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Law of Demand
• A decrease in the price of a good, all
other things held constant, will cause an
increase in the quantity demanded of
the good.
• An increase in the price of a good, all
other things held constant, will cause a
decrease in the quantity demanded of
the good.
Change in Quantity
Demanded
Price
An increase in price
causes a decrease in
quantity demanded.
P1
P0
Q1
Q0
Quantity
Change in Quantity
Demanded
Price
A decrease in price
causes an increase in
quantity demanded.
P0
P1
Q0
Q1
Quantity
Changes in Demand
• Change in Buyers’ Tastes
• Change in Buyers Incomes
– Normal Goods
– Inferior Goods
• Change in the Number of Buyers
• Change in the Price of Related Goods
– Substitute Goods
– Complementary Goods
Change in Demand
An increase in demand
refers to a rightward shift
in the market demand
curve.
Price
P0
Q0
Q1
Quantity
Change in Demand
A decrease in demand
refers to a leftward shift
in the market demand
curve.
Price
P0
Q1
Q0
Quantity
Law of Supply
• A decrease in the price of a good, all
other things held constant, will cause a
decrease in the quantity supplied of the
good.
• An increase in the price of a good, all
other things held constant, will cause an
increase in the quantity supplied of the
good.
Change in Quantity Supplied
A decrease in price
causes a decrease in
quantity supplied.
Price
P0
P1
Q1
Q0
Quantity
Change in Quantity Supplied
An increase in price
causes an increase in
quantity supplied.
Price
P1
P0
Q0
Q1
Quantity
Changes in Supply
• Change in Production Technology
• Change in Input Prices
• Change in the Number of Sellers
Change in Supply
An increase in supply
refers to a rightward shift
in the market supply curve.
Price
P0
Q0
Q1
Quantity
Change in Supply
A decrease in supply refers
to a leftward shift in the
market supply curve.
Price
P0
Q1
Q0
Quantity
Market Equilibrium
• Market equilibrium is determined at the
intersection of the market demand curve
and the market supply curve.
• The equilibrium price causes quantity
demanded to be equal to quantity
supplied.
Market Equilibrium
Price
D
S
P
Q
Quantity
Market Equilibrium
Price
D0
D1
S0
An increase in demand
will cause the market
equilibrium price and
quantity to increase.
P1
P0
Q0 Q1
Quantity
Market Equilibrium
Price
D1
D0
S0
A decrease in demand
will cause the market
equilibrium price and
quantity to decrease.
P0
P1
Q1 Q0
Quantity
Market Equilibrium
Price
D0
S0
P0
P1
Q0 Q1
S1
An increase
in supply
will cause
the market
equilibrium
price to
decrease and
quantity to
increase.
Quantity
Market Equilibrium
Price
D0
S1
P1
P0
Q1 Q0
S0
A decrease in
supply will
cause the
market
equilibrium
price to
increase and
quantity to
decrease.
Quantity
Concept of the Derivative
The derivative of Y with respect to X is
equal to the limit of the ratio Y/X as
X approaches zero.
Rules of Differentiation
Constant Function Rule: The derivative
of a constant, Y = f(X) = a, is zero for all
values of a (the constant).
Y  f (X )  a
dY
0
dX
Rules of Differentiation
Power Function Rule: The derivative of
a power function, where a and b are
constants, is defined as follows.
Y  f (X )  aX b
dY
 b  a X b 1
dX
Rules of Differentiation
Sum-and-Differences Rule: The derivative
of the sum or difference of two functions
U and V, is defined as follows.
U  g( X )
V  h( X )
dY dU dV


dX dX dX
Y  U V
Rules of Differentiation
Product Rule: The derivative of the
product of two functions U and V, is
defined as follows.
U  g( X )
V  h( X )
dY
dV
dU
U
V
dX
dX
dX
Y  U V
Rules of Differentiation
Quotient Rule: The derivative of the
ratio of two functions U and V, is
defined as follows.
U  g( X )
dY

dX
V  h( X )

V dU
dX
 
 U dV
V
2
U
Y
V
dX

Rules of Differentiation
Chain Rule: The derivative of a function
that is a function of X is defined as follows.
Y  f (U )
U  g( X )
dY dY dU


dX dU dX
Optimization With Calculus
Find X such that dY/dX = 0
Second derivative rules:
If d2Y/dX2 > 0, then X is a minimum.
If d2Y/dX2 < 0, then X is a maximum.