Lecture notes
Microeconomics 1 Block 2 Supply and Demand Lecture Notes 20/21
- Module
- Microeconomics 1
- Institution
- The University Of York (UOY)
Microeconomics 1 Block 2 Supply and Demand Lecture Notes 20/21
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Micro Block 2: Supply and Demand2.1 Supply
The supply curve
The supply curve for an individual rm i is denoted Si(p), and shows the quantity supplied by rm i
at each possible price p. In producer theory, we will study how to construct these individual
supply curves.
Figure 25: the supply curve
Figure 25 illustrates the supply curve S(p) = c + dp, where c = -1 and d = 1.
In perfect competition, there are many rms identical to rm i in the market. If there are n such
rms, then the supply curve is simply S(p) = ni=1 Si(p), i.e. the sum of the individual supply curves.
This is the short run supply curve because we assume that n is xed (but large).
Elasticity of supply
The price elasticity of supply measures how the quantity supplied of a good changes with the
price of that good. It is de ned as s = ( S(p)/ p)(p/S(p)). In other words, the price elasticity of
supply is the percentage change in supply in response to a given percentage change in the price.
Graphically, elasticity of supply is somehow related to how steep the supply curve is. The steeper
the supply curve is, the less sensitive quantity supplied is to price, the smaller is the elasticity.
When the supply curve is vertical, the supply is perfectly inelastic since quantity doesn't change
with price. When the supply curve is horizontal, supply is perfectly elastic since a small change in
price would generate an in nity change in quantity.
Inverse supply
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, The demand and supply functions measure the amount of a good consumers and rms are willing
to buy or produce at a given price. Sometimes, it is useful to invert these relationships to get price
as a function of quantity.
The inverse supply function, Ps(p), is the price at which producers would be willing to sell q units
of goods. The inverse demand and supply curve are useful to de ne the consumer and producer
surplus.
EXAMPLE Assume that the beer supply curve is S(p) = p - 1. Hence, the inverse supply function
is PS(q) = 1 + q. This tells us that the beer industry is wiling to supply, for example, 7 bottles of
beer at a minimum price of 1 + 7 = £8. Assume that the beer demand curve is D(p) = 10 - p.
Hence, the inverse demand function is PD(q) = 10 - q. This tells us that the beer consumers are
willing to pay 10 - 6 = £4 to buy, for example, 6 bottles of beer.
Producers’ surplus
The producers’ surplus is the are above the inverse supply curve and below the market price, up
to the quantity producers sell.
Figure 26: producers’ surplus
2.2 Demand
The demand curve
The demand curve for an individual consumer j is denoted Dj(p), and shows the quantity
demanded by consumer j at each possible price p. The market demand curve is the sum of all the
individual demand curves so that D(p) = mj=1 Dj(p), where m is the number of consumers in the
market.
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