Mirco Soffritti

Microeconomics
Microeconomics
Microeconomics is the branch of economics that focuses on the behavior of
individual economic agents, such as consumers, firms, and workers, and how
they make decisions regarding the allocation of limited resources.

It examines how these agents interact in markets, how prices are determined,
and how resources are distributed based on supply and demand.
Microeconomic statements?
• A bakery decides to raise the price of its pastries due to higher flour costs.

• The weather forecast predicts heavy rain for the weekend, affecting outdoor events.

• A local restaurant hires additional staff during peak tourist season to meet
increased demand.

• The government reduces income taxes to stimulate national economic growth.

• A central bank raises interest rates to combat inflation.

• A team wins a championship after an impressive performance in the final game.

The content of Topic 3

Competitive markets Demand

Where (some) goods and The decisions of who
services are exchanged purchase goods & services

Supply Equilibrium
The decisions of who When quantity demanded
produces goods & services equals quantity supplied
What you will learn
• Competitive Market: A market structure where no single entity controls the price,
ensuring efficient allocation of resources.
• Demand Schedule (quantity of goods consumers are willing to buy at different
price point), vs demand curve (its graphical representation).
• Law of Demand: As the price of a good increases, the quantity demanded typically
decreases, holding other factors constant (ceteris paribus).
• Supply Schedule (quantity of a good producers are willing to supply at varying
prices) and supply Curve (its graphical representation).
• Market Equilibrium: The point at which the quantity demanded by consumers
equals the quantity supplied by producers.
The way we talk…
“I hate when the price of grapes increases! We all end up
purchasing fewer grapes and spend more for them!”

“When the price of flour rises, the cost of making bread will increase.
And, therefore, the demand for bread will end up decreasing!”

“The market for olive oil is so competitive, that

producers can charge any price they want!"

“If the demand for olives decreases, the supply

for olive must also decrease!”
 Competitive
01 markets
Back to CFD model

We will study the markets where firms and households

exchange money against goods and services.
Competitive markets
▪ A competitive market in microeconomics is a type of market
structure where there are many buyers and sellers, none of whom can
individually influence the market price of a good or service.
▪ Products are typically similar (indistinguishable), and the prices are
determined by the forces of supply and demand (an auctioneer).
▪ Since no single buyer or seller has enough power to set prices, They
are price takers. Competition among them keeps prices stable and
ensures that resources are allocated efficiently (this last sentence
will become clear in the future).
Competitive markets: an example
• Imagine the market for milk. There are thousands of farmers
producing milk and thousands of buyers, such as food companies.
• Each farmer’s milk is more or less identical, so no single farmer can
charge much more or less than the going market price.
• If one farmer tries to charge a higher price, buyers will simply
purchase from another farmer who offers a lower price.
• Similarly, if one firm decides not to buy milk, it won't affect the overall
market price because there are many other buyers.
• This kind of market, where no single participant can dictate the price,
is a good example of a competitive market. Agents are price takers
02 Demand
Demand schedule
▪ A demand schedule is a table that shows the quantity of a good or
service that either one or all consumers is/are willing and able to
purchase at various prices during a specific period of time.
▪ When it relates to one person we call it individual demand schedule.
When it relates to all individuals together (as a group) we call it
aggregate demand schedule
▪ The demand schedule illustrates the relationship between the price
of the good and the quantity demanded, holding all other factors
constant (ceteris paribus).
Demand schedule/curve/function
The graphical representation (left) of a schedule of demand (right) (or just demand)
is called demand curve. Unit price on the vertical axis!! Its mathematical expression
is called demand function. For each price there is a quantity demanded.
Example: Aggregate demand for natural gas in the US (BTU/British Thermal Units, to measure energy)
Law of demand
There is no (known) exception to the rule: ceteris paribus, the greater the price,
the smaller the quantity demanded for a good or a service. Law of demand.
What about luxury goods? What about rice in poor countries? No exceptions!
Example: Aggregate demand for natural gas in the US (BTU/British Thermal Units, to measure energy)
Is this a demand curve?
Cross-sectional data (same time but different countries) about the price of
gasoline (vertical axis) and consumption of gasoline (horizontal axis) in different
countries. Can the curve in blue be called the demand curve for gasoline? Explain
Example: Consumption of gasoline in different countries (2021) against price
Movement along the demand curve
Ceteris paribus (preferences, income, price of other goods, tax/subsidies, etc.),
a decease (increase) in the price of gas leads to an increase (decrease) in the
quantity demanded of gas along a given demand curve.
Movement along the demand curve
At point A, the price of natural gas is $3.50 per BTU, and the quantity demanded is
8.1 trillion BTUs. If, ceteris paribus, the price decreases to $3.00 per BTU, the
quantity demanded increases to 9.7 trillion BTUs, moving to point B on the curve.

This movement from point A to B

shows a change in the quantity
demanded due to a change in price
(ceteris paribus), and since this
happens along the same demand
curve, it is called a "movement along
the demand curve."
Movement of (shift of) the demand curve
A shift of the demand curve occurs when the entire demand curve moves to the
left or right due to changes in factors other than the price of the good itself.
These factors can include changes in consumer income, preferences, the
prices of related goods, and expectations about future prices, among others.
Movement of (shift of) the demand curve
The curve shifts from D1 to D2, indicating a change in demand due to factors
other than the price of natural gas. At point C, on the new demand curve D2,
even though the price is the same as at point A ($3.50 per BTU),
the quantity demanded is now higher, at
10 trillion BTUs.
This indicates that something has
happened in the market (such as a colder
winter increasing the need for heating)
that has increased the overall demand for
natural gas, shifting the entire demand
curve to the right.
Movement along/of the demand curve
To summarize about a shift
What we see in the diagram below can be described in the following,
alternative and equivalent, ways:
a) A shift to the right in the demand curve
b) An increase in demand
c) An increase in quantity demanded at each
and all price levels
Movement along/of the demand curve
Factor that may shift the demand curve for (for example) chocolate ice cream:
• Consumer income
• Prices of related goods
• Tastes
• Expectations
• Number of buyers
• Climate
• Health
• Law
• Etc.
Increase of demand
Consumer Income
If consumer incomes rise, people have more discretionary income to spend on
luxury items like chocolate ice cream. As a result, the demand for chocolate ice
cream increases, shifting the demand curve to the right.

Prices of Related Goods

If the price of substitute goods like vanilla ice cream increases, consumers
might choose to buy less vanilla and more chocolate ice cream, increasing the
demand for chocolate ice cream and shifting the demand curve to the right.
Alternatively, if the price of complementary goods like chocolate syrup or
waffle cones decreases, the overall cost of enjoying chocolate ice cream could
drop, increasing demand and shifting the curve to the right.
Increase of demand
Tastes/preferences
If there is a popular new trend or advertising campaign that highlights the
benefits of eating chocolate for stress relief, the demand for chocolate ice
cream might increase as consumers seek comfort in this product. This would
shift the demand curve to the right.

Expectations
If consumers expect the price of chocolate ice cream to increase in the near
future, they might buy more now to take advantage of the current lower price,
increasing demand and shifting the curve to the right..
Increase of demand
Number of buyers
If the population in a city increases due to an influx of new residents, the
number of potential buyers of chocolate ice cream would increase, leading to
higher demand and shifting the demand curve to the right.

Climate
In warmer seasons or in a hot climate, the demand for cold treats like chocolate
ice cream tends to increase, shifting the demand curve to the right.
Increase of demand
Health
If a brand introduces a healthier version of chocolate ice cream, such as one
that is low in sugar or made with plant-based ingredients, this might attract
health-conscious consumers who previously avoided traditional chocolate
ice cream.

Law
If the government offers subsidies for dairy farming or for healthier ice cream
options, the cost of producing chocolate ice cream might decrease, leading
to a lower price and potentially higher demand, shifting the curve to the right.
Example: a linear demand curve
Assume the following demand function
𝑞 = 𝐷 𝑝 = 20 − 2𝑝
where 𝑝 denotes the unit price of ice creams and 𝑞 (lt) the quantity demanded for it.
The function whose curve is presented on
right is the inverse of 𝐷(𝑝), that is
1
𝑝 = 𝐷−1 𝑞 = 10 − 𝑞
2
• What is the quantity demanded at a
price equal to 𝑝 = 6?
• What is the price for which the quantity
demanded is 𝑞 = 20?
Example: shift of a linear demand curve
Consider again the demand function
𝑞 = 𝐷 𝑝 = 20 − 2𝑝
along with the functions 𝐷′ 𝑝 and 𝐷′′ 𝑝 .
• What could cause a shift from 𝐷 to 𝐷’?
a) a price increase
b) an increase in people’s income.

• What could cause a shift from 𝐷 to 𝐷’’?

a) a price decrease
b) a decrease in temperature.
Kinds of goods: ordinary vs Giffen
Economist classify goods depending on how their quantity demanded respond
to changes in _________, ceteris paribus.

a) Price (from one point to another along the same demand curve)
• An ordinary good: Quantity demanded decreases when its unit price
increases (and vice versa). This is the Law od Demand.

• A Giffen good: Quantity demanded increases when its unit price

increases (and vice versa).

Giffen goods represent a violation of the

Law of Demand (negative slope of demand
function) and are unknow in practice.
Kinds of goods: normal vs inferior
Economist classify goods depending on how their quantity demanded respond
to changes in _________, ceteris paribus.
b) People’s income (from one demand curve to another)
• A normal good: Quantity demanded increases when income increases
(and vice versa). Example: cars, meat, trips, entertainment, etc.

• An inferior good: Quantity demanded decreases when income increases

(and vice versa). Rice, potatoes, etc.

Luxury goods are also normal goods.

Not many goods are inferior
Kinds of goods: subsitute vs complement
Economist classify goods depending on how their quantity demanded respond
to changes in _________, ceteris paribus.
b) Price of related goods (from one demand curve to another)
• A substitute good: Quantity demanded increases when the price of
another good increases (and vice versa). Example: public transportation
vs driving, Pepsi vs Coke, Netflix vs Prime TV, etc.

• A complementary good: Quantity demanded increases when the price of

another good decreases (and vice versa). Example:
printer vs ink cartridges, cars vs gasoline, etc.

Many pair of goods have a ‘certain’ degree of substitutability

To practice with kinds of goods
Suppose Sergio's income increases by 10%, leading to a 5% increase in the
quantity demanded of good A and a 0.5% decrease in the quantity demanded
of good B, ceteris paribus. Which of the following statements is true?

a) Product A is inferior, and Product B is normal for Sergio.

b) Product A is a normal, and Product B is an inferior for Sergio.
c) Both Product A and Product B are normal for Sergio.
d) Both Product A and Product B are inferior for Sergio.
To practice with kinds of goods
When the price of petroleum ______, then the demand for solar energy
______,. (Hint: solar energy good is a substitute for petroleum.)
a) increases; increases
b) increases; decreases
c) decreases; increases
d) None of the above
To practice with kinds of goods
In a hypothetical scenario, the income earned by the average guy eating
staple food (such as Spam) increases by 20%, yet his quantity demanded
decreases by 10%. Nothing else changes.
This scenario suggests that staple food is:
a) A normal good.
b) An inferior good.
c) A Giffen good.
d) A substitute good.
To practice with kinds of goods
Which of the following will cause an increase in the demand for cars?
a) Price of car tires increases because of a Malaysian rubber shortage
b) Gasoline prices drop by 50% when OPEC nations increase
production
c) McDonald’s increases its hamburger production in response to
consumer trends
d) None of the above
To practice with demand curves
Consider the following diagram about two demand curves for baseballs

The movement from A to _____ is caued by a lower price, while the shift from A to _____
could be caused by an incraese in the number of consumers
a) C ; B
b) B; C
c) F ; B
d) C ; F
To practice with demand curves
Consider the following diagram about two demand curves for baseballs

The movement from A to B represents the _____ in the quantity demanded of baseballs
resulting from _______.
a) decrease ; an increase in the price of a baseball
b) decrease ; a decrease in the price of a baseball
c) increase ; an increase in the price of a baseball
d) increase ; a decrease in the price of a baseball
To practice with demand curves
Consider the following diagram about two demand curves for baseballs

An increase in the demand for baseballs is shown by a:

a) movement from A to B.
b) movement from B to A.
c) shift from D0 to D1.
d) shift from D1 to D0.
To practice with the Law of Demand
According to the Law of Demand, a decrease in the price of coffee leads to:
a) An increase in the quantity demanded for coffee, ceteris paribus.
b) An increase in the demand for coffee (right shift of D curve).
c) A decrease in the quantity demanded for coffee, ceteris paribus.
d) A decrease in the demand for coffee (left shift of D curve).
 Individual vs market demand
The market demand curve is the horizontal sum of the individual demand* curves
for all 𝑚 consumers participating as demanders in the market.

*For each price level (for example $5) we add everyone’s quantity demanded 𝑞 = 𝑞1 + 𝑞2 + ⋯ + 𝑞𝑚 (= 30 + 20 = 50)
Individual vs market demand
Only for the bravest
Consider the following two demand functions (A = Aldo, B = Borja):
1
𝑝𝐴 𝑞𝐴 = 100 − 𝑞𝐴 and 𝑝𝐵 𝑞𝐵 = 100 − 𝑞𝐵
2

To obtain the horizontal sum over 𝑞, we first need to write 𝑞𝐴 𝑝𝐴 and 𝑞𝐵 𝑝𝐵

𝑞𝐴 𝑝𝐴 = 100 − 𝑝𝐴 and 𝑞𝐵 𝑝𝐵 = 200 − 2𝑝𝐵
Now set price at the same level 𝑝𝐴 = 𝑝𝐵 = 𝑝 and calculate

𝑞 𝑝 = 𝑞𝐴 𝑝 + 𝑞𝐵 𝑝 = 100 − 𝑝 + 200 − 2𝑝 = 300 − 3𝑝

which corresponds to the market demand function:

1
𝑝 𝑞 = 100 − 𝑞
3
03 Supply
Supply schedule
▪ A supply schedule is a table that shows the quantity of a good or
service that either one or all producers is/are willing and able to
supply at various prices during a specific period of time.
▪ When it relates to one firm we call it individual supply schedule.
When it relates to all individuals together (as a group) we call it
aggregate supply schedule.
▪ The supply schedule illustrates the relationship between the price
of the good and the quantity supplied, holding all other factors
constant (ceteris paribus).
Supply schedule/curve/function
The graphical representation (left) of a schedule of supply (right) (or just supply) is
called supplied curve. Unit price on the vertical axis!! Its mathematical expression
is called supply function. For each price there is a quantity supplied.
Example: Aggregate supply for natural gas in the US (BTU/British Thermal Units, to measure energy)
There is no Law of Supply
Unlike in the case of the demand, there is no Law of supply.
Supply curves could be horizontal, upward sloping, or (potentially) downward
sloping. However, most supply curves are typically upward sloping.
Example: Aggregate demand for natural gas in the US (BTU/British Thermal Units, to measure energy)
Movement along the supply curve
Ceteris paribus (technology, number of firms, price of inputs, etc.), an increase
(decrease) in the price of gas leads to an increase (decrease) in the quantity
supplied of gas along a given supply curve.
Movement along the supply curve
At point A, the price of natural gas is $3.00 per BTU, and the quantity supplied is
10 trillion BTUs. If the price increases to $3.50 per BTU, the quantity supplied
increases to 11.2 trillion BTUs, moving to point B on the curve.

This movement from point A to B

shows a change in the quantity
supplied due to a change in price
(ceteris paribus), and since this
happens along the same supply curve,
it is called a "movement along the
supply curve."
Movement of (shift of) the supply curve
A shift of the supply curve occurs when the entire demand curve moves to the
left or right due to changes in factors other than the price of the good itself.
These factors can include changes in consumer income, preferences, the
prices of related goods, and expectations about future prices, among others.
Movement of (shift of) the supply curve
A shift of the supply curve occurs when the entire demand curve moves to the
left or right due to changes in factors other than the price of the good itself.
These factors can include changes in price of inputs, technology, expectations,
number of sellers, law, etc.
Movement of (shift of) the supply curve
The curve shifts from S1 to S2, indicating a change in supply due to factors other
than the price of natural gas. At point C, on the new demand curve S2, even
though the price is the same as at point A ($3.00 per BTU),
the quantity supplied is now higher, at 12
trillion BTUs.
This indicates that something has
happened in the market (such as a the
price of labor has decreased) that has
increased the overall supply for natural
gas, shifting the entire supply curve to the
right.
To summarize about a shift
What we see in the diagram below can be described in the following,
alternative and equivalent, ways:
a) A shift to the right in the supply curve
b) An increase in supply
c) An increase in quantity supplied at each
and all price levels
Movement along/of the supply curve
Factor which typically shifts the supply curve for (for example) chocolate ice cream:
• Price of inputs
• Technology
• Expectations
• Number of firms
• Tax
• Law/regulations
• Etc.
Increase of supply
Price of Inputs: It refers to the cost of raw materials, labor, and other
resources needed to produce chocolate ice creams. If the price of key inputs
like cocoa or milk decreases, the cost of production drops, leading to an
icrease in supply.

Technology: Technological advancements can enhance production efficiency,

reducing costs and increasing supply. Improved technology in refrigeration
machinery, for instance, would shift the supply curve of chocolate ice creams
to the right.
Increase of supply
Expectations: Expectations about future prices and/or costs can influence
current supply. If firms expect the price of chocolate ice cream to drop in the
future, they might increase current supply to sell less later at lower prices,
leading to a rightward shift in the supply curve.

Number of firms: The number of firms in the market for chocolate ice cream
affects total market supply. An increase in the number of firms results in an
increase in supply, shifting the supply curve to the right.
Increase of supply
Tax: A subsidy to the producer of chocolate ice cream would decrease costs
and increase supply. This results in a rightward shift of the supply curve. A tax
would have the opposite effect, decreasing supply.

Law/regulations: Deregulation, such as reduction of environmental laws or

health and safety standards, can decrease production costs, thereby
increasing supply. Conversely, the introduction of ggovernment regulations
can increase costs and decrease supply..
Example: a linear supply curve
Assume the following demand function
𝑞 = 𝑆 𝑝 = −7 + 𝑝
where 𝑝 denotes the unit price of ice creams and 𝑞 (lt) the quantity supplied for it.
The function whose curve is presented on
right is the inverse of S(𝑝), that is
𝑝 = 𝑆 −1 𝑞 = 7 + 𝑞
• What is the quantity supplied at a price
equal to 𝑝 = 6?
• What is the price for which the quantity
supplied is 𝑞 = 20?
Example: a shifts of a linear supply curve
Consider again the supply function
𝑞 =𝐷 𝑝 =7+𝑝
along with the functions S′ 𝑝 and S′′ 𝑝 .
• What could cause a shift from 𝑆 to 𝑆’?
a) a price increase
b) an increase in the price of labor.

• What could cause a shift from 𝑆 to 𝑆’’?

a) a price decrease
b) a decrease in temperature.
To practice with supply
According to the model of supply and demand, a decrease in the supply of
oranges is most likely to have been caused by:

a) an increase in the price for oranges.

b) a decrease in the price for oranges.

c) An improvement in the technology used to produce oranges.

d) An increase in the cost of making oranges.

To practice with quantity supplied and supply
If the government introduces a $0.50 per unit subsidy for the production of
chocolate ice cream, how is the supply curve of chocolate ice creams likely
to respond?

a) Shift to the left

b) Shift to the right

c) Remain unchanged

d) Become steeper
To practice with quantity supplied and supply
If the price of cocoa (the key ingredient for the production of chocolate ice
creams) increases, which of the following is an accurate description of what
happens in the market for chocolate ice creams?

a) The supply of ice creams increases

b) The price of chocolate ice creams certainly increases

c) The supply curve of chocolate ice creams shifts rightward

d) There is a lower quantity supplied of chocolate ice creams at each and

all price levels.
To practice with supply
Which of the following would be expected to increase the supply of copy machines?

a) A decrease in the number of firms manufacturing copy machines

b) A decrease in the price of copy machines

c) A decrease in the price of toner

d) A decrease in the cost of the labor hired to make copy machines

04 Equilibrium
Equilibrium in competitive markets
In competitive markets, equilibrium is the state where the quantity demanded by
consumers equals the quantity supplied by producers, resulting in a stable
market price. This occurs where the demand curve intersects the supply curve.

Key Concepts:
• Market Clearing Price: The price at which the market is in equilibrium.
• Equilibrium quantity: The amount of goods traded in the equilibrium.
• Stability: Any deviation from this price and quantity will naturally correct
as market forces push back towards equilibrium.
Equilibrium in competitive markets
In competitive markets, equilibrium is the state where the quantity demanded by
consumers equals the quantity supplied by producers, resulting in a stable
market price.

The price at which this takes place is in

the equilibrium price, also referred to as
the market-clearing price.

The quantity of the good or service

bought and sold at that price is the
equilibrium quantity.
Equilibrium in competitive markets
In competitive markets, equilibrium is the state where the quantity demanded by
consumers equals the quantity supplied by producers, resulting in a stable
market price.
What is the equilibrium price and quantity
of natural gas?
• How many $ (per BTU) would demanders
be willing to pay to purchase 10 BTUs?
• How many $ (per BTU) would suppliers
be willing to charge to supply 10 BTUs?
• Hence?
Equilibrium in competitive markets
In competitive markets, equilibrium is the state where the quantity demanded by
consumers equals the quantity supplied by producers, resulting in a stable
market price.
What is the equilibrium price and quantity
of natural gas?
• How many $ (per BTU) would demanders
be willing to pay to purchase 10 BTUs?
• How many $ (per BTU) would suppliers
be willing to charge to supply 10 BTUs?
• Hence?
Example: linear demand & supply
Assume the following demand and supply function
𝑞𝑑 = 𝐷 𝑝 = 20 − 2𝑝 and 𝑞𝑠 = 𝑆 𝑝 = −7 + 𝑝
where 𝑝 denotes the unit price of ice creams and
𝑞 (lt) the demanded for goods.
Intersecting demand and supply, and setting 𝑞𝑑 = 𝑞𝑠 = 𝑞
we obtain:
20 − 2𝑝 = −7 + 𝑝 ⇒ 27 = 3𝑝 ⇒ 9 = 𝑝 and 2 = 𝑞
Hence, the market clearing price is 𝑝∗ = 9 while the
equilibrium quantity is 𝑞 ∗ = 2 .
As simple as that!
To practice with equilibrium
Fill in the blanks by using the diagram below

If the price is $2.50, the quantity demanded is $ _____ and the quantity supplied is
_____ . Therefore, there would be a market shortage/surplus/equilibrium (choose)
equal to _______ bottles.
To practice with equilibrium
Fill in the blanks by using the diagram below

If the price is $0.50, the quantity demanded is $ _____ and the quantity supplied is
_____ . Therefore, there 0ould be a market shortage/surplus/equilibrium (choose)
equal to _______ bottles.
To practice with equilibrium
Fill in the blanks by using the diagram below

The equilibrium price is $_____ and the equilibrium quantity is ______ . In the
equilibrium, the quantity demanded is $ _____ and the quantity supplied is _____ . In
the equilibrium, there is a market shortage/surplus/equilibrium (choose) equal to
_______ bottles.
Summary of Topic 3
Competitive Markets Overview
• Definition: A competitive market is one where numerous buyers and
sellers exist, and no single party can influence the market price.
• Characteristics: Products are generally indistinguishable, and prices are
set by supply and demand dynamics.
• Example: Milk market, where no single farmer can dictate the price.
• Key Questions:
i. What to produce?
ii. How to produce it?
iii. How much to produce?
Summary of Topic 3
Demand Concepts
• Demand Schedule: A table showing the quantity of a good consumers
are willing to buy at various prices over a period.
• Individual vs. Aggregate: Demand can be considered for a single
individual or the entire market.
• Demand Curve: A graphical representation of the demand schedule.
Price is on the vertical axis.
• Law of Demand: As the price of a good increases, the quantity
demanded decreases, ceteris paribus.
Summary of Topic 3
Supply Concepts
• Supply Schedule: A table showing how much producers are willing to
supply at different prices.
• Individual vs. Aggregate: The same distinction applies between
individual and market supply schedules.
• Supply Curve: Graphical depiction of the supply schedule.
• Movement along the Curve: Changes in the price of a good lead to
movements along the supply curve.
• Shift in Supply Curve: Caused by factors like input prices, technology,
and regulations.
Summary of Topic 3
Equilibrium in Competitive Markets
• Market Equilibrium: Occurs where the quantity demanded equals the
quantity supplied, leading to a stable market price.
• Market Clearing Price: The price at which no surplus or shortage exists.
• Shifts: Both the demand and supply curves can shift, changing the
equilibrium price and quantity.