also can analyze

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the market equilibrium in terms of welfare. And when we analyze the market intervention we can
conclude who is winning.

If we add the total surplus; is equivalent to the W TS= Welfare

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The consumer surplus is always a triangle.

If the equilibrium price is lower the consumer surplus is going to increase, because we want to pay
the lower price as posible.

PRODUCER SURPLUS:

Difference between Equilibrium Price and the price I’d like to receive.

If price is higher the producer surplus is going to increase and consumer surplus decrease. If the
price is lower the consumer surplus is going to increase and the producer surplus is going to
decrease.

Is the market equilibrium is efficient the welfare is maximize. The market equilibrium is efficient
when the equilibrium quantity is maximize and the price minimum.

The total surplus is distributed in consumers and producers.

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 the willingness to pay is higher than the
equilibrium price. But the Eq. Price is higher
than the willingness to pay you’re not going
to buy.

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MARKET INTERVENTION:

Price ceiling: Is a maximum price

Price floor: Is a minimum price

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If rent increases, the quantity is going to increase. When rent decreases, the quantity decrease.
The government can regulate and put a price ceiling (max.)

To apply ceiling higher than the Eq. price, then the government intervention doesn’t work. To apply
a price ceiling has to be lower than the equilibrium price.

Efficiency vs Equity

An economy is efficient (Pareto Efficiency) if it takes all opportunities to make some people better
off without making other people worse off. (Vilfredo Pareto 1848-1923).

No one can be made better off without making someone else worse off (Pareto efficiency).

Equity means that everyone gets his/her fair share. Since people can disagree about what’s “fair,”
equity isn’t as well-defined a concept as efficiency. Equity doesn’t imply equalization.

In addition to efficiency, it is desirable that the allocation of scarce resources is equitable and
economically just. The measurement of equity has to do with income distribution.

Income Distribution

We can get an indication of relative income inequality through the use of Gini coefficients and
Lorenz curves.

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 LORENZ CURVE

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LORENZ CURVE: A Lorenz curve is a graphical representation of income inequality.

If the Lorenz curve is near the straight line the equity is higher. Is a graphical representation of
income.

GINI COEFFICIENTS

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A Gini coefficient is a summary measure of income
inequality.

The Rawls’ criterion John Rawls (1921-2002)

The criterion of MAXIMIN (short for "Maximum minimorum") i.e. maximizing minimum wage.
The emphasis is on the most disadvantaged.
The Rawls' justice concept: John Rawls' influential book.

Maximin consist in maximize the minimum. Minimax consists in minimize the maximum. If we
minimize the minimum level of income we can maximize the total welfare.

Utilitarianism. Jeremy Bentham (1748-1832)

The goal is maximizing total welfare. therefore, the total utility increases as decreases social
inequality.

Utilitarianism is not in favor of egalitarism.

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 4 legs of the Welfare State: the public health, public education,
unemployment subsidies, transports to handicap people.

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ELASTICITY

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30 ——— 45

((45-30)/30) x 100 = 50%

The relationship is negative. We have to add a minus sign

in order to change this relationship.

In economics, the demand elasticity (elasticity of demand) refers to how sensitive the demand for
a good is to changes in other economic variables, such as prices and consumer income.

2 extreme cases of price elasticity of demand:

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 Price elasticity of demand and its determinants:

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Time horizon:

Short run= inelastic. More time to calibrate the impact of the price.

Long run= elastic (flatter)

Availability of substitutes:

If it’s high quantity, then de demand will be elastic. More impact tot the price.

Nature of commodity (necessity, comfort or luxury):

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Necessity: Inelastic Demand. When we pay our necessities, this price is full of taxes because our
demand is inelastic.

Luxury: We don’t need them, so elastic demand.

Share in total expenditure:

Low share: bread; Inelastic.

High share: cars; Elastic.

Income level:

Rich: The demand is inelastic.

Poor: The demand is elastic, it’s important the impact of the price.

Habits: Inelastic demand

Breadth of definition:

Pasta < Spaghettis

Pasta: Lower quantity of substitutes, so inelastic demand.

Spaghettis: Is the price is very high you’re not going to buy it, so elastic demand.

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 Factors affecting the elasticity supply:

Time period:

Short run: Inelastic supply. It’s more difficult t change the quantity of production. We can only
change the variable inputs.

Long run: Elastic demand, we can change all the variables.

No se permite la explotación económica ni la transformación de esta obra. Queda permitida la impresión en su totalidad.
The easiness of entering the industry:

When the market is open: the supply function will be elastic.

When the easiness is lower; inelastic supply.

The cost of attracting inputs from alternative uses:

Lower to attract additional quantity of inputs, the supply quantity will be Elastic Supply.

The nature of inputs:

Is the inputs have very specific uses, the supply function will be more inelastic.

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If we can adapt the different inputs to produce different goods : Elastic demands

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