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Microeconomic Tools Lecture 2 Supply and Demand • In microeconomics, we typically have suppliers reacting positively to price, and demanders reacting negatively. • The two of them combine to provide an equilibrium, that indicates the market quantity and the market price. Demand for Apples Price 10.00 7.50 5.00 2.50 100 200 300 400 500 Apples What affects demand? • • • • Price of the good Prices of other goods Consumer income Tastes Demand for Apples Price 10.00 Demand with higher income 7.50 5.00 2.50 100 200 300 400 500 Apples Supply of Apples 10.00 7.50 5.00 2.50 100 200 300 400 500 Apples What affects supply? • • • • • Technological change Input prices Prices of Production-Related Goods Size of the Industry Weather Supply of Apples 10.00 Poor weather 7.50 Improved technology 5.00 2.50 100 200 300 400 500 Apples Equilibrium of Demand and Supply Supply Demand 10.00 7.50 5.00 2.50 100 200 300 400 500 Apples Equilibrium of Demand and Supply Supply Demand 10.00 7.50 5.00 Total Revenue, Total Expenditures 2.50 100 200 300 400 500 Apples Equilibrium of Demand and Supply Shift in Demand Supply Demand 10.00 7.50 5.00 2.50 100 200 300 400 500 Apples Equilibrium of Demand and Supply Supply Demand 10.00 Shift in Supply 7.50 5.00 2.50 100 200 300 400 500 Apples Equilibrium of Demand and Supply Shift in Demand Demand 10.00 Supply Shift in Supply 7.50 5.00 2.50 100 200 300 400 500 Apples Utility Analysis? • In Principles courses we often measure utility -- sometimes use “utils” ... • Utils ????? • For several analyses in health economics, we’ll want to use more modern analysis …, • Although for insurance, we’ll have to impose some “cardinality.” • Ordinal utility Indifference Curves 100 75 50 25 20 40 60 80 100 Pounds of Spam Indifference Curves 100 Higher level of utility 75 50 25 20 40 60 80 100 Pounds of Spam How much is bought? In a month Visits = $20/visit Spam = $10/pound Income = $1500 100 75 50 25 If price of Spam doubles? 150 20 40 60 80 100 Pounds of Spam Putting them together In a month Prescriptions = $20/visit Spam = $10/pound Income = $1500 100 75 50 25 20 40 60 80 100 Pounds of Spam Putting them together In a month Visits = $20/visit Spam = $10/pound Income = $1500 U1 100 U2 75 50 47 25 20 40 5660 80 100 Pounds of Spam Putting them together 100 In a month Visits = $15/visit Spam = $10/pound Income = $1500 U increases 75 More visits 50 More Spam Why? 25 20 40 60 80 100 Pounds of Spam A close look at the tangency In a month Visits = $20/visit Spam = $10/pound Income = $1500 100 U2 75 -phΔv +psΔs 50 -ΔU/Δv = - Mgl. utility of visits ΔU/Δs = Mgl. utility of Spam 25 20 40 60 80 100 Pounds of Spam A close look at the tangency In a month Visits = $20/visit Spam = $10/pound Income = $1500 100 -pvΔv + psΔs = 0 Δv/Δs = ps/pv Now, for utility MUv/Mus = (ΔU/Δv)/(ΔU/Δs) U2 75 = Δs/Δv ps/pv = Δv/Δs = MUs/Muv -phΔv or Muv /pv = MUs/ ps +psΔs 50 -ΔU/Δv = - Mgl. utility of visits ΔU/Δs = Mgl. utility of Spam 25 20 40 60 80 100 Pounds of Spam Utility per $ • Bang/buck has to be the same for each good! • Why?
