ECON 310-1
Intermediate Microeconomic Theory
Northwestern University | Complete Study Guide with Graphs
Consumer Theory · Elasticity · Taxes · Budget Lines · IC Analysis · Slutsky Equation
, WEEK 1 — Markets, Excise Taxes & Elasticity
1.1 Supply, Demand & Market Equilibrium
The Demand Curve
The demand curve shows the maximum price consumers are willing to pay for each additional unit of a good, or
equivalently, the quantity demanded at each price. It slopes downward (law of demand): as price rises, quantity demanded
falls.
Demand function: Q_d = f(P, I, Preferences, P_substitutes, P_complements)
General linear demand: Q_d = a − bP (b > 0)
• Price ↑ → movement along the curve (↓ quantity demanded)
• Income, preferences, prices of other goods change → shift of the entire curve
The Supply Curve
The supply curve shows the minimum price producers need to receive to supply each unit. It slopes upward: higher prices
make production more profitable.
General linear supply: Q_s = c + dP (d > 0)
Market Equilibrium
Equilibrium occurs where Q_d = Q_s. At the equilibrium price P*, the market clears — no shortage or surplus. Any deviation
triggers price adjustment back to equilibrium.
Set Q_d = Q_s → solve for P* → plug back in for Q*
EXAMPLE: Q_d = 12 − Q and Q_s = 2 + Q. Equilibrium: 12 − Q = 2 + Q → 2Q = 10 → Q* = 5, P* = 7.
Figure: Market Equilibrium: Supply meets Demand
Demand Shifts vs. Movements Along the Curve
, A change in the price of the good itself causes a movement along the demand curve (change in quantity demanded). A
change in any other determinant shifts the entire curve.
Figure: Demand Curve Shifts: Right (increase) vs. Left (decrease)
Demand Shifter Effect Direction
Income ↑ (normal good) Demand increases Right shift →
Income ↑ (inferior good) Demand decreases Left shift ←
Price of substitute ↑ Demand increases Right shift →
Price of complement ↑ Demand decreases Left shift ←
Consumer tastes favor good Demand increases Right shift →
# buyers in market ↑ Demand increases Right shift →
The Valentine's Day Effect
Fresh-cut red roses sell for 3–5× their normal price around Valentine's Day. Demand surges rightward → both equilibrium
price and quantity rise. White and yellow roses see smaller price increases because their demand is more stable year-round
(used for other events), so their demand curves fluctuate less.
Intermediate Microeconomic Theory
Northwestern University | Complete Study Guide with Graphs
Consumer Theory · Elasticity · Taxes · Budget Lines · IC Analysis · Slutsky Equation
, WEEK 1 — Markets, Excise Taxes & Elasticity
1.1 Supply, Demand & Market Equilibrium
The Demand Curve
The demand curve shows the maximum price consumers are willing to pay for each additional unit of a good, or
equivalently, the quantity demanded at each price. It slopes downward (law of demand): as price rises, quantity demanded
falls.
Demand function: Q_d = f(P, I, Preferences, P_substitutes, P_complements)
General linear demand: Q_d = a − bP (b > 0)
• Price ↑ → movement along the curve (↓ quantity demanded)
• Income, preferences, prices of other goods change → shift of the entire curve
The Supply Curve
The supply curve shows the minimum price producers need to receive to supply each unit. It slopes upward: higher prices
make production more profitable.
General linear supply: Q_s = c + dP (d > 0)
Market Equilibrium
Equilibrium occurs where Q_d = Q_s. At the equilibrium price P*, the market clears — no shortage or surplus. Any deviation
triggers price adjustment back to equilibrium.
Set Q_d = Q_s → solve for P* → plug back in for Q*
EXAMPLE: Q_d = 12 − Q and Q_s = 2 + Q. Equilibrium: 12 − Q = 2 + Q → 2Q = 10 → Q* = 5, P* = 7.
Figure: Market Equilibrium: Supply meets Demand
Demand Shifts vs. Movements Along the Curve
, A change in the price of the good itself causes a movement along the demand curve (change in quantity demanded). A
change in any other determinant shifts the entire curve.
Figure: Demand Curve Shifts: Right (increase) vs. Left (decrease)
Demand Shifter Effect Direction
Income ↑ (normal good) Demand increases Right shift →
Income ↑ (inferior good) Demand decreases Left shift ←
Price of substitute ↑ Demand increases Right shift →
Price of complement ↑ Demand decreases Left shift ←
Consumer tastes favor good Demand increases Right shift →
# buyers in market ↑ Demand increases Right shift →
The Valentine's Day Effect
Fresh-cut red roses sell for 3–5× their normal price around Valentine's Day. Demand surges rightward → both equilibrium
price and quantity rise. White and yellow roses see smaller price increases because their demand is more stable year-round
(used for other events), so their demand curves fluctuate less.
