Here are the steps to solve this problem: a) With the 40% drop in export demand, total demand falls to Q = 3244 - 283P - 0.4(3244 - 283P) = 1944 - 283P. Setting supply equal to this reduced demand gives 1944 + 207P = 1944 - 283P. Solving for P yields P = $2.50. So the price falls slightly but farmers do not have much to worry about. b) At the target price of $3.50, the government must buy enough wheat to raise the market quantity from the equilibrium of 1944 + 207P = 1944 - 283P (where P = $2.50) to the quantity where P = $3.

1. Microeconomics
Session 1-2

2. The demand curve
P
Q
680
5000
Q=q(P)

3. The inverse demand curve
Q
P
5000
680
P=p(Q)

4. The Demand Curve
The demand curve, labeled D,
shows how the quantity of a good
demanded by consumers
depends on its price. The
demand curve is downward
sloping; holding other things
equal, consumers will want to
purchase more of a good as its
price goes down.
The quantity demanded may also
depend on other variables, such
as income, the weather, and the
prices of other goods. For most
products, the quantity demanded
increases when income rises.
A higher income level shifts the
demand curve to the right (from D
to D’).
SUPPLY AND DEMAND
Figure 2.2
The Demand Curve

5. IEA sees surge in oil demand from India,
emerging nations
PTI May 12, 2016
Surge in oil demand in India
and other emerging
nations will lead to reduction
in global oil surplus in the
first half of 2016,
the International Energy
Agency (IEA) said today.
Price
Oil Demand
X
Y
Before Oil
Surge
After Oil
Surge
After Oil
Surge
Before Oil
Surge

6. Monsoon to wash away diesel demand surge
Reuters Jun 16, 2016
The monsoon is expected to
dump above-average rainfall
on the South Asian nation
after two years of drought,
cutting its use of diesel for
irrigation pumps and
generators over the third
quarter and potentially
rejuvenating exports of the oil
product.
Price
Demand For Diesel
X
Y
Before
After
Shift In Demand Curve
After Before

7. Homework 1
• Show that the term Supply can be used in
two different senses implying either
quantity supplied or supply curve using
some newspaper articles.

8. Shifts in Demand
Quantity Demanded
of Y Decreases
Quantity Demanded
of Y Increases
Complements
Two goods for which an
increase in the price of one
leads to a decrease in the
quantity demanded of the
other
Substitutes
Two goods for which an
increase in the price of one
leads to an increase in the
quantity demanded of the
other.
When Price of X Increases,

9. SUPPLY AND DEMAND
The Supply Curve
● supply curve Relationship between the quantity of a good that
producers are willing to sell and the price of the good.
The Supply Curve
The supply curve, labeled S in
the figure, shows how the
quantity of a good offered for
sale changes as the price of the
good changes. The supply
curve is upward sloping: The
higher the price, the more firms
are able and willing to produce
and sell.
If production costs fall, firms
can produce the same quantity
at a lower price or a larger
quantity at the same price. The
supply curve then shifts to the
right (from S to S’).
Figure 2.1

10. THE MARKET MECHANISM
Supply and Demand
The market clears at price P0
and quantity Q0.
At the higher price P1, a surplus
develops, so price falls.
At the lower price P2, there is a
shortage, so price is bid up.
Figure 2.3

11. • How Parsees are coping
up with the problem of
extinction?
• Why everybody in China
are purchasing increasingly
bigger house over time?

12. CHANGES IN MARKET
EQUILIBRIUM
New Equilibrium Following
Shifts in Supply and Demand
Supply and demand curves
shift over time as market
conditions change.
In this example, rightward
shifts of the supply and
demand curves lead to a
slightly higher price and a
much larger quantity.
In general, changes in price
and quantity depend on the
amount by which each
curve shifts and the shape
of each curve.
Figure 2.6

13. CHANGES IN MARKET
EQUILIBRIUM
New Equilibrium Following
Shifts in Supply and Demand
Supply and demand curves
shift over time as market
conditions change.
In this example, rightward
shifts of the supply and
demand curves lead to a
slightly lower price and a
much larger quantity.
In general, changes in price
and quantity depend on the
amount by which each
curve shifts and the shape
of each curve.
Figure 2.6
P2
P1
Q1 Q2
Price
Quantity
S1
S2
D2
D1

14. CHANGES IN MARKET EQUILIBRIUM
Demand Supply Quantity Price
Increases Increases Increases Ambiguous
Decreases Decreases Decreases Ambiguous
Increases Decreases Decreases Increases
Decreases Increases Increases Decreases

15. A change in quantity
Q
P
5000
680
P=p(Q)
700
4990

16. ELASTICITIES
● elasticity Percentage change in one variable resulting from
a 1-percent increase in another.
● price elasticity of demand Percentage change in quantity
demanded of a good resulting from a 1-percent increase in its
price.
Price Elasticity of Demand
(2.1)

17. ELASTICITIES
● linear demand curve Demand curve that is a straight line.
Linear Demand Curve
Linear Demand Curve
Figure 2.11
The price elasticity of demand
depends not only on the slope
of the demand curve but also
on the price and quantity.
The elasticity, therefore, varies
along the curve as price and
quantity change. Slope is
constant for this linear demand
curve.
Near the top, because price is
high and quantity is small, the
elasticity is large in magnitude.
The elasticity becomes smaller
as we move down the curve.

18. ELASTICITIES
● infinitely elastic demand Principle that consumers will buy as much
of a good as they can get at a single price, but for any higher price the
quantity demanded drops to zero, while for any lower price the
quantity demanded increases without limit.
Linear Demand Curve
(a) Infinitely Elastic Demand
Figure 2.12
(a) For a horizontal demand
curve, ΔQ/ΔP is infinite.
Because a tiny change in price
leads to an enormous change
in demand, the elasticity of
demand is infinite.

19. ELASTICITIES
● completely inelastic demand Principle that consumers will buy a
fixed quantity of a good regardless of its price.
Linear Demand Curve
(b) Completely Inelastic Demand
Figure 2.12
(b) For a vertical demand curve,
ΔQ/ΔP is zero. Because the
quantity demanded is the same
no matter what the price, the
elasticity of demand is zero.

20. Price Elasticity of Demand
0
Completely
Inelastic
-∞
Infinitely
Elastic
E = -1
Unitary
Elastic
SaltTomato CarHyundai Car
-0.1-4.6 -1.3-4.3
Elastic Inelastic

21. A change in quantity (algebra)
 Total Revenue ≡ TR(Q) = p(Q) · Q
 Marginal Revenue ≡ MR(Q) = TR’(Q)
 TR’(Q) = p(Q) + p’(Q) · Q
= p(Q) [ 1 + p’(Q) · Q / p(Q)]
= p(Q) [ 1 + 1/e]
where
 e = p / (p’(Q) · Q)

22. Price elasticity of demand
 e = p · Q’(p) / Q(p)
 TR’(Q) = MR(Q) = p(Q) [ 1 + 1/e]
 Abs(e) > 1 ; demand is elastic; TR’(Q) > 0
 Abs(e) < 1 ; demand is inelastic; TR’(Q) < 0

23. ELASTICITIES
● income elasticity of demand Percentage change in the quantity
demanded resulting from a 1-percent increase in income.
Other Demand Elasticities
● cross-price elasticity of demand Percentage change in the
quantity demanded of one good resulting from a 1-percent increase in
the price of another.
● price elasticity of supply Percentage change in quantity supplied
resulting from a 1-percent increase in price.
Elasticities of Supply
(2.2)
(2.3)

24. Demand
SHORT-RUN VERSUS LONG-RUN ELASTICITIES
(a) Gasoline: Short-Run and Long-Run
Demand Curves
Figure 2.13
(a) In the short run, an increase in
price has only a small effect on the
quantity of gasoline demanded.
Motorists may drive less, but they will
not change the kinds of cars they are
driving overnight.
In the longer run, however, because
they will shift to smaller and more
fuel-efficient cars, the effect of the
price increase will be larger.
Demand, therefore, is more elastic in
the long run than in the short run.

25. Demand
SHORT-RUN VERSUS LONG-RUN ELASTICITIES
(b) Automobiles: Short-Run and Long-Run
Demand Curves
Figure 2.13
(b) The opposite is true for
automobile demand. If price
increases, consumers initially defer
buying new cars; thus annual
quantity demanded falls sharply.
In the longer run, however, old cars
wear out and must be replaced; thus
annual quantity demanded picks up.
Demand, therefore, is less elastic in
the long run than in the short run.
Demand and Durability

26. Demand
SHORT-RUN VERSUS LONG-RUN ELASTICITIES
Income Elasticities
Income elasticities also differ from the short run to the
long run.
For most goods and services—foods, beverages, fuel,
entertainment, etc.— the income elasticity of demand is
larger in the long run than in the short run.
For a durable good, the opposite is true. The short-run
income elasticity of demand will be much larger than the
long-run elasticity.

27. MARKET DEMAND
● market demand curve Curve relating
the quantity of a good that all consumers
in a market will buy to its price.
From Individual to Market Demand
TABLE 4.2 Determining the Market Demand Curve
(1) (2) (3) (4) (5)
Price Individual A Individual B Individual C Market
($) (Units) (Units) (Units) (Units)
1 6 10 16 32
2 4 8 13 25
3 2 6 10 18
4 0 4 7 11
5 0 2 4 6

28. MARKET DEMAND
From Individual to Market Demand
Summing to Obtain a Market Demand
Curve
The market demand curve is
obtained by summing our three
consumers’ demand curves DA,
DB, and DC.
At each price, the quantity of
coffee demanded by the market is
the sum of the quantities
demanded by each consumer.
At a price of $4, for example, the
quantity demanded by the market
(11 units) is the sum of the
quantity demanded by A (no
units), B (4 units), and C (7 units).
Figure 4.10

29. CONSUMER SURPLUS
● consumer surplus Difference between what a consumer is willing to
pay for a good and the amount actually paid.
Consumer Surplus and Demand
Consumer Surplus
Consumer surplus is the
total benefit from the
consumption of a product,
less the total cost of
purchasing it.
Here, the consumer surplus
associated with six concert
tickets (purchased at $14
per ticket) is given by the
yellow-shaded area.
Figure 4.13

30. Consumer and Producer Surplus
 Individual consumer surplus is the difference
between the maximum amount that a consumer is
willing to pay for a good and the amount that the
consumer actually pays.
 Producer surplus for a particular unit of output is
the difference between the price at which it is sold
and the marginal cost of producing it. Total
producer surplus is the sum of producer surplus
over all units sold. It equals the difference between
revenue and variable costs.

31. Homework 2 (Page 56, exercise 5)
• Much of the demand for U.S. agricultural output has come
from other countries. In 1998, the total demand for wheat
was Q = 3244 – 283P. Of this, total domestic demand was
QD = 1700 – 107P, and domestic supply was QS = 1944
+ 207P. Suppose the export demand for wheat falls by 40
percent.
a) U.S. farmers are concerned about this drop in export
demand. What happens to the free-market price of wheat
in the United States? Do the farmers have much reason
to worry?
b) Now suppose the U.S. government wants to buy enough
wheat to raise the price to $3.50 per bushel. With the drop
in export demand, how much wheat would the
government have to buy? How much would this cost the
government?