Microeconomics-week2 reading book for.pdf

micro economic , micro economic ,micro economic

1. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
PMP Economics
Week 2
Market Mechanism
and Welfare Theory

2. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Learning Objectives
(W2LO1) explain the relationship between demand and price,
and other determinants of demand
(W2LO2) explain the relationship between supply and price, and
other determinants of supply
(W2LO3) describe the market mechanism and equilibrium
(W2LO4) discover and apply Welfare theory
2
By the end of this lecture, you should be able to:

3. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
What might cause:
•Range Rover to decide to cut back
for production of cars.
Starter Activity (Debate)
•Travel agents to put more
emphasis on selling low cost UK
holiday rather than luxury or
expensive overseas holidays.
•Adidas decided to increase the
production of the German football
national team’s shirt.
Learning Objective: (W2LO1) explain the relationship between demand and price, and other determinants of demand
Aiming High
What criteria
shaping companies
decisions?

4. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
•Understanding and forecasting the impacts of changes in
the global economy on market price, consumption and
production
•Assessing and evaluating the role of government in
correcting markets through different policies
•Determining the effects of government’s intervention such
as taxes and subsidies, or tariffs and import quotas on
consumers, domestic and foreign producers.
The model of demand and supply and demand-supply
analysis can be applied to a wide range of problems
including but not limited to:
Supply-Demand Analysis
Learning Objective: (W2LO2) explain the relationship between supply and price, and other determinants of supply.

5. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Q
S= Q
S(P)
The Supply curve shows the relationship between price and amount
of a good (quantity supplied) that firms are willing and able to sell.
The Supply curve
Figure 1: The supply curve
THE SUPPLY CURVE
•labeled Sin the figure
•shows a positive relationship
between the quantity
supplied and price of the
good
•is positively sloped/ upward
sloping: The higher the price
of the good, the more firms
are able and willing to
produce and sell.
Learning Objective: (W2LO2) explain the relationship between supply and price, and other determinants of supply.

6. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Change in Price and the Supply curve
When price of the good changes, ceteris paribus, quantity supplied
changes Movement along the supply curve
An increase in price
•P1increases to P2
•Quantity supplied Q1 rises to Q2
movement upward the Supply
curve: The higher the price of
the good, the more firms are
able and willing to produce
and sell.
There is a positive relationship
between price and quantity
supplied, when other factors
remain the same (Law of Supply).
The Supply curve
P2
P1
Q2Q1
Figure 2: Movement along the supply curve
Learning Objective: (W2LO2) explain the relationship between supply and price, and other determinants of supply.

7. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
The Supply Curve
Other variables that affect Supply
•production costs (including wages, interest charges, costs of raw materials),
•price of related goods (e.g. substitutes or complements),
•natural factors (e.g. weather, natural disaster,…)
•number of firms,
•technology (affects productivity),
•future price expectations
changes in supply
shift the supply curve
Example:If production costs fall, firms can
produce:
the same quantity (Q1) at a lower
price (P2) or
a larger quantity (Q2) at the same
price (P1)
Supply curve shifts to the right (Sto S′)
Figure 3: Shift of the supply curve
Learning Objective: (W2LO2) explain the relationship between supply and price, and other determinants of supply.

8. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Learn from media 1
Learning Objective: (W2LO2) explain the relationship between supply and price, and other determinants of supply.

9. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
THE DEMAND CURVE
•labeled D
•shows a negative relationship
between the quantity demanded
and price of the good
•is downward sloping: holding
other things equal, consumers will
want to purchase more of a good
as its price goes down
The demand curve shows the relationship between the price and the
amount of a good that consumers are willing and able to buy (quantity
demanded)
The Demand Curve
Q
D= Q
D(P)
Figure 4: The demand curve
Learning Objective: (W2LO1) explain the relationship between demand and price, and other determinants of demand

10. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Change in Price and the Demand curve
When price of the good changes, ceteris paribus, quantity demanded
changes Movement along the demand curve
An increase in price
•P1increases to P2
•Quantity supplied Q1 rises to Q2
movement upward the Supply
curve: The higher the price, the
more firms are able and willing to
produce and sell.
The Demand curve
P2
P1
Q2 Q1
An increase in price
•P1 increases to P2
•Quantity demanded Q1 reduces to
Q2
movement upward the Demand
curve: The higher the price of the
good, the less consumers are able
and willing to consume.
There is a negative relationship
between price and quantity
demanded, when other factors
remain the same (Law of
Demand). Figure 5: Movement along the demand curve
Learning Objective: (W2LO1) explain the relationship between demand and price, and other determinants of demand

11. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Other variables that affect Demand
•income,
•the prices of related goods (i.e. substitutes
or complements)
•number of consumers,
•consumer tastes and preferences,
•Future price expectations
changes in demand
shift the demand curve
Example: If consumers’ incomes increase
If the market price were held constant at
P1, there is an increase in the quantity
demanded from Q1 to Q2, or
For the same quantity demanded Q1, the
willingness to pay increases fromP1to P2
Demand curve shifts to the right (Dto
D′).
The Demand Curve
Figure 6: Shift of the demand curve
Learning Objective: (W2LO1) explain the relationship between demand and price, and other determinants of demand

12. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Learn from media 2
Learning Objective: (W2LO2) explain the relationship between supply and price, and other determinants of supply.

13. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Substitutes: Two goods for which an
increase in the price of one good
leads to a rise in the demand for the
other.
e.g. tea and coffee
Related Goods
Learning Objective: (W2LO1) explain the relationship between demand and price, and other determinants of demand
Complements: Two goods for
which a decrease in the price of
one good leads to an increase in
the demand for the other.
e.g. DVD player and DVDs

14. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Class Activity 2
Eachstudentshouldwritedown10substituteand10
complimentsgoodsin3minutes.Studentsmustbeable
toexplainhowonegoodisrelatedtotheother?
Learning Objective: (W2LO1) explain the relationship between demand and price, and other determinants of demand
Aiming High
Compare your
examples in the UK
and a second
country? Will you
have the same
results?

15. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Learning Objectives
(W2LO1) explain the relationship
between demand and price, and other
determinants of demand
(W2LO2) explain the relationship
between supply and price, and other
determinants of supply.
LO3:​
LO4:​

16. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
MARKET EQUILIBRIUM: A situation where the quantity demanded and the quantity supplied
are equal at the prevailing market price.
•Equilibrium: The market clearing
price P
0and clearing quantity Q
0
•Market mechanism: Tendency in a
free market for price to adjust to
clear the market.
•Surplus: A situation where the
quantity supplied exceeds the
quantity demanded.
At the higher price P
1(surplus) 
price falls to restore equilibrium
•Shortage: A situation where the
quantity demanded exceeds the
quantity supplied.
At the lower price P
2(shortage) 
price rises to clear the market
The Market Mechanism
Figure 7: Market equilibrium, Surplus and Shortage
Learning Objective: (W2LO3) describe the market mechanism and equilibrium

17. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
NEW EQUILIBRIUM
FOLLOWING
SHIFT IN SUPPLY
When the supply curve
shifts to the right,
New market clearing
price is lower, at P
3
New and larger quantity
at Q
3.
Changes in Market Equilibrium
Figure 8: Rightward shift of the supply curve when the
demand curve remains the same
Learning Objective: (W2LO3) Understand the market mechanism and equilibrium

18. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
NEW EQUILIBRIUM
FOLLOWING SHIFT
IN DEMAND
When the demand curve
shifts to the right,
the new equilibrium is at
a higher price P
3and a
larger quantity Q
3.
Changes in Market Equilibrium
Figure 9: Rightward shift of the demand curve when
the supply curve remains the same
Learning Objective: (W2LO3) describe the market mechanism and equilibrium

19. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
NEW EQUILIBRIUM
FOLLOWING SHIFTS IN
BOTH SUPPLY AND
DEMAND
When market conditions
change, in some cases,
both supply and demand
curves shift.
In this example, both supply
and demand curve shift to
the right, which results in a
slightly increase in price and
a much larger rise quantity.
In summary, changes in
price and quantity at the
new market clearing levels
depend on how much each
curve shifts and the shape
of them.
Changes in Market Equilibrium
Figure 10: New equilibrium when both demand curve
and supply curve shift to the right
Learning Objective: (W2LO3) describe the market mechanism and equilibrium

20. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Learn from media 3
Learning Objective: (W2LO3) describe the market mechanism and equilibrium

21. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
THE MARKET FOR WHEAT AND RICE IN THE EARLY 1990s
(a)Atechnologicalbreakthroughonbreedingimprovedseedsforbasiccropsincluding
wheatandrice-theGreenRevolution-doubledtheharvestperacreinlow-income
countriesaroundtheworldbytheearly1990s.Atechnologicalimprovementwhichreduces
productioncostswillshiftsupplycurverightwardincreasequantitysuppliedatanygiven
price.However,thetrendoflow-carbdietresultedinadecreaseindemandforhigh-carb
foodsuchaswheatandriceandshiftthedemandcurveforthesegoodstotheleft.
Learning Objective: (W2LO3) Understand the market mechanism and equilibrium
Class Activity 3-1

22. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Class Activity 3-1
(a) The supply curve for wheat and rice shifted downward as
production costs fell; the demand curve shifted to the left as
consumer’s preference changed. As change in supply is larger than
change in demand, the price of fell sharply and quantity increased.
Figure 11a: The market for wheat and rice in the early 1990s
Learning Objective: (W2LO3) describe the market mechanism and equilibrium

23. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
THE MARKET FOR CANNED FOOD IN THE UK DURING CORONAVIRUS LOCKDOWN IN 2020
(b)ThespreadofCoronavirusledtoa
strictlockdownintheUKinMarch2020,
whichdisruptedthesupplyofcanned
food.Asaresult,thesupplyofcanned
foodinallsupermarketsdroppedand
supplycurveshiftedtotheleft.
However,thesituationandthelockdown
resultedinapanicandbulk-buyingtrend
amongthepublic.Hence,therewasa
significantincreaseindemandfor
cannedfood,whichledtoemptyshelves
inmostofthesupermarketsintheUK
withinthefirstmonthofthelockdown.
Class Activity 3-2
Learning Objective: (W2LO3) describe the market mechanism and equilibrium

24. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Class Activity 3-2
(b) The supply curve for canned food shifted leftward as the supply
chain was disrupted, while the demand curve shifted to the right
due to panic consumption. As the change in demand is larger than
the change in supply, both price and quantity increased.
Figure 11b: The market for canned food in the UK in 2020
Aiming High
What other goods do you
know acted the same as
canned food during Covid
period? Explain it.
Learning Objective: (W2LO3) describe the market mechanism and equilibrium

25. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Learning Objectives
(W2LO1) explain the relationship
between demand and price, and other
determinants of demand
(W2LO2) explain the relationship
between supply and price, and other
determinants of supply.
(W2LO3) describe the market
mechanism and equilibrium
LO4:​

26. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Consumer Surplus
Consumer surplus: The monetary difference between a consumer’s
maximum willingness to pay for a good and the actual price of that
good in the market.
Consumer Surplus and Demand
Consumersurplusisthetotalbenefit
thatthebuyergetsfromthe
consumptionofaproduct.
Here, the consumer surplus associated
with slices of chocolate fudge
(purchased at $3 per slice) is given by
the blue-shaded area:
$2 + $1 = $3
The total expenditure is given by the
yellow-shaded area:
$3 + $3 + $3 = $9
Figure 12: Consumer surplus
Learning Objective: (W2LO4) discover and apply Welfare theory

27. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Consumer Surplus
Forthemarketasawhole,consumer
surplusistheareaundertheinverse
demandcurveandabovethepurchaseprice
uptothelevelofoutputtradedinthe
market.
Here,theconsumersurplusisgivenbythe
yellow-shadedtriangleandisequalto
1/2 x ($20 − $14) x 6500 = $19,500
APPLYING CONSUMER SURPLUS
Consumersurplusmeasurestheaggregatebenefitobtainedbyallofthebuyersfrom
consuminggoodsinamarket.
Wecanevaluateboththecostsandbenefitsnotonlyofalternativemarketstructures,but
ofpublicpoliciesthatalterthebehaviorofconsumersandfirmsinthosemarketsby
combiningthesurplusfromconsumerswiththetotalprofitsfromproducers,
Figure 13: Consumer surplus generalised
Learning Objective: (W2LO4) discover and apply Welfare theory

28. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Calculating Consumer Surplus
Theyellow-shadedtrianglegivesthe
consumersurplusgeneratedwhenNetflix
subscriptionpriceisat£8.99/monthand
Netflixissubscribedby12.4million
individuals.
Thesurplusiscreatedbecausesome
consumersarewillingtopaymorethan£8.99
permonthtogetaccesstoNetflix.
CS=1/2x(£20-£8.99)x12.4=£68.26mil
Figure 14: Subscription of Netflix in the UK
Netflix is a streaming service that provides subscribers with
a wide variety ofTV shows, movies, documentaries and
etc. oninternet-connected devices.
Learning Objective: (W2LO4) discover and apply Welfare theory

29. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Producer Surplus
PRODUCER SURPLUS (PS) is the monetary difference
between the market price of a product and the sellers’
minimum willingness to accept to produce it (marginal
cost).
Theproducersurplusforamarketistheareaabovethe
inversesupplycurveandbelowthemarketprice,from0
uptooutputQ*.
Thiscapturesthebenefitthatlower-costproducers
enjoybysellingatthemarketprice
Figure 15: Producer Surplus
APPLYING PRODUCER SURPLUS
Producersurplusmeasurestheaggregatebenefit
obtainedbyallexistingproducersinamarket.
WeuseProducersurplusandConsumersurplusto
evaluatewelfaregainsandwelfarelossesinthemarket.
The green-shaded area represents Producer surplus,
which measures the total net gain (or loss) to producers
when operating in a certain market.
Learning Objective: (W2LO4) discover and apply Welfare theory

30. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Consumersurplus,whichmeasurestheaggregate
benefitsofallconsumers,istheyellow-shadedarea
betweenthedemandcurveandthemarketprice.
Producersurplusmeasurestheaggregateprofitsof
producers,plusrentstofactorinputs,whichisshown
bythegreen-shadedareabetweenthesupplycurve
andthemarketprice.
WELFARE THEORY
ConsumerSurplus:
ConsumerAiswillingtopay£20perunitfora
goodofwhichmarketpriceis£15,hence,enjoysa
benefitof£5foreveryunitconsumed.
ConsumerBenjoysabenefitof£2,whichisthe
differencebetweenawillingnesstopayof£17and
actualpricepaidof£15perunit.
ConsumerCvaluingthegoodatexactlythe
marketprice,enjoysnobenefit.
Together, consumer and producer surplus measure the welfare benefit
of a competitive market.
Learning Objective: (W2LO4) discover and apply Welfare theory

31. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Learn from media 4
Learning Objective: (W2LO4) discover and apply Welfare theory

32. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Learning Objectives
(W2LO1) explain the relationship
between demand and price, and other
determinants of demand
(W2LO2) explain the relationship
between supply and price, and other
determinants of supply.
(W2LO3) describe the market
mechanism and equilibrium
(W2LO4) discover and apply Welfare
theory

33. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Summary

34. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Q & A

35. Effective from September 2020 | P_EcoEconomics
Copyright © 2020 Pearson Education • Microeconomics• Robert S. Pindyck & Daniel Rubinfeld, 9
th
Global Edition.
Independent Study Task
I suggest you to watch the below video to better
understand Welfare Economics:
https://www.youtube.com/watch?v=PC3qooaF5Xs
A good source to study a practical work on demand, supply and equilibrium.
Fish supply and demand for food security in Sub-Saharan Africa: An analysis of the
Zambian fish sector
Tran, N., Chu, L., Chan, C. Y., Genschick, S., Phillips, M. J., & Kefi, A. S. (2019). Fish
supply and demand for food security in Sub-Saharan Africa: An analysis of the
Zambian fish sector.Marine Policy,99, 343-350.