Microeconomics Study Notes: Demand, Supply, Elasticity, and Market Equilibrium

Demand and Supply Analysis

Introduction to Demand and Supply

Demand and supply are fundamental concepts in microeconomics, describing how prices and quantities of goods are determined in markets. The interaction between buyers (demand) and sellers (supply) establishes the market equilibrium.

• Demand: The quantity of a good or service that consumers are willing and able to purchase at various prices.

• Supply: The quantity of a good or service that producers are willing and able to offer for sale at various prices.

• Law of Demand: As the price of a good increases, the quantity demanded decreases, ceteris paribus.

• Law of Supply: As the price of a good increases, the quantity supplied increases, ceteris paribus.

• Market Equilibrium: The point where quantity demanded equals quantity supplied.

Example: If the price of apples rises, consumers buy fewer apples, and producers are willing to supply more.

Elasticity

Price Elasticity of Demand

Elasticity measures the responsiveness of quantity demanded or supplied to changes in price or other factors. Price elasticity of demand is a key concept for understanding consumer behavior.

• Price Elasticity of Demand (PED): The percentage change in quantity demanded divided by the percentage change in price.

Formula:

$E_d = \frac{\% \Delta Q_d}{\% \Delta P}$

• Elastic Demand: $E_d > 1$ (quantity demanded changes more than price)

• Unit Elastic: $E_d = 1$ (quantity demanded changes exactly as price)

• Inelastic Demand: $E_d < 1$ (quantity demanded changes less than price)

Example: If a 10% increase in price leads to a 20% decrease in quantity demanded, $E_d = 2$ (elastic).

Other Types of Elasticity

• Income Elasticity of Demand: Measures how quantity demanded changes as consumer income changes.

• Cross-Price Elasticity of Demand: Measures how quantity demanded of one good changes as the price of another good changes.

Formulas:

Income Elasticity: $E_y = \frac{\% \Delta Q_d}{\% \Delta Y}$

Cross-Price Elasticity: $E_{xy} = \frac{\% \Delta Q_x}{\% \Delta P_y}$

Market Equilibrium and Shifts

Determining Equilibrium

Market equilibrium occurs where the demand and supply curves intersect. At this point, the market clears, and there is no excess supply or demand.

• Equilibrium Price ($P^*$): The price at which quantity demanded equals quantity supplied.

• Equilibrium Quantity ($Q^*$): The quantity bought and sold at the equilibrium price.

Example: If $Q_d = 100 - 2P$ and $Q_s = 20 + 3P$, set $Q_d = Q_s$ to solve for $P^*$ and $Q^*$.

$100 - 2P = 20 + 3P$ $80 = 5P$ $P^* = 16$ $Q^* = 100 - 2(16) = 68$

Shifts in Demand and Supply

Changes in factors other than price can shift the demand or supply curve, leading to a new equilibrium.

• Demand Shifters: Income, tastes, prices of related goods, expectations, number of buyers.

• Supply Shifters: Input prices, technology, expectations, number of sellers.

Example: An increase in consumer income shifts the demand curve for normal goods to the right.

Elasticity Table

Classification of Elasticity

The following table classifies demand elasticity based on the value of $E_d$:

Elasticity ($E_d$)	Type	Effect on Total Revenue
$E_d > 1$	Elastic	Price increase decreases total revenue
$E_d = 1$	Unit Elastic	Total revenue unchanged
$E_d < 1$	Inelastic	Price increase increases total revenue

Marginal Analysis

Marginal Cost and Marginal Revenue

Marginal analysis is used to determine optimal production and pricing decisions.

• Marginal Cost (MC): The increase in total cost from producing one more unit.

• Marginal Revenue (MR): The increase in total revenue from selling one more unit.

Profit Maximization Condition:

$MR = MC$

Example: If $MC = 10$ and $MR = 10$, the firm is maximizing profit at that output level.

Tabular Data: Demand and Supply Schedules

Example Demand Schedule

Price	Quantity Demanded
1	400
2	300
3	200
4	100
5	0

Interpretation: As price increases, quantity demanded decreases, illustrating the law of demand.

Example Supply Schedule

Price	Quantity Supplied
2	2
3	3
4	5
5	6
6	7

Interpretation: As price increases, quantity supplied increases, illustrating the law of supply.

Summary Table: Elasticity Types

	$E_d = \infty$	$E_d = 1$	$0 < E_d < 1$
Demand	Perfectly Elastic	Unit Elastic	Inelastic
Supply	Perfectly Elastic	Unit Elastic	Inelastic

Applications and Examples

Calculating Elasticity

• Midpoint Formula: Used for calculating elasticity between two points.

$E_d = \frac{(Q_2 - Q_1) / [(Q_2 + Q_1)/2]}{(P_2 - P_1) / [(P_2 + P_1)/2]}$

Example: If price increases from $2$ to $3$ and quantity demanded decreases from $400$ to $300$:

$E_d = \frac{(300 - 400) / 350}{(3 - 2) / 2.5} = \frac{-100 / 350}{1 / 2.5} = -0.286 / 0.4 = -0.715$

This indicates inelastic demand.

Revenue and Elasticity

• Total Revenue (TR): $TR = P \times Q$

• When demand is elastic, lowering price increases total revenue.

• When demand is inelastic, raising price increases total revenue.

Conclusion

Understanding demand, supply, elasticity, and market equilibrium is essential for analyzing how markets function and how changes in economic variables affect outcomes. These concepts form the foundation for further study in microeconomics, including consumer and producer theory, market structures, and welfare analysis.

Additional info: Some formulas, tables, and examples were inferred and expanded for clarity and completeness based on standard microeconomics curriculum.