ECON 110 Introductory Microeconomics

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ECON 110Introductory Microeconomics

• Lecture 5
• Fall, 2009
• William Chow

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Highlight

• Factors affecting supply
• Market Equilibrium
• Change in demand and supply
• Applications

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Prices of related goods produced

• A substitute in production for a good is another
  good that can be produced using the same
  resources, e.g. residential flats and industrial
  complexes
• Goods are complements in production if they must
  be produced together, e.g. beef and leather
• The supply of a good increases and its supply
  curve shifts rightward if the price of a
  substitute in production falls or if the price of
  a complement in production rises

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Other factors

• Expected future prices If the price of a good is
  expected to fall in the future, current supply
  increases and the supply curve shifts rightward
• The number of suppliers The larger the number of
  suppliers of a good, the greater is the supply of
  the good. An increase in the number of suppliers
  shifts the supply curve rightward
• Technology Advances in technology create new
  products and lower the cost of producing existing
  products, so they increase supply and shift the
  supply curve rightward

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Market Equilibrium

• When demand and supply come to meet one another,
  a market equilibrium can be achieved
• An equilibrium is a state at which things have no
  tendency to change
• This shows the unique price (equilibrium price)
  at which QD QS

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Market Equilibrium

• The buying and selling plans are hence balanced
• The equilibrium quantity is the quantity bought
  and sold at the equilibrium price
• This indicates the prevailing market price and
  the amount of transactions dealt in the market

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Market Equilibrium Important Note

• Price regulates buying and selling plans
• Price serves as signals for buyers and sellers to
  adjust their plans

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Changes in Demand and/or Supply
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Application

• Event The WSJ reports that the prices of PC
  components are expected to fall by 5-8 percent
  over the next six months.
• Scenario 1 You manage a small firm that
  manufactures PCs.
• Scenario 2 You manage a small software company.

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Application

• Use Comparative Static Analysis to see the Big
  Picture.
• Comparative static analysis shows how the
  equilibrium price and quantity will change when a
  determinant of supply or demand changes.

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Big Picture Impact of decline in component
prices on PC market
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Scenario 2

• More complicated chain of reasoning to arrive at
  the Big Picture.
• Step 1 Use analysis like that in Scenario 1 to
  deduce that lower component prices will lead to
• a lower equilibrium price for computers.
• a greater number of computers sold.
• Step 2 How will these changes affect the Big
  Picture in the software market?

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Scenario 2
Price of Software
P0
Quantity of Software
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Conclusion

• Scenario 1 Equilibrium price of PCs will fall,
  and equilibrium quantity of computers sold will
  increase.
• Scenario 2 Software prices are likely to rise,
  and more software will be sold.