Microeconomics Class notes

DARTMOUTH COLLEGE, DEPARTMENT OF ECONOMICS ECONOMICS 1




Dartmouth College, Department of Economics: Economics 1, Fall ‘02




Topic 2: Supply and Demand

Economics 1, Fall 2002
Andreas Bentz
Based Primarily on Frank Chapters 2, 4




Dartmouth College, Department of Economics: Economics 1, Fall ‘02




Supply and Demand: Equilibrium

Example: The Market for Apartments




© Andreas Bentz page 1

,DARTMOUTH COLLEGE, DEPARTMENT OF ECONOMICS ECONOMICS 1




The (Market) Demand Curve
X Demand curve for one bedroom apartments:
price (100s of $)


10
The demand curve
8 for a good tells us
how much of that
6 good is demanded
4 at each price.

2
D
0
0 1 2 3 4 5 quantity (100s)
3




The Demand Curve, cont’d
X A downward-sloping demand curve tells us
that:
– The higher the price, the less the demand for the
good.
X Why?
– As price increases, fewer potential buyers can
afford to buy the good (income/wealth effect).
– As price increases, some potential buyers
substitute other goods (substitution effect).
X We can write the (inverse) demand curve as
p(q). Then we know that dp / dq < 0.
4




© Andreas Bentz page 2

, DARTMOUTH COLLEGE, DEPARTMENT OF ECONOMICS ECONOMICS 1




The (Industry) Supply Curve
X Supply curve for one bedroom apartments:
price (100s of $)
S
10
The supply curve for
8 a good tells us how
much of that good is
6 supplied at each
4 price.

2

0
0 1 2 3 4 5 quantity (100s)
5




The Supply Curve, cont’d
X An upward-sloping supply curve tells us that:
– The higher the price, the greater the supply for the
good.
X Why?
– Typically: the more you produce, the greater the
production cost for each additional unit. In order to
be willing to supply more, you therefore need to be
able to charge a higher price for each unit. (The
price must cover the production cost.)



6




© Andreas Bentz page 3