Micro Economics

Assignment (1)
Micro Economics

Submitted to:
Kamran baig
Submitted by:
Malik Allah Razi
Section:
(b)
I.D.
(073605-087)
Batch:
(36)
Course:
(BBA)
Submitted date:
1-12-2007

UNIVERSITY OF MANIGMENT AND

TECHNOLOGY

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Supply
“Supply of good or service is an amount that firm sell under certain
condition during a specify time period.”

Market supply:

1) If there is a increase in price of a good supply by supplier will

increase,

2) If there is a decrease in price of a good supply by supplier will

decrease.

Combination Price Quantity

A 5 55
B 4 40
C 3 35
D 2 30
E 1 25

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Price Supplier 1 Supplier 2 Combine Quantity

5 55 35 90
4 50 30 80
3 45 20 65
2 40 15 55
1 35 10 45

Shift in supply curve:

Due to any other factor (not price of good) result in shift of
supply. It could be machinery which increases the cost so supply is reduces.
It moves from left to right. As shown in the figure. S1, S2, S3, these are
supplies at a given fix price.

Shift in supply v/s movement along a supply

curve:
At a given price of good supply changes. As if we are given comp from the
university we will use more of the floppy but price of that remain at same
price.
There could be reduction in the production charges
so supply shell be increased to get more floppy or good salad and hence

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more income will be gained. As a result of it supply will move from left to
right at same price.

Source of shift in supply:

1) cost of input product

2) technology and productivity

3) taxes and subsidies

Change in supply v/s change in quantity supplied:

1) Change in supply:
“Change in any determinant of supply, not price, is change in supply”

2) Change in quantity demanded:

“Change in price leads to change in quantity supplied.”

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Law of supply and Demand

“Price of any good adjust bring supply and demand for that good into
balance”

Price Quantity Supply Quantity Demanded Difference

5 10
4 8
3 6
2 4
1 2
2 8
4 6
6 0
8 -4
10 -8

(Market Clearing Price)

Determinant of the Price:

1) SUPPLY OF A GOOD

2) TECHNOLOGY

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3) FUTURE PERSEPTIONS

Market Equilibrium:
In is the point at which supply and demand are correlated. It is market
clearing price. At it there is no surplus and no shortage. In the upper figure
there is (E) point which is equilibrium point.

Elasticity
“Measure of the responsiveness of quantity demanded or quantity supplied
to one of its determinant.”

Price elasticity of demand:

“It is measure of the how much quantity demanded of a good respond to a
change in price of that good calculate as the percentage change in quantity
demanded / percentage change in price.”

Unit demand:
“The relationship in which quantity changes exactly in proportion to the
change in price.”

Elastic demand:
“The demand relationship in which a given percentage change in price will
reserve in a larger percentage in quantity demanded.”
Total expenditure and price are inversely related in the elastic reign of the
demand curve.

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Inelastic demand:
“Demand relationship in which a given percentage change in price result in
less then proportionate percentage change in the quantity demanded”

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Calculating the price elasticity:

Price elasticity of demand = percentage change in quantity demanded /
. Percentage change in price

Determinant of price elasticity:

Since it depends on the consumer preference so it depends on economical,
social and physiological shape individual desires.

1) Necessities v/s Discretionary Expenditure:

Necessities tend to have inelastic demand where as discretionary demand got

elastic demand.
If price of Dr Check up increases people will visit less time. On other
hand if price of yacht increases demand will fall substantially. Difference
b/w these two is that Dr is necessary for us where as yachts are discretionary.
Of course whether a good is necessity or discretionary it depends not on
intrinsic properties but on preference of buyer. For an avid sailor yacht may
be necessity with inelastic demand and visit to a Dr may be luxury with
elastic demand.

2) Availability of a close Substitutes:

A good with close substitute have more elastic demand because it is easier
for consumer to switch from one good to another e.g. butter and margarine.
Egg on other hand has fewer substitutes closer so it is less elastic.
3) Definition of Market:
It also depends on how boundaries of the markets are drawn? Narrowly
define market yen to be more elastic the broadly define. Since it is easier to
find close substitute in narrow define market. For exam food, a broad
category has fairly inelastic demand because there are no close substitutes
for food. Ice cream a narrow define category is elastic. Feast could be
substitute with vanilla.

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4) Time Horizon:
Good tend to be more elastic demand over long time horizons. Price of
petrol rise quantity demanded fall less in first few months. Over time how
ever people buy more fuel efficient car. Switch to public transport, or move
closer where they work.

Price elasticity and revenue:

Revenue:
“It is the amount pay by a buyer and received by the seller of a good. In
any market it is equal to the P multiply by Q. P is equal to price of good;
q is equal to quantity of that good.”

If demand is inelastic it increases the revenue as price is increases. A

increase in price rises revenue because q is proportionally smaller then the
rise in p.

If demand is elastic then increase in price cause decrease in total revenue.

That is an increase in price reduces total revenue because fall in q is
proportionally greater then the rise in p.

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P/piece Quantity Total Elasticity

Demanded Revenue

1.1 0 0 21.00

1 1 1 63.33

.90 2 1.8 30.40

.80 3 2.4 2.143

.70 4 2.8 1.144

.60 5 3.0 1.100

.50 6 3.0 .692

.40 7 2.8 .467

.30 8 2.4 .294

.20 9 1.8 .158

.10 10 1.0

Price elasticity of the supply:

“It is a measure of how much quantity supplied of a good respond to a
change in price of that good, calculated as the percentage change in quantity
supplied divide by percentage change in price.”

Calculation:
Price elasticity of supply = percentage change in quantity supplied /
. Percentage change in price

Determinant of price elasticity of the supply:

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It responds how quantity responds to the change in price. Price elasticity will
said to be inelastic if quantity supplied responds lightly to change in price.

Seller effect:
It depends on how seller is flexible to a change in amount of good they
produce. E.g. beachfront land has an inelastic supply because it impossible
to produce more of it. In comparison manufactured good such as cars have
elastic supply because firm that produce tem can run their factories longer in
respond to a high pie.

Time period:
Supply is more elastic in long run then in short run. In short time firms can
not change size of factory to make more or less of good. Thus in short run
quantity supplied can respond substantially to price. In contrast in long
period firm can build more factories or close old one. In edition new firm
can enter and old firm can shut down. Thus in long run quantity supplied can
respond to substantially to price.

Shortage:
“If quantity demanded is more then quantity supplied at a price below
market clearing price.”

Surplus:
“It is a situation under which demand is less then quantity supplied at a price
above market clearing price.”

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