ECON 203

INTERMEDIATE
MICROECONOMICS

Asst. Prof. (PhD) ZEYNEP ELİTAŞ

ANADOLU UNIVERSITY
2017-2018 FALL
AGENDA
 INTRODUCTION

 The Purpose of Microeconomic Theory

 The Problem of Scarcity
 The Function of Microeconomic Theory
 Markets, Functions, and Equilibrium
 Comparative Statistics and Dynamics
 Partial Equilibrium and General Equilibrium Analysis
 Positive Economics and Normative Economics

 DEMAND, SUPPLY, and EQUILIBRIUM: AN OVERVIEW

 THE MEASURUMENT OF ELASTICITIES

 MATHEMATICS FOR MICROECONOMICS

WHAT IS THE MICROECONOMICS?
 Microeconomics deals with the economic behavior of
individual decision-making units. These units include
consumers, workers, investors, resource owners and business
firms in a free-enterprise economy- in fact, any individual or
entity that plays a role in the functioning of the economy.

 Microeconomics explains how and why these units make

economic decisions. For example, it explains how consumers
make purchasing decisions and how their choices are affected
by changing prices and incomes. It also explains how firms
decide how many workers to hire and how workers decide
where to work and how much work to do.
WHAT IS THE MICROECONOMICS?
 Another important concern of microeconomics is how
economic units interact to form larger units-markets and
industries. Microeconomics helps us to understand, for
example, why the automobile industry developed the way it
did and how producers and consumers interact in the market
for automobiles.
 It explains how automobile prices are determined, how much
automobile companies invest in new factories, and how many
cars are produced each year. By studying the behavior and
interaction of individual firms and consumers,
microeconomics reveals how industries and markets operate
and evolve, why they differ from one another, and how they
are affected by government policies and global economic
conditions.
THE PURPOSE OF THE THEORY
 The purpose of theory is to predict and explain. A theory is a
hypothesis that has been successfully tested. A hypothesis is tested
not by the realism of its assumption(s) but by its ability to predict
accurately and explain, and also by showing that the outcome follows
logically and directly from the assumptions.

 EXAMPLE 1. From talking to friends and neighbors, from our own behavior,
we observe that when the price of a particular cut of meat rises, we buy less of
it. From this casual real-world observation, we could construct the following
general hypothesis: “If the price of a commodity rises, then the quantity
demanded of the commodity declines.” In order to test this hypothesis and
arrive at a theory of demand, we must go back to the real world to see whether
this hypothesis is indeed true for various commodities, for various people, and
at different points in time. Since these outcomes would follow logically and
directly from the assumptions (i.e., consumers would want to substitute
cheaper for more expensive commodities) we would accept the hypothesis as a
theory.
THE PURPOSE OF THE THEORY
 Microeconomic Theory examines how a consumer spends his/her
income to maximize satisfaction, how a firm combines resources to
minimize production costs and maximize profits, how a particular
form of market structure (perfect comp., monopoly, monopolistic
comp., and oligopoly) arises and how each affects the well-being of
society, how the pricing and employment of resources or inputs are
determined, and how government can increase the well-being of
society with taxes and subsidies. Surely, these are important
questions. Microeconomic theory provides the tools that enable us to
answer these questions.
 Microeconomic theory is also the basis for most «applied» fields of
economics such as industrial economics, labor economics, natural
resources and environmental economics, agricultural economics,
regioanl economics, public finance, development economics, and
international economics. One cannot understand these other fields
well without a through understanding of microeconomic theory.
MICROECONOMICS TOPICS
 Demand, supply, and equilibrium: Supply and demand is
an economic model of price determination in a perfectly
competitive market. It concludes that in a perfectly competitive
market with no externalities, per unit taxes, or price controls,
the unit price for a particular good is the price at which the
quantity demanded by consumers equals the quantity supplied by
producers. This price results in a stable economic equilibrium.
 Measurement of elasticities: Elasticity is the measurement
of how responsive an economic variable is to a change in another
variable. Elasticity can be quantified as the ratio of
the percentage change in one variable to the percentage change in
another variable, when the later variable has a causal influence
on the former. It is a tool for measuring the responsiveness of a
variable, or of the function that determines it, to changes in
causative variables in unitless ways. Frequently used elasticities
include price elasticity of demand, price elasticity of
supply,income elasticity of demand, elasticity of
substitution between factors of production and elasticity of
intertemporal substitution.
 Theory of consumption; Consumer theory is the study of
examining tastes of consumers that is related to utility
concepts or indifference curves. What is the aim of a rational
consumer in spending income or to maximize utility.
 Theory of production; Production theory is the study of
production, or the economic process of converting inputs into
outputs. Production uses resources to create a good or service that is
suitable for use, gift-giving in a gift economy, or exchange in
a market economy. This can include manufacturing,
storing, shipping, and packaging. Some economists define
production broadly as all economic activity other
than consumption. They see every commercial activity other than
the final purchase as some form of production.
 Costs of production; The cost-of-production theory of
value states that the price of an object or condition is determined by
the sum of the cost of the resources that went into making it. The cost
can comprise any of the factors of production : labor,
capital,land. Technology can be viewed either as a form of fixed
capital (ex:plant) or circulating capital (ex:intermediate goods).
 Labor economics; Labor economics seeks to understand the
functioning and dynamics of the markets for wage labour. Labour
markets function through the interaction of workers and employers.
Labour economics looks at the suppliers of labour services (workers),
the demands of labour services (employers), and attempts to
understand the resulting pattern of wages, employment, and income.
 Welfare economics; Welfare economics is a branch of economics
that uses microeconomic techniques to evaluate well-being from
allocation of productive factors as to desirability and economic
efficiency within an economy, often relative to competitive general
equilibrium.
 Economics of information; Information economics or
the economics of information is a branch of microeconomic
theory that studies how information and information systems
affect an economy and economic decisions. Information has
special characteristics. It is easy to create but hard to trust. It
is easy to spread but hard to control. It influences many
decisions. These special characteristics (as compared with
other types of goods) complicate many standard economic
theories.
THE PROBLEM OF SCARCITY
 The word scarce is closely associated with the word limited
or economic as opposed to unlimited or free. Scarcity is the
central fact of every society.

 Scarcity means that we must make choices

 each choice has opportunity costs
 the opportunity costs depend on how much of each good is
produced

 EXAMPLE 2. Economic resources are the various types of labor, capital, land,
and entrepreneurship used in producing goods and services. Since the resources
of every society are limited or scarce, the ability of every society to produce goods
and services is also limited. Because of this scarcity, all societies face the
problems of what to produce, how to produce, for whom to produce, how to ration
the commodity over time, and how to provide for the maintenance and growth of
the system.
WHAT ABOUT HUMAN WANTS?
 Human wants refer to the quality, variety, and quantity of
goods and services and conditions of life. We always seem
to wish for more and better ones. The sum of total of all
human wants is insatiable or can never be fully satisfied.
THE FUNCTION OF MICROECONOMIC
THEORY
 Facing with the scarcity, all societies, from the most primitive to the
most advanced, must somehow determine:

 What to produce
 How to produce
 For whom to produce
 How to provide for the growth of the system
 How to ration a given quantity of a commodity over time.

 Microeconomic theory, or price theory, studies the economic behavior of

individual decision-making units.

 EXAMPLE 3. During the course of business activity, firms purchase or hire

economic resources supplied by households in order to produce the goods and
services demanded by households. Households then use the income received
from the sale of resources (or their services) to business firms to purchase the
goods and services supplied by business firms. The “circular flow” of economic
activity is now complete. Thus, microeconomic theory, or price theory, studies
the flow of goods and services from business firms to households, the
composition of such a flow, and how the prices of goods and services in the flow
are determined. It also studies the flow of the services of economic resources
from resource owners to business firms, the particular uses into which these
resources flow, and how the prices of these resources are determined.
MARKETS, FUNCTIONS, AND EQUILIBRIUM
 A market
 is the place or context in which buyers and sellers buy and sell goods, services, and resources.
We have a market for each good, service, and resource bought and sold in the economy.
 A function
 shows the relationship between two or more variables. It indicates how the value of one
variable (the dependent variable) depends on and can be found by specifying the value of one
or more other (independent) variables.
 Equilibrium
 refers to the market condition which once achieved, tends to persist. Equilibrium results from
the balancing of market forces.

 EXAMPLE 4. The market demand function for a commodity gives the

relationship between the quantity demanded of the commodity per time
period and the price of the commodity (while keeping everything else
constant). By substituting various hypothetical prices (the independent
variable) into the demand function, we get the corresponding quantities
demanded of the commodity per time period (the dependent variable). The
market supply function for a commodity is an analogous concept—except
that we now deal with the quantity supplied rather than the quantity
demanded of the commodity.

 EXAMPLE 5. The market equilibrium for a commodity occurs when the

forces of market demand and market supply for the commodity are in
balance. The particular price and quantity at which this occurs tend to
persist in time and are referred to as the equilibrium price and the
equilibrium quantity of the commodity.
COMPARATIVE STATICS AND DYNAMICS
 Comparative statics studies and compares two or more
equilibrium positions, without regard to the transitional period
and process involved in the adjustment.
 Dynamics, on the other hand, deals with the time path and the
process of adjustment itself. In this class we deal almost
exclusively with comparative statics.

 EXAMPLE 6. Starting from a position of equilibrium, if the market demand

for a commodity, its supply, or both vary, the original equilibrium will be
disturbed and a new equilibrium usually will eventually be reached.
Comparative statics studies and compares the values of the variables
involved in the analysis at these two equilibrium positions, while dynamic
analysis studies how these variables change over time as one equilibrium
position evolves into another.
PARTIAL EQUILIBRIUM AND GENERAL
EQUILIBRIUM ANALYSIS

 Partial equilibrium analysis is the study of the behavior of

individual decision-making units and the working of individual
markets, viewed in isolation.
 General equilibrium analysis, on the other hand, studies the
behavior of all individual decision-making units and all
individual markets, simultaneously. This class deals primarily
with partial equilibrium analysis.

 EXAMPLE 7. The change in the equilibrium condition of the commodity in

Example 5 was examined only in terms of what happens in the market of
that particular commodity. That is, we abstracted from all other markets by
implicitly keeping everything else constant (the “ceteris paribus”
assumption). We were then dealing with partial equilibrium analysis.
However, when the equilibrium condition for this commodity changes, it will
affect to a greater or lesser degree and directly or indirectly the market for
every other commodity, service, and factor. This is examined in general
equilibrium analysis.
POSITIVE ECONOMICS AND NORMATIVE
ECONOMICS
 Microeconomics is concerned with both Positive and Normative
questions. Positive questions deal with explanation and prediction,
normative questions with what ought to be.

 Positive economics deals with or studies what is, or how the

economic problems facing a society are actually solved.
Positive analysis Analysis describing relationships of cause and effect.
 Normative economics, on the other hand, deals with or studies what
ought to be, or how the economic problems facing the society should
be solved.
Normative analysis Analysis examining questions of what ought to be.

 EXAMPLE 8. Suppose that a firm pollutes the air in the process of

producing its output. If we study how much additional cleaning cost is
imposed on the community by this pollution, we are dealing with positive
economics. Suppose that the firm threatens to move out rather than pay for
installing antipollution equipment. The community must then decide
whether it will allow the firm to continue to operate and pollute, pay for the
antipollution equipment itself, or just force the firm out with a resulting loss
of jobs. In reaching these decisions, the community is dealing with normative
economics.
REVIEW QUESTIONS
 A theory is
 (a) an assumption
 (b) an “if-then” proposition
 (c) a hypothesis
 (d) a validated hypothesis
 A hypothesis is tested by
 (a) the realism of its assumption(s)
 (b) the lack of realism of its assumption(s)
 (c) its ability to predict accurately an outcome that follows logically from
the assumption(s)
 or (d) none of the above
 In a free-enterprise economy, the problems of what, how, and for
whom are solved by
 (a) a planning committee
 (b) the elected representatives of the people
 (c) the price mechanism
 (d) none of the above
REVIEW QUESTIONS
 Which of the following is incorrect?
 (a) Microeconomics is concerned primarily with the problem of what, how, and for
whom to produce.
 (b) Microeconomics is concerned primarily with the economic behavior of
individual decision-making units when at equilibrium.
 (c) Microeconomics is concerned primarily with the time path and process by
which one equilibrium position evolves into another.
 (d ) Microeconomics is concerned primarily with comparative statics rather than
dynamics.
 Which aspect of taxation involves normative economics?
 (a) the incidence of (i.e., who actually pays for) the tax
 (b) the effect of the tax on incentives to work
 (c) the “fairness” of the tax
 (d) all of the above.

 Microeconomics deals primarily with

 (a) comparative statics, general equilibrium, and positive economics,
 (b) comparative statics, partial equilibrium, and normative economics,
 (c) dynamics, partial equilibrium, and positive economics, or
 (d ) comparative statics, partial equilibrium, and positive economics.
THE DEMAND CURVE
 The individual demand shows the quantity of a commodity that an individual is
willing and able to purchase over a specific time period at each price of the
commodity , while holding constant all other relevant economic variables on
which demand depends.
 The demand curve shows how much of a good consumers are willing to buy as
the price per unit changes. We can write this relationship between quantity
demanded and price as an equation:

 The other economic variables held constant are: the person’s money income,
the prices of other commodities, individual tastes, and the number of
consumers in the market. By varying the price of the commodity under
consideration while keeping constant the individual’s money income, tastes, the
prices of other commodities, and the number of consumers in the market (the
assumption of ceteris paribus), we get the individual’s demand schedule for
the commodity.
THE DEMAND CURVE
 The graphic representation of the individual’s demand schedule gives us that person’s
demand curve.
 Law of Demand (THE LAW OF NEGATIVELY SLOPED DEMAND): The inverse
relationship between price and quantity (indicating that a greater quantity of the
commodity is demanded at a lower prices and a smaller quantity at higher prices).
 Why it is so? (the relationship is negative?)
Suppose that we consider all of the possible renters of the apartments and ask each of them the
maximum amount that he or she would be willing to pay to rent one of the apartments.
Let’s start at the top. There must be someone who is willing to pay the highest price. Suppose
that this person is willing to pay $500 a month for an apartment.
If there is only one person who is willing to pay $500 a month to rent an apartment, then if the
price for apartments were $500 a month, exactly one apartment would be rented—to the one
person who was willing to pay that price.
Suppose that the next highest price that anyone is willing to pay is $490. Then if the market
price were $499, there would still be only one apartment rented: the person who was willing to
pay $500 would rent an apartment, but the person who was willing to pay $490 wouldn’t. And
so it goes. Only one apartment would be rented if the price were $498, $497, $496, and so on . . .
until we reach a price of $490. At that price, exactly two apartments would be rented: one to the
$500 person and one to the $490 person.
Similarly, two apartments would be rented until we reach the maximum price that the person
with the third highest price would be willing to pay, and so on. Economists call a person’s
maximum willingness to pay for something that person’s reservation price. The reservation
price is the highest price that a given person will accept and still purchase the good. In other
words, a person’s reservation price is the price at which he or she is just indifferent between
purchasing or not purchasing the good.
 THE DEMAND CURVE
Thus the number of apartments that will be rented at a given price p∗ will just be the number of
people who have a reservation price greater than or equal to p∗.

 We can plot these reservation prices in a diagram as in Figure. Here the price is depicted on the
vertical axis and the number of people who are willing to pay that price or more is depicted on
the horizontal axis.
 THE DEMAND CURVE

 Another way to view Figure is to think of it as measuring how many people would want to rent
apartments at any particular price. Such a curve is an example of a demand curve—a curve
that relates the quantity demanded to price. When the market price is above $500, zero
apartments will be rented. When the price is between $500 and $490, one apartment will be
rented. When it is between $490 and the third highest reservation price, two apartments will be
rented, and so on. The demand curve describes the quantity demanded at each of the possible
prices.
 The demand curve for apartments slopes down: as the price of apartments decreases more
people will be willing to rent apartments.
THE DEMAND CURVE

Qx = a – bPx

 EXAMPLE 1. Suppose that an individual’s demand function for commodity X is

ceteris paribus. By substituting various prices of X into this demand function, we get the
individual’s demand schedule. The individual’s demand schedule for commodity X shows
the alternative quantities of commodity X that the person is willing to purchase at
various alternative prices for commodity X, while keeping everything else constant.
THE DEMAND CURVE

EXAMPLE 2. Plotting each pair of values as a point on a graph and joining the resulting points,
we get the individual’s demand curve for commodity X (which will be referred to as dx) shown in
Figure. The demand curve shows that at a particular point in time, if the price of X is $7, the
individual is willing to purchase 1 unit of X over the period of time specified.
If the price of X is $6, the individual is willing to purchase 2 units of X over the specified time
period, and so on.
 SHIFTS IN THE DEMAND CURVE
 When any of the ceteris paribus conditions changes, the entire demand curve shifts. This is
referred to as a change in demand as opposed to a change in the quantity demanded, which
is movement along the same demand curve.

 EXAMPLE 3. When an individual’s money income rises (while everything else remains
constant), the person’s demand for a commodity usually increases (i.e., the individual’s demand
curve shifts up), indicating that at the same price that person will purchase more units of the
commodity per unit of time.
 Thus, if the individual’s money income rises, the individual’s demand curve for steaks will shift
up so that at the unchanged steak price, that person will purchase more steaks per month.
Steak is called a normal good. There are, however, some commodities (such as bread and
potatoes) whose demand curve usually shifts down when the individual’s income rises. These are
called inferior goods.

 EXAMPLE 4. A change in the individual’s tastes for a commodity also causes a shift in that
person’s demand curve for the commodity. For example, a greater desire on the part of an
individual to consume ice cream causes an upward shift in the individual’s demand curve for ice
cream. A reduced desire is reflected in a downward shift.
 Similarly, the individual’s demand curve for a commodity shifts up when the price of a
substitute commodity rises, but shifts down when the price of a complement (a commodity
used together with the one considered) rises. Thus, the demand for tea shifts up when the price
of coffee (a substitute) rises but shifts down when the price of lemons (a complement of tea)
riseS.
SHIFTS IN THE DEMAND CURVE
 THE MARKET DEMAND FOR A COMMODITY
 The market or aggregate demand for a commodity gives the alternative amounts
of the commodity demanded per time period, at various alternative prices, by all
the individuals in the market. The market demand for a commodity thus
depends on all the factors that determine the individual’s demand and, in addition,
on the number of buyers of the commodity in the market.
 Geometrically, the market demand curve for a commodity is obtained by the
horizontal summation of all the individuals’ demand curves for the commodity.
 EXAMPLE 5. If there are two identical individuals (1 and 2) in the market, each
with a demand for commodity X given by Qdx = 8-Px , the market demand (QDx)
 THE MARKET DEMAND FOR A COMMODITY
EXAMPLE 6. If there are 1000 identical individuals in the market, each with the
demand for commodity X given by Qdx = 8 – Px ceteris paribus (cet. par.), the market
demand schedule and the market demand curve for commodity X are obtained as
follows:
Qdx = 8 Px (individual’s dx)
QDx = 1000 (Qdx) (market Dx)
= 8000 -1000Px
 THE SUPPLY CURVE

 Supply curve gives the relationship between the quantity of a good that
producers are willing to sell and the price of the good. We can write this
relationship as an equation:
QS = QS(P)

 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.
 THE SUPPLY CURVE
 The quantity of a commodity that a single producer is willing to sell over a specific time period
is a function of or depends on the price of the commodity and the producer’s costs of production.
In order to get a producer’s supply schedule and supply curve of a commodity, certain factors
which influence costs of production must be held constant (ceteris paribus).
 The quantity that producers are willing to sell depends not only on the price they receive but
also on their production costs, including wages, interest charges, and the costs of raw
materials.
 These are technology, the prices of the inputs necessary to produce the commodity, and for
agricultural commodities, climate and weather conditions. By keeping all of the above
factors constant while varying the price of the commodity, we get the individual producer’s
supply schedule and supply curve.

 When production costs decrease, output increases no matter what the market price happens to
be. The entire supply curve thus shifts to the right.

 Economists often use the phrase change in supply to refer to shifts in the supply curve, while
reserving the phrase change in the quantity supplied to apply to movements along the supply
curve. (When the factors that we kept constant in defining a supply schedule and a supply
curve (the ceteris paribus condition) change, the entire supply curve shifts. This is referred to
as a change or shift in supply and must be clearly distinguished from a change in the quantity
supplied (which is a movement along the same supply curve).

 EXAMPLE 9. If there is an improvement in technology (so that the producer’s costs of

production fall) the supply curve shifts downward. Thus downward shift is referred to as an
increase in supply. It means that at the same price for the commodity, the producer offers
more of it for sale per time period.
 THE SUPPLY CURVE
 Here we have to think about the nature of the market we are examining. The
situation we will consider is where there are many independent landlords who are
each out to rent their apartments for the highest price the market will bear. We
will refer to this as the case of a competitive market. Other sorts of market
arrangements are certainly possible, and we will examine a few later.
 The short-run supply curve in this market is depicted in figure as a vertical
line. Whatever price is being charged, the same number of apartments will be
rented, namely, all the apartments that are available at that time.
 THE SUPPLY CURVE
 EXAMPLE 7. Suppose that a single producer’s supply function for commodity X is
Qsx = –40 + 20Px
By substituting various “relevant” prices of X into this supply function, we get the
producer’s supply schedule shown in Table:

 EXAMPLE 8. Plotting each pair of values from the supply schedule in Table 2.4 on a
graph and joining the resulting points, we get the producer’s supply curve (see Fig.).
As in the case of demand, the points on the supply curve represent alternatives as
seen by the producer at a particular point in time.
 THE MARKET SUPPLY
 The market or aggregate supply of a commodity gives the alternative amounts of the
commodity supplied per time period at various alternative prices by all the producers
of this commodity in the market. The market supply of a commodity depends on all
the factors that determine the individual producer’s supply and, in addition, on the
number of producers of the commodity in the market.

 EXAMPLE 10. If there are 100 identical producers in the market, each with a supply
of commodity X given by Qsx = -40 + 20Px cet. par., the market supply (QSx) is
obtained as follows:
Qsx = -40 +20Px (single producer’s sx )
QSx = 100(Qsx) (market Sx)
= -4000 + 2000Px
 MARKET IN EQUILIBRIUM

 Equilibrium refers to the market condition which, once achieved, tends to persist. In
economics this occurs when the quantity of a commodity demanded in the market per
unit of time equals the quantity of the commodity supplied to the market over the
same time period. Geometrically, equilibrium occurs at the intersection of the
commodity’s market demand curve and market supply curve. The price and quantity
at which equilibrium exists are known, respectively, as the equilibrium price and the
equilibrium quantity.

 EXAMPLE 11. From the market demand curve of Example 6 and the market supply
curve of Example 10, we can determine the equilibrium price and the equilibrium
quantity for commodity X as shown in Table below and figure. At the equilibrium
point, there exists neither a surplus nor a shortage of the commodity and the market
clears itself. Ceteris paribus, the equilibrium price and the equilibrium quantity tend
to persist in time.
 MARKET IN EQUILIBRIUM

 EXAMPLE 12 Since we know that at equilibrium

QDx = QSx
we can determine the equilibrium price and the equilibrium quantity mathematically:
QDx = QSx
8000 - 1000Px = - 4000 + 2000Px
12.000 = 3000Px
Px = $4 (equilibrium price)
Substituting this equilibrium price either into the demand equation or into the supply
equation, we get the equilibrium quantity.
QDx = 8000 - 1000(4) or QSx = - 4000 + 2000(4)
= 8000 - 4000 = - 4000 + 8000
= 4000 (units of X) = 4000 (units of X)
 MARKET IN EQUILIBRIUM

 Equilibrium refers to the market condition which, once achieved, tends to persist. In
economics this occurs when the quantity of a commodity demanded in the market per
unit of time equals the quantity of the commodity supplied to the market over the
same time period. Geometrically, equilibrium occurs at the intersection of the
commodity’s market demand curve and market supply curve. The price and quantity
at which equilibrium exists are known, respectively, as the equilibrium price and the
equilibrium quantity.

 EXAMPLE 11. From the market demand curve of Example 6 and the market supply
curve of Example 10, we can determine the equilibrium price and the equilibrium
quantity for commodity X as shown in Table below and figure. At the equilibrium
point, there exists neither a surplus nor a shortage of the commodity and the market
clears itself. Ceteris paribus, the equilibrium price and the equilibrium quantity tend
to persist in time.
 MARKET IN EQUILIBRIUM
 To better understand the equilibrium, let us consider what would happen at a price
other than p∗. For example, consider some price p < p∗ where demand is greater than
supply. Can this price persist? At this price at least some of the landlords will have
more renters than they can handle.
 There will be lines of people hoping to get an apartment at that price; there are more
people who are willing to pay the price p than there are apartments. Certainly some
of the landlords would find it in their interest to raise the price of the apartments
they are offering.
 MARKET IN EQUILIBRIUM
 Similarly, suppose that the price of apartments is some p > p∗. Then some of the
apartments will be vacant: there are fewer people who are willing to pay p than there
are apartments. Some of the landlords are now in danger of getting no rent at all for
their apartments. Thus they will have an incentive to lower their price in order to
attract more renters.

 If the price is above p∗ there are too few renters; if it is below p∗ there are too many
renters. Only at the price of p∗ is the number of people who are willing to rent at that
price equal to the number of apartments available for rent. Only at that price does
demand equal supply.
 MARKET IN EQUILIBRIUM
 At the price p∗ the landlords’ and the renters’ behaviors are compatible in the sense
that the number of apartments demanded by the renters at p∗ is equal to the number
of apartments supplied by the landlords. This is the equilibrium price in the market
for apartments.
 MARKET IN EQUILIBRIUM
 At the price p0 the landlords’ and the renters’ behaviors are compatible in the sense
that the number of apartments demanded by the renters at p0 is equal to the number
of apartments supplied by the landlords. This is the equilibrium price in the market
for apartments.
 COMPARATIVE STATISTICS
 We can ask how the price of apartments changes when various aspects of the market change.
This kind of an exercise is known as comparative statics, because it involves comparing two
“static” equilibria without worrying about how the market moves from one equilibrium to
another.
 Let’s start with a simple case. Suppose that the supply of apartments is increased, as in Figure:

 It is easy to see in this diagram that the equilibrium price of apartments will fall.
Similarly, if the supply of apartments were reduced the equilibrium price would rise.
 COMPARATIVE STATISTICS

 Let’s try a more complicated example. Suppose that a developer decides to turn several of
the apartments into condominiums. What will happen to the price of the remaining
apartments?
 Your first guess is probably that the price of apartments will go up, since the supply has
been reduced. But this isn’t necessarily right. It is true that the supply of apartments to
rent has been reduced. But the demand for apartments has been reduced as well, since
some of the people who were renting apartments may decide to purchase the new
condominiums.
 COMPARATIVE STATISTICS

 It is natural to assume that the condominium purchasers come from those who already live
in the inner-ring apartments—those people who are willing to pay more than p∗ for an
apartment. Suppose, for example, that the demanders with the 10 highest reservation
prices decide to buy condos rather than rent apartments. Then the new demand curve is
just the old demand curve with 10 fewer demanders at each price. Since there are also 10
fewer apartments to rent, the new equilibrium price is just what it was before, and exactly
the same people end up living in the innerring apartments. This situation is depicted in
the figure. Both the demand curve and the supply curve shift left by 10 apartments, and
the equilibrium price remains unchanged.
 GLOSSARY

 Change in demand A shift in the entire demand curve of a commodity resulting

from a change in the individual’s money income or tastes, or prices of other
commodities.
 Change in the quantity demanded A movement along a given demand curve for a
commodity as a result of a change in its price.
 Change in the quantity supplied A movement along a given supply curve for a
commodity as a result of a change in its price.
 Change in supply A shift in the entire supply curve of a commodity resulting
from a change in technology, the prices of the inputs necessary to produce the
commodity, and (for agricultural commodities) climate and weather conditions.
 Equilibrium The market condition which, once achieved, tends to persist. This
occurs when the quantity of a commodity demanded equals the quantity supplied to
the market.
 Law of demand The inverse relationship between price and quantity reflected in
the negative slope of a demand curve.
 Stable equilibrium The type of equilibrium where any deviation from equilibrium
brings into operation market forces which push us back toward equilibrium.
 Unstable equilibrium The type of equilibrium where any deviation from the
equilibrium position brings into operation forces which push us further away from
equilibrium.
 REVIEW QUESTIONS

 In drawing an individual’s demand curve for a commodity, which one of the following is
varying?
(a) The individual’s money income,
(b) the price of other commodities,
(c) the price of the commodity under consideration,
(d) the tastes of the individual.
 When the price of a substitute of commodity X falls, the demand for X

(a) rises,
(b) falls,
(c) remains unchanged,
(d) any of the above.
 When both the price of a substitute and the price of a complement of commodity X rise, the
demand for X
(a) rises,
(b) falls,
(c) remains unchanged,
(d) all of the above are possible.
(d) An increase in the price of a substitute, by itself, causes an increase in the demand for X.
An increase in the price of a complement, by itself, causes a decrease in the demand for X.
When both the price of a substitute and the, price of a complement of commodity X rise, the
demand curve for X can rise, fall, or remain unchanged depending on the relative strength of
the two opposing forces.
 REVIEW QUESTIONS

 In drawing a producer’s supply curve for a commodity, which one of the following is varying?
(a) Technology,
(b) the prices of inputs,
(c) features of nature such as climate and weather conditions,
(d) the price of the commodity under consideration.
 If the supply curve of a commodity is positively sloped, a rise in the price of the commodity,
ceteris paribus, results in and is referred to as
(a) an increase in supply,
(b) an increase in the quantity supplied,
(c) a decrease in supply, or
(d) a decrease in the quantity supplied.
 If, from a position of stable equilibrium, the market supply of a commodity decreases while the
market demand remains unchanged,
(a) the equilibrium price falls,
(b) the equilibrium quantity rises,
(c) both the equilibrium price and the equilibrium quantity decrease,
(d) the equilibrium price rises but the equilibrium quantity falls.
(d) A decrease in the market supply of a commodity refers to an leftward shift in the
market supply curve. With an unchanged market demand curve for the commodity, the
new equilibrium point will be higher and t the left of the previous equilibrium point. This
involves a higher equilibrium price but a lower equilibrium quantity than before.
 REVIEW QUESTIONS

 Table gives two demand schedules of an individual for commodity X. The second
(Qd0x) resulted from an increase in the individual’s money income (while keeping
everything else constant).
(a) Plot the points of the two demand schedules on the same set of axes and get the two
demand curves,
(b) What would happen if the price of X fell from $5 to $3 before the individual’s income
rose?
(c) At the unchanged price of $5 for commodity X, what happens when the individual’s
income rises?
(d) What happens if at the same time that the individual’s money income rises, the
price of X falls from $5 to $3?
(e) What type of good is commodity X? Why?
 REVIEW QUESTIONS

(a) Plot the points of the two demand schedules on the same set of axes and get the two
demand curves,
 REVIEW QUESTIONS
b) When the price of X falls from $5 to $3 before the individual’s income rises, the
quantity of X demanded by the individual increases from 20 to 30 units per time
period. (This is movement along dx in a downward direction, from point A to point B in
the figure.)

c) When the individual’s income rises, that person’s entire demand curve shifts up
and to the right from dx to dx’. This is referred to as an increase in demand. At the
unchanged price of $5, the individual will now (i.e., after the shift) buy 40 units of X
rather than 20 (i.e., the individual goes from point A to point C).
 REVIEW QUESTIONS
d) When the individual’s income rises while the price of X falls (from $5 to $3), the
individual purchases 35 additional units of X (i.e., the individual goes from point A to
point D).

(e) Since dx, shifted up (to dx’) when the individual’s income rose, commodity X is a
normal good for this individual. If dx has shifted down as the individual’s income rose,
commodity X would have been an inferior good for this individual.
In some cases, a commodity may be normal for one individual over some ranges of his or
her income and inferior for another individual or for the same individual over different
ranges of income.
 REVIEW QUESTIONS
 The values in Table refer to the change in an individual’s consumption of coffee and
tea at home when the price of coffee rises (everything else, including the price of tea,
remains the same).
 (a) Draw a figure showing these changes, and
 (b) explain the figure drawn.
 REVIEW QUESTIONS
 (a) Draw a figure showing these changes, and
 REVIEW QUESTIONS
 In the Fig. (a), we see that when the price of coffee rises; from 40¢ to 60¢ per cup
(with everything else affecting the demand for coffee remaining the same), the
quantity demanded of coffee falls from 50 to 30 cups per month. This is reflected by a
movement along the individual’s demand curve for coffee in an upward
direction. Since tea is a substitute for coffee, the increase in the price of coffee
causes an upward shift in the hypothetical demand curve for tea, from d to d’ in the
Fig. (b).
 Thus, with the price of tea remaining at 20¢ per cup, the individual’s consumption of
tea increases from 40 to 50 cups per month.
 REVIEW QUESTIONS
 The values in the table refer to the change in an individual’s consumption of lemons
and tea at home when the price of lemons rises (everything else, including the price
of tea, remains the same).
(a) Draw a figure showing these changes, and
(b) explain the figure drawn.
 REVIEW QUESTIONS
(a) Draw a figure showing these changes, and
 REVIEW QUESTIONS
 (b) In the Fig. (a), we see that when the price of lemons rises from 10¢ to 20¢ each
(with everything else affecting the demand for lemons remaining the same), the
quantity of lemons demanded falls from 20 to 15 per month. This is reflected by a
movement along the individual’s demand curve for lemons in an upward
direction.
 Since lemons are a complement of tea for this individual, the increase in the price of
lemons causes a downward shift in the hypothetical demand curve for tea, from d to
d’’ in Fig. (b). Thus, while the price of tea remains at 20¢ per cup, the individual’s
consumption of tea decreases from 40 to 35 cups per month.
 REVIEW QUESTIONS
 Suppose that as a result of an improvement in technology, the producer’s supply
function becomes Qs’ x = -10 + 20Px.
(a) Derive this producer’s new supply schedule.
(b) On one set of axes, draw this producer’s supply curves before and after the
improvement in technology,
(c) How much of commodity X does this producer supply at the price of $4 before and
after the improvement in technology?
 REVIEW QUESTIONS
 Suppose that as a result of an improvement in technology, the producer’s supply
function becomes Qs’ x = -10 + 20Px.
(a) Derive this producer’s new supply schedule.

(b) Derive this producer’s new supply schedule.

(c) Before the supply curve increased (shifted down), the producer offered for sale 40
units of X at the price of $4. After the improvement in technology, the producer is
willing to offer 70 units of X at the same commodity price of $4.
 REVIEW QUESTIONS
 There are 10,000 identical individuals in the market for commodity X, each with a
demand function given by Qdx= 12 - Px and 1000 identical producers of commodity
X, each with a function given by Qsx = 20Px
(a) Find the market demand function and the market supply function for commodity X.
(b) Find the market demand schedule and the market supply schedule of commodity X
and from them find the equilibrium price and the equilibrium quantity.
(c) Plot, on one set of axes, the market demand curve and the market supply curve for
commodity X and show the equilibrium point. (d) Obtain the equilibrium price and the
equilibrium quantity mathematically.
 REVIEW QUESTIONS
 There are 10,000 identical individuals in the market for commodity X, each with a
demand function given by Qdx= 12 - Px and 1000 identical producers of commodity
X, each with a function given by Qsx = 20Px
(a) Find the market demand function and the market supply function for commodity X.

QDx = 10,000 (12 - 2Px)

= 120,000 - 20,000Px
QSx = 1000(20Px)
= 20,000Px

(b)
REVIEW QUESTIONS

(d ) QDx = QSx
120,000 - 20,000Px = 20,000Px
120,000 = 40,000Px
Px = $3 (equilibrium price)
QDx = 120,000 - 20,000(3) or QSx = 20,000(3)
= 60,000 (unit of X) = 60,000 (units of X)
 REVIEW QUESTIONS
Is the equilibrium condition in the above problem stable? Why?

The equilibrium condition is stable for the following reason. At prices above the
equilibrium price, the quantity supplied exceeds the quantity demanded. A surplus
results and the price is bid down toward the equilibrium level. At prices below the
equilibrium level, the quantity demanded exceeds the quantity supplied. A shortage of
the commodity arises and the price is bid up toward the equilibrium level. This is
reflected in Table and Fig.
 REVIEW QUESTIONS
(b) We have a situation of unstable equilibrium when a displacement from equilibrium
brings into operation market forces that push us even further away from equilibrium.
This occurs when the market supply curve has a smaller slope than the market demand
curve for the commodity. In the unlikely case that the market demand curve and the
market supply curve coincide, we have a situation of neutral or metastable equilibrium.
Should this occur, a movement away from an equilibrium point does not activate any
automatic force either to return to or to move further away from the original
equilibrium point.
 REVIEW QUESTIONS
Table gives the market demand schedule and the market supply schedule of commodity Y. Is the
equilibrium for commodity Y stable or unstable? Why?

 Table and Fig. show that the equilibrium price is $3 and the equilibrium quantity is 7000 units.
If, for some reason, the price of Y rises to $4, the quantity demanded (6000 units) will exceed the
quantity supplied (4000), creating a shortage (of 2000). This shortage will cause the price of Y to
rise even more, and we move still further from equilibrium. The opposite occurs if a displacement
causes the price of Y to fall below the equilibrium price. Thus, the equilibrium for commodity Y is
unstable.
 THE MEASUREMENT OF ELASTICIES
An elasticity measures the sensitivity of one variable to another. Specifically, it is a
number that tells us the percentage change that 'will ocur in one variable in response to
a 1-percent increase in another variable.
The price elasticity of demand (e) measures how much the quantity demanded of a good
changes when its price changes.
Since price and quantity are inversely related, the coefficient of price elasticity of
demand is a negative number.
Letting ΔQ represent the change in the quantity demanded of a commodity resulting
from a given change in its price (ΔP), we have

 Price elasticities tend to be higher when the goods are luxuries, when substitutes are
available, and when consumers have more time to adjust their behaviors.
 Since there is an ability to adjust consumption patterns, price elasticities are
generally higher in the long-run than in the short-run.
 Goods that have ready substitutes tend to have more elastic demand than those that
have no substitutes.
 THE MEASUREMENT OF ELASTICIES
EXAMPLE 1. Given the market demand schedule in Table 3.1 and market demand
curve in Fig. 3-1, we can find e for a movement from point B to point D and from D to B,
as follows:
 THE MEASUREMENT OF ELASTICIES
Note the use of averaging to calculate percentage changes in price and quantity. The formula
for a percentage change is ΔP/P. The value of ΔP is clearly 2= 7-5. But it is not immediately
clear what value we should use for P in the denominator. Is it the original value of P or the
final value, or sth in between. ( The same thing is true for quantity also)

 For very small percentage changes, it does not much matter. But for larger changes, the
difference is significant. We can avoid getting different results by using the average of the two
prices [(PB + PD)/2] and the average of the two quantities [(QB + QD)/2] instead of either PB and QB
or PD and QD in the formula to find e. Thus,
ARC AND POINT ELASTICITY
 The coefficient of price elasticity of demand between two points on a demand curve
is called arc elasticity. Thus, up to now, we found arc elasticity. demand in general
differs at every point along a demand curve. Point elasticity of demand can be
found geometrically as shown in Examples 3 and 4.
 EXAMPLE 3. Since we want to measure elasticity at point C, we have only a single
price and a single quantity. Expressing each of the values in the formula for e in
terms of distances, we get:
ARC AND POINT ELASTICITY
 EXAMPLE 4. We can find e at point D for the demand curve as follows. We draw a
tangent to Dy at point D
 THE MEASUREMENT OF ELASTICIES
Demand is said to be elastic if e >1, inelastic if e <1, and unitary elastic if e =1.
 When a 1 percent change in price calls forth more than a 1 percent change in
quantity demanded, the good has price-elastic demand.
 When 1 percent change in price produces less than a 1 percent change in quantity
demanded, the good has price-inelastic demand.
 When the percentage change quantity demanded is exactly the same as the
percentage change in, the good has unit-elastic demand.
 PRICE ELASTICITY IN DIAGRAMS
In panel(a), a halving of price has tripled quantity demanded. It shows price-elastic
demand. In panel (b), the doubling of quantity demanded exactly matches the halving of
price. In panel c, cutting price in half led to only a 50 percent increase in quantity
demanded, so it is the price inelastic demand.
 PRICE ELASTICITY IN DIAGRAMS
Figure displays the important polar extremes where the price elasticites are infinite
and zero, or completely elastic and completely inelastic. Completely inelastic
demands, or ones with zero elasticity (Ed=0) are ones where the quantity demanded is
ssen to be a vertical demand curve. By contrast, when demand is infinitely (perfectly)
elastic (Ed=∞), a tiny change in price will lead to an indefinitely large change in
quantity demanded, as in the horizontal demand curve.

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.
 PRICE ELASTICITY IN DIAGRAMS
Figure displays the important polar extremes where the price elasticites are infinite
and zero, or completely elastic and completely inelastic. Completely inelastic
demands, or ones with zero elasticity (Ed=0) are ones where the quantity demanded is
ssen to be a vertical demand curve. By contrast, when demand is infinitely (perfectly)
elastic (Ed=∞), a tiny change in price will lead to an indefinitely large change in
quantity demanded, as in the horizontal demand curve.

Principle that consumers will buy a

fixed quantity of a good regardless of its
price.
LINEAR DEMAND CURVE
 Linear demand curve is a demand curve that is a straight line which follows such
a form:

 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 a 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.
LINEAR DEMAND CURVE
 We can calculate the elasticity as the ratio of the lower segment to the upper
segment at the demand point. For example at point B, the lower segment is 3 times
as long as the upper segment, so the price elasticity is 3. (e = |BZ| / |AB| )
 A similar calculation at point R shows that the price elasticity at that point is 1/3.
 A similar calculation at point M shows that the price elasticity at that point is 1.
 Elasticity is relatively large when we are high up the linear DD curve.
 Elasticity is relatively low when we are down the linear DD curve.
THE ALGEBRA OF ELASTICITIES FOR A LINEAR DEMAND
CURVE
 For the mathematically inclined, we can show the algebra of elasticities for a linear
demand curve which is written as :

 The demand elasticity at point (P0, D0) is defined as

Ed=( %ΔQ)/(% Δ P)=
=(ΔQ)/(ΔP).(P0/Q0)
=b.(P0/Q0)
Note that the elasticity of a linear demand curve (line) depends upon the slope
of the demand curve.
THE ALGEBRA OF ELASTICITIES FOR A LINEAR DEMAND
CURVE
 As an example, consider the demand curve
Q = 8 - 2P
 For this curve, ΔQ/ΔP is constant and equal to – 2. However, the curve does not have
a constant elasticity. Observe from the figure that as we move down the curve, the
ratio P/Q falls; the elasticity therefore decreases in magnitude.
 Near the intersection of the curve with the price axis, Q is very small, so Ep=-2 (P/Q)
is large in magnitude. When P = 2 and Q =4, Ep = -1 At the intersection with the
quantity axis, P = 0 so Ep=0
ELASTICITY IS NOT THE SAME AS SLOPE
 We must remember not to confuse the elasticity of a curve with its slope. The slope is not
the same as the elasticity because the demand curve’s slope depends on the changes in P
and Q, where as the elasticity depends on the percentage changes in P and Q.

 In panel (a), we have a constant slope but different elasticities on the line.
 In panel (b), we have a constant elasticity (unit-elasticity) because the percentage change in
price is equal everywhere to the percentage change in quantity but has no constant slope.
ELASTICITY AND REVENUE (TOTAL EXPENDITURES)
 Regardless of the shape of the demand curve, as the price of a commodity increase
(fall), the total expenditures of consumers on the commodity (P*Q) fall (rise), when
e>1, remain unchanged when e=1, and rise (fall) when e<1.
ELASTICITY AND REVENUE (TOTAL EXPENDITURES)
 EXAMPLE 5. In Fig. 3-5 and Table 3.3, we find e at points B, C, D, F, G, H, and L for the
demand curve and can observe what happens.to total expenditures on commodity X as Px
falls. At point B, e=TM/OT= 7000/1000= 7. The coefficient of price elasticity of Dx at other
points is found in a similar way. As we approach point A, e approaches infinity. As we
approach point M, e approaches zero.
OTHER DEMAND ELASTICITIES

INCOME ELASTICITY OF DEMAND

 The coefficient of income elasticity of demand (eM) measures the percentage change in the
amount of a commodity purchased per unit time (ΔQ/Q) resulting from a given percentage
change in a consumer’s income (ΔM/M):

When eM is negative, the good is inferior. If eM is positive, the good is normal.

A normal good is usually a luxury if its eM>1, otherwise it is a necessity. Depending on
the level of the consumer’s income, eM for a good is likely to vary considerably.
Thus a good may be a luxury at “low” levels of income, a necessity at «intermediate» levels of
income and an inferior good at “high” levels of income.
OTHER DEMAND ELASTICITIES
INCOME ELASTICITY OF DEMAND
 EXAMPLE: Columns (1) and (2) of Table 3.4 show the quantity of commodity X that an
individual would purchase per year at various income levels. Column (5) gives the
coefficient of income elasticity of demand of this individual for commodity X between the
various successive levels of available income. Column (6) indicates the range of income
over which commodity X is a luxury, a necessity or an inferior good. Commodity X might
refer to bottles of champagne. At income levels above $24,000 per year, champagne
becomes an inferior good for this individual (who presumably substitutes rare and very
expensive wines for champagne).
OTHER DEMAND ELASTICITIES
CROSS ELASTICITY OF DEMAND
 The coefficient of cross elasticity of demand of commodity X with respect to
commodity Y(exy) measures the percentage change in the amount of X purchased per
unit of time (ΔQx/Qx) resulting from a given percentage change in the price of
Y(ΔPy/Py).

 If X and Y are substitutes, exy is

positive.
 On the other hand, if X and Y are complements, exy is
negative.
 When commodities are nonrelated (i.e., when they are independent of each other),
exy=0.
OTHER DEMAND ELASTICITIES
 EXAMPLE 7. To find the cross elasticity of demand between tea (X) and coffee (Y)
and between tea (X) and lemons (Z) for the data in the next table, we proceed as
follows

Since exy is positive, tea and coffee are substitutes. Since exz is negative, tea and
lemons are complements.
OTHER DEMAND ELASTICITIES

PRICE ELASTICITY OF SUPPLY

The coefficient of price elasticity of supply (es) measures the percentage change in the
quantity supplied of a commodity per unit of time (ΔQ/Q) resulting from a given
percentage change in the price of the commodity (ΔP/P).

 When the supply curve is positively sloped (the usual case), price and quantity move
in the same direction and es>0. The supply curve is said to be elastic if es>1, inelastic
if es<1, and unitary elastic if es=1.
OTHER DEMAND ELASTICITIES

 EXAMPLE 8. To find ex for a movement from point A to point C, from C to A and

midway between A and C (i.e., at point B) and midway between C and F (i.e., at point
D) for the values of Table 3.6, we proceed as follows:
GLOSSARY
 Arc elasticity of demand
The coefficient of price elasticity of demand between two points on a demand curve.
 Cross elasticity of demand
The ratio of the percentage change in the amount of commodity X purchased per unit of
time to the percentage change in the price of commodity Y. If exy>0, X and Y are
substitutes; if exy<0, X and Y are complements; and if exy=0, X and Y are nonrelated
(i.e., independent).
 Income elasticity of demand
The ratio of the percentage change in the amount of a commodity purchased per unit of
time to the percentage change in the consumer’s income. If eM>0, the commodity is
normal, and if eM<0, it is inferior; if eM>1, it is a luxury, and if 0<eM<1, it is a necessity.
 Point elasticity of demand
The coefficient of price elasticity of demand at a particular point on a demand curve.
 Price elasticity of demand
The ratio of the percentage change in the quantity of a commodity demanded per unit of
time to the percentage change in the price of the commodity. If e>1, demand is elastic; if
e<1, demand is inelastic; and if e=1, demand is unitary elastic.
 Price elasticity of supply
The ratio of the percentage change in the quantity of a commodity supplied per unit of
time to the percentage change in the price of the commodity.
REVIEW QUESTIONS
 If the percentage increase in the quantity of a commodity demanded is smaller than
the percentage fall in its price, the coefficient of price elasticity of demand is
(a) greater than 1
(b) equal to 1
(c) smaller than 1
(d) zero
 If the quantity of a commodity demanded remains unchanged as its price changes,
the coefficient of price elasticity of demand is
(a) greater than 1
(b) equal to 1
(c) smaller than 1
(d) zero
 An increase in the price of a commodity when demand is inelastic causes the total
expenditures of consumers of the commodity to
(a) increase,
(b) decrease,
(c) remain unchanged,
(d) any of the above.
REVIEW QUESTIONS
 A fall in the price of a commodity whose demand curve is a rectangular hyperbola
(e=1) causes total expenditures on the commodity to
(a) increase,
(b) decrease,
(c) remain unchanged,
(d) any of the above.
 If the income elasticity of demand is greater than 1, the commodity is
(a) a necessity,
(b) a luxury,
(c) an inferior good,
(d) a nonrelated good.
 If the amount of a commodity purchased remains unchanged when the price of
another commodity changes, the cross elasticity of demand between them is
(a) negative,
(b) positive
(c) zero,
(d) 1.
REVIEW QUESTIONS
 Which of the following elasticities measure a movement along a curve rather than a
shift in the curve?
(a) The price elasticity of demand. (c) The cross elasticity of demand.
(b) The income elasticity of demand. (d) The price elasticity of supply.
Ans. (a) and (d). The price elasticity of demand and supply measures the relative
responsiveness in quantity to the corresponding relative changes in the commodity
price, keeping everything else constant. These are movements along a curve. The
income elasticity and cross elasticity of demand measure shifts in demand.
REVIEW QUESTIONS