Polytechnic University of the Philippines

College of Social Sciences and Development

Department of Economics

INSTRUCTIONAL MATERIALS FOR

MICROECONOMICS
ECON 2043

Compiled by

Melcah Pascua Monsura

Russel R. Penamante
Celso G. Tan Jr.
 Table of Contents

Overview about Microeconomics……………………………………….……………………………4

Chapter 1 Introduction
1.1 Definition………………………………………….…………………………………………..5
1.2 Methodologies………………………………………………………………………………..5
1.3 Economic Goals………………………...……………………………………………………6
1.4 Production Possibilities Model………………………..…………………………………….6
1.5 Optimal Allocation……………………………………………………….…………………...8
Exercise 1…………………..……………………………………..…………………….……...10

Chapter 2 Market
2.1 Demand……………………………………………………………..………………….…...12
2.2 Supply……………………………………………………………………………………….15
Exercise 2………………………..………………………………………………….………….17
2.3 Market Equilibrium………………………………………………………………………….18
2.4 Government Control on Price……………………………………………………………..20
Exercise 3……………………………………………………………………………………….21
2.4 Change in Demand, Supply, and Equilibrium……………………………………………22
Exercise 4……………………………………………………………………………………….24

Chapter 3 Elasticity
3.1 Price Elasticity of Demand………………………………………….……………………..25
3.2 Price Elasticity of Supply………………………………………………………………..…29
3.3 Cross Elasticity of Demand…………………………………………………….…….……30
3.4 Income Elasticity of Demand…………………………………………………….….…….31
3.5 Consumer Surplus and Producer Surplus……………………………………………..…31
3.6 Tax Incidence…………………………………………………………………………...…..33
Exercise 5……………………………………………………………………………………….35

Chapter 4 Consumer Behavior and Utility Maximization

4.1 The Concept of Total Utility and Marginal Utility……………………………..……..……36
4.2 Theory of Consumer Behavior……………………………………………….……………37
4.3 Indifference Curve and Budget Line (Ordinal Utility)…………………………………….41
Exercise 6………………………………………..……………………………………….…….49

Chapter 5 Theory of the Firm (Production and Cost of Production)

5.1 Production Function……………………………………………………………..…………50
5.2 Returns to Scale…………………………………………………………………………….51
5.3 Production Periods…………………………………………………………………..……..51
5.4 Three Stages of Production……………………………………………………….……….54
5.5 Cost of Production…………………………………………………………..……………...54
5.6 Short-Run Production Costs………………………………………………………………55
5.7 Long-Run Production Costs…………………………………………………….…………56
5.8 Production and Costs in the Long Run……………………………………………………61
Exercise 7……………………………………………………………………………………….65

Chapter 6 Perfect and Imperfect Markets (Market Structures)

6.1 Pure Competition………………………………………………………………………...…67
Characteristics of Pure Competition………………………………………………….67

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 Two Approaches of Profit Maximization…………………………………………..…67
Profit-Maximizing Output………………………………………………………………69
Loss Minimizing Case………………………………………………………………….70
Shutdown Case……………………………………………………………………...…71
Marginal Cost as a Supply Curve…………………………………………………….72
Determining Market Price and Profits………………………………………………..73
Long-Run Equilibrium………………………………………………………………....74
6.2 Pure Monopoly……………………………………………………………………………...76
Characteristics of Pure Monopoly………………………………………………….…76
Monopolist as Price Maker…………………………………………………………….77
Profit Maximization………………………………………………………………….…78
Possibility of Losses of Monopolist…………………………………………………...78
Social Costs of Monopoly Power……………………………………………………..79
Regulated Monopoly…………………………………………………………………..80
Price Discrimination……………………………………………………………………81
Exercise 8…………………….…………………………………………………………………83
6.3 Monopolistic Competition………………………………………………………………….84
Characteristics of Monopolistic Competition………………………………………...84
Profit Maximization in the Short-Run………………………………………………....85
Long-Run Equilibrium as Normal Profit………………………………………………86
6.4 Oligopoly………………………………………………………………………………….…86
Characteristics of Oligopoly………………………………………………………..….86
Game Theory…………………………………………………………………………...87
Kinked-Demand Theory……………………………………………………………….88
Cartels and Other Collusion……………………………………………………….….89
Price Leadership Model……………………………………………………………….90
Exercise 9……………………………………………………………………………………….93
6.5 Efficiency (Productive Efficiency and Allocative Efficiency……………………………..94
Efficiency in Perfect Market (Purely Competitive Firm)……………………………..94
Efficiency in Imperfect Markets……………………………………………………….97
Economic Effects of Monopoly: Price, Output, and Efficiency……………………..86
Monopolistic Competition and Efficiency…………………………………………….98
Oligopoly and Efficiency……………………………………………………………….99
Exercise 10……………………………………………………………………………………100

Chapter 7 Government and Market Failures

7.1 Public Goods………………………………………………………………………………101
7.2 Externalities……………………………………………………………………………..…103
Negative Externalities……………………………………………………………..…103
Positive Externalities…………………………………………………………………104
Government Intervention…………………………………………………………….106
7.3 Information Failures (Asymmetric Information)……………………………………...…107
7.4 Government Roles in the Economy……………………………………………………..108

REFERENCES………………………………………………………………………………..……….109

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OVERVIEW

Microeconomics studies the behavior of the individuals and the firms. This topic will be
divided into two parts, (a) utility maximization of the individuals and (b) profit maximization and
loss minimization of the firms. The cardinal approach and ordinal approach are the two
approaches used to describe the utility maximization of the individuals. Cardinal approach is a
classical approach of measuring utility using utils while ordinal approach explains utility using
indifference curve and budget line. Furthermore, profit maximization and loss minimization will be
discussed using the market structures in perfect market and imperfect markets. Pure competition
is considered as the perfect market while imperfect markets are composed of monopoly,
monopolistic competition, and oligopoly. These market structures utilize the theory of production
and cost to explain the optimal decision of the firms.

There are some discussions included as introduction in this course. These topics are
needed to explain the two main subjects of microeconomics. This course will start by discussing
the introduction of economics including its definition, fundamentals, methodologies, and economic
goals. These topics are crucial to discuss the ideas of scarcity and opportunity cost under
production possibility curve and identifying the allocative efficiency using marginal benefit (MB)
and marginal cost (MC) analysis. The ideas from these topics will be used in analyzing the
behavior of the firms regarding profit maximization and loss minimization.

Market will also be discussed including demand, supply, market equilibrium and
elasticities. Subjects under elasticity are price elasticity of demand and supply, cross elasticity of
demand, and income elasticity of demand. The demand side of the market has the big contribution
in terms of explaining the consumer’s theory of preference on utility maximization of the
individuals. While all the areas under this topic were needed to further describe the decisions of
the firms. Lastly, when market failure happens in terms of public goods, externalities, and
asymmetric information the government will intervene to efficiency to the public.

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CHAPTER 2: Market

Learning Objectives: This chapter discusses the demand and supply concepts in the market. At
the end of this chapter, the readers will be able to understand the law of demand and
supply, distinguish the difference between change in quantity demanded from change in
demand and the change quantity supplied from change in supply, identify the determinants
of demand and supply, identify the equilibrium price and equilibrium quantity and analyze
the effects of the changes of demand and supply to equilibrium price and equilibrium
quantity.

Market is a place where the buyers and sellers meet. There are two actors involved in the
market. These are the (1) buyers also known as the demanders and the (2) sellers also known
as the suppliers. Hence, this topic will be divided into parts, demand side and supply side, before
discussing the market equilibrium. Elasticity will be explained on the last part of this chapter.

2.1 Demand

Demand shows various amount of goods that consumers are willing and able to buy at a
specific period of time (day, week, month or year). This can be represented as demand schedule
or demand table, demand curve and demand function.

2.1.1 Demand Schedule

Quantity The table shows that as the price increases, the quantity
Price
Demanded demanded decreases. This is called the law of
0 100 demand.
5 90
10 80 Take note that demand is different from quantity
15 70 demanded. Demand refers to the whole schedule while
20 60 quantity demanded refers to the specific amount of good
25 50 at a given price (i.e at price 10 quantity demanded is 80).

Based on the above demand schedule, quantity demanded will be changed when price
changed, leaving demand unchanged. Demand can change based on the change of its
determinants known as determinants of demand. A change in demand can be easily shown using
the demand curve.

There are three explanations of the inverse relationship of price and quantity demanded:

1. The law of demand is consistent with Common Sense. People ordinarily do buy more of a
product at a low price than at a high price. Price is an obstacle that deters consumers from
buying. The higher that obstacle, the less of a product they will buy; the lower the price
obstacle, the more they will buy. The fact that businesses have “sales” is evidence of their
belief in the law of demand.

2. In any specific time period, each buyer of a product will derive less satisfaction (or benefit, or
utility) from each successive unit of the product consumed. The second Big Mac will yield less
satisfaction to the consumer than the first, and the third still less than the second. That is,
consumption is subject to Diminishing Marginal Utility. And because successive units of a

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 particular product yield less and less marginal utility, consumers will buy additional units only
if the price of those units is progressively reduced.

3. We can also explain the law of demand in terms of income and substitution effects. The
income effect indicates that a lower price increases the purchasing power of a buyer’s money
income, enabling the buyer to purchase more of the product than before. A higher price has
the opposite effect. The substitution effect suggests that at a lower price, buyers have the
incentive to substitute what is now a less expensive product for similar products that are now
relatively more expensive. The product whose price has fallen is now “a better deal” relative
to the other products.

For example, a decline in the price of chicken will increase the purchasing power of
consumer incomes, enabling people to buy more chicken (the income effect). At a lower price,
chicken is relatively more attractive, and consumers tend to substitute it for pork, lamb, beef, and
fish (the substitution effect). The income and substitution effects combine to make consumers
able and willing to buy more of a product at a low price than at a high price.

2.1.2 Demand Curve

Transforming the above demand schedule to demand curve:

Because of the inverse relationship of price and quantity demanded, demand curve is a
downward sloping curve. Consider the following determinants of demand:

1. Tastes or preferences. If consumers have favorable response regarding the good,

demand will increase making demand curve shifts to the right. On the other hand,
unfavorable response of consumers on the good will decrease demand and will shift
demand curve to the left.
2. Number of Buyers. An increase in the number of buyers will increase in demand and
make the demand curve shift to the right. Otherwise to the left.
3. Income. There are two kinds of goods under income, normal good or superior good
and inferior good. As income increase demand for normal good also increase. This
means a positive relationship between income and normal goods. On the other hand,

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 as income increase demand for inferior good will decrease. Thus, there is a negative
or inverse relationship of income and inferior good.
4. Price of Related Goods. Substitute goods and complementary goods are considered
as related goods. When there is an increase of price of a particular good and the
demand of its related good increased, the goods are considered as substitute goods.
On the other hand, when there is an increase of price of a particular good and the
demand of its related good decreased, these goods are complementary goods.
5. Expectation. Consumer’s expectations on the change of price because of weather,
tradition and culture. In example, if there will be a super typhoon tomorrow today’s
demand will increase because consumers are expecting higher price of goods after
typhoon and decrease of supply of goods.

These determinants are also known as non-price determinants. The effect of the change
of these determinants causes the movement of one curve to another demand curve which is
called change in demand.

Any movement from one point to another point along the same demand curve due to the
change in price of the commodity itself, holding other determinants constant, is called change in
quantity demanded.

2.1.3 Demand Function

Another representation of demand is a function. Considering the given demand schedule,

we can derive its demand function:

Qd = a – bP

∆𝑄𝑑
where Qd = Quantity Demanded, a = intercept (at price 0), b = slope ( ), and P = price.
∆𝑃

The negative slope represents the negative relationship of price and quantity demanded.
Intercept is the maximum amount of goods that the consumers are willing and able to buy at price
0. Thus,

Qd = 100 – 2P
∆𝑄𝑑
b = ∆𝑃
90−100 −10
= 5−0 = 5
b=-2
To check: substitute the P with the given prices from the table.

Qd = 100 – 2(0) = 100 – 0 = 100

Qd = 100 – 2(5) = 100 – 10 = 90
Qd = 100 – 2(10) = 100 – 20 = 80
Qd = 100 – 2(15) = 100 – 30 = 70
Qd = 100 – 2(20) = 100 – 40 = 60
Qd = 100 – 2(25) = 100 – 50 = 50

This function is applicable to linear equation where the slope is constant or equal. In this
function, the slope is -2.

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2.2 Supply
Supply shows various amount of goods that suppliers are willing and able to sell or make
available in the market at a specific period of time (day, week, month or year). This can be
represented as supply schedule or supply table, supply curve and supply function.

2.2.1 Supply Schedule

Quantity The table shows that as the price increases, the quantity
Price
Supplied supplied also increases. This is called the law of supply.
0 60
Take note that supply is different from quantity supplied. Supply
5 70 refers to the whole schedule while quantity supplied refers to
10 80 the specific amount of good at a given price (i.e., at price 10
15 90 quantity supplied is 80).
20 100
25 110

Based on the supply schedule, quantity supplied can be changed when price changed
leaving supply unchanged. Supply can change based on the change of its determinants known
as determinants of supply. A change in supply can be easily shown using the supply curve.

2.2.2 Supply Curve

The positive or direct relationship of price and quantity supplied shows an upward sloping
curve of supply curve.

Increase in supply will shift the supply curve to the right (S0 to S1). Decrease in supply will
shift the supply curve to the left (S0 to S2). If quantity supplied can be changed through the change
in price, supply can be changed through the change of its determinants. There are six (6)
determinants of supply:

1. Resource Price. This refers to the prices of resources used in the production like
wages for labor and rent for capital. When there is an increase in the resource price,
cost of production will increase that could lead to a decrease in supply. On the other
hand, lower resource price leads to lower cost of production that will increase supply.

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 2. Technology. Upgrading the firm’s production by using advance technology from
manual production can decrease the cost of production. Instead of paying laborers
with wages, the firms can make efficient production by using machineries. This leads
to an increase in supply,
3. Number of Sellers. An increase in the number of suppliers will also increase supply.
4. Taxes and Subsidies. Taxes are part of the cost of production while subsidies are
help of the government to the firms. Taxes are mandatory payment of the firms. All
firms should pay taxes but only firms can avail for subsidies. Subsidies are given for
those who have an important role in the society and the government cannot give up
its functions (i.eg production of the farmers). When the government imposed higher
tax to the firms, cost of production will increase then supply will decrease. When
subsidies like fertilizer and free irrigation were given to the farmers, cost of production
decreased that could lead to an increase in supply.
5. Price of other goods. These goods are not necessarily be related goods or
complementary goods, but these two goods were production using same equipment
and materials. Wherein it is easy to shift production from one good to another when
the price of one good changed. Example: Suppose there are two balls, ball for
basketball and a ball for volleyball. Then let us say, a firm is producing basketball, but
the price of volleyball increased. A firm will choose to produce volleyball because of
higher price therefore the supply of basketball will decrease. It is easy to shift a
production because the two balls have almost the same materials and using the same
equipment in production.
6. Expectation. The suppliers are expecting for a change in price in the future. When
the firms expected that the price of their goods will increase in the future, the present
supply of their goods will decrease.

These determinants are also known as non-price determinants. The movement of one
curve to another demand curve caused by the change in non-price determinants is called change
in supply. On the other hand, any movement of one point to another point along the same supply
curve due to the change in the price of the good itself is called a change in quantity supplied.

2.2.3 Supply Function

Supply function is another representation of supply. Given the above supply schedule, we
can derive its supply function:

Qs = c + dP

∆𝑄𝑑
where Qs = Quantity Supplied, c = intercept (at price 0), d = slope ( ∆𝑃 ), and P = price.
The positive slope (d) represents direct or positive relationship of price and quantity
supplied. The intercept (c) is the maximum amount of goods that the suppliers are willing and
able to make available in the market at price 0. Thus,

Qs = 60 + 2P
∆𝑄𝑑
b= ∆𝑃
70−60
= 5−0
10
=
5
b=2

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 To check: substitute the P with the given prices from the table.

Qs = 60 + 2(0) = 60 + 0 = 60
Qs = 60 + 2(5) = 60 + 10 = 70
Qs = 60 + 2(10) = 60 + 20 = 80
Qs = 60 + 2(15) = 60 + 30 = 90
Qs = 60 + 2(20) = 60 + 40 = 100
Qs = 60 + 2(25) = 60 + 50 = 110

This function is applicable to linear equation where the slope is constant or equal. In this
function, the slope is 2.

Exercise 2

I. Underline the best answer.

1. A favorable change in consumer tastes for a product will (increase, decrease,

unchanged) demand, the demand curve will shift to the (right, left, no shift).
2. An increase in the number of buyers in a market (increases, decreases, unchanged)
demand, demand curve will shift to the (right, left, no shift).
3. As your income rises, your demand for inferior goods (increases, decreases,
unchanged), demand curve for this good will shift to the (right, left, no shift).
4. As your income rises, your demand for superior goods (increases, decreases,
unchanged), demand curve for this good will shift to the (right, left, no shift).
5. A newly expectation of higher prices may cause consumers to (increase, decrease,
unchanged) its current demand, demand curve will shift to the (right, left, no shift).
6. An increase in the price of a good will (increase, decrease, unchanged) the demand for
its substitute good, demand curve for the substitute good will shift to the (right, left, no
shift).
7. An increase in the price of a good will (increase, decrease, unchanged) the demand for
its complement, demand curve for its complement will shift to the (right, left, no shift).
8. If there will be a super typhoon tomorrow, present demand will (increase, decrease,
unchanged), demand curve will shift to the (right, left, no shift).
9. When resource prices fall, firms will (increase, decrease, unchanged) their supply,
supply curve will shift to the (right, left, no shift).
10. Due to an increase in resource prices, firms will (increase, decrease, unchanged) their
supply, supply curve will shift to the (right, left, no shift).
11. Increase number of suppliers will (increase, decrease, unchanged) the supply, supply
curve will shift to the (right, left, no shift).
12. A decrease in the sales or property taxes will (increase, decrease, unchanged) supply,
supply curve will shift to the (right, left, no shift).
13. An increase in sales or property taxes will (increase, decrease, unchanged) supply,
supply curve will shift to the (right, left, no shift).
14. If the government subsidizes the production of a good, supply for this good will (increase,
decrease, unchanged), supply curve will shift to the (right, left, no shift).
15. Adopting advance technologies will (increase, decrease, unchanged) supply, supply
curve will shift to the (right, left, no shift).

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2.3 Market Equilibrium

Since demand and supply are represented by three models, market equilibrium can also
be determined using the three representations by combining the two. Equilibrium means balance
or equal, therefore, market equilibrium exists when quantity demanded is equal to quantity
supplied.

2.3.1 Table or Schedule

Using the demand schedule and supply schedule above, market equilibrium is at price 10
where Qd = Qs of 80. Price 10 is called the Equilibrium Price (Pe) while quantity 80 is called the
Equilibrium Quantity (Qe).

There are two problems faced by the market when market equilibrium is not present. At
prices below equilibrium price (0 and 5), quantity demanded is greater than quantity supplied thus,
shortage is present. On the other hand, surplus occurs at prices above equilibrium price (15, 20
& 25) where quantity demanded is less than quantity supplied. To compute how much the
shortage and surplus is in the market, subtract quantity supplied to quantity demanded (Qs – Qd).

Example:

1) At price 5, Qs is equal to 70 and Qd is equal to 90.

Qs – Qd: 70 – 90 = -20

Negative sign represents shortage. Thus, there is shortage of 20 units.

2) At price 20, Qs is equal to 100 and Qd is equal to 60.

Qs – Qd: 100 – 60 = 40

Positive sign represents surplus. Thus, there is a surplus of 40 units.

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 2.3.2 Curve or Graph

Plotting the given schedules of demand and supply into one graph,

Upper portion of the graph shows surplus while the lower portion represents shortage. The
interaction of demand curve and supply curve represents the market equilibrium (ME). The above
diagram also shows that equilibrium price is 10 and equilibrium quantity is 80.

2.3.3 Function

Using the derived demand function Qd = 100 – 2P and supply function Qs = 60 + 2P, we
can derive equilibrium price and equilibrium quantity. Following the condition of market
equilibrium, Qd = Qs;

Qd = Qs
a – bP = c + dP
100 – 2P = 60 + 2P

Combine like terms:

100 – 60 = 2P + 2P
40 = 4P

Divide both sides by 4

10 = P; thus, 10 is the equilibrium price.

To calculate the equilibrium quantity, substitute P as 10 in the functions.

Qd = Qs
a – bP = c + dP
100 – 2P = 60 + 2P
100 – 2(10) = 60 + 2(10)
100 – 20 = 60 + 20
80 = 80; thus, 80 is the equilibrium quantity.

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2.4 Government Control on Price

There are cases that even though equilibrium price is present, consumers cannot afford
to buy goods because it is expensive for them and sellers cannot sell the goods because it is
cheap on their part. Government intervention on price is needed to help both consumers and
sellers.

Price ceiling is imposed to help the consumers to buy goods. It is the maximum legal
price that can be charged by the sellers to the consumers. Prices above the price ceiling are
considered illegal. An effective price ceiling can be found below the equilibrium price but may
result to shortage.

On the other hand, price floor is imposed to help the sellers when they consider the price
of goods low for them to recover their costs. It is the minimum legal price that the sellers can
charge on goods. Prices below the price floor are considered illegal. An effective price floor can
be found above the equilibrium price but may result to surplus.

For example, during calamities the production of agricultural products will be affected.
Given an equilibrium price in the market, sellers are not willing to sell their goods because the
given price is not enough for them to recover their costs in producing the goods. In order to help
them, the government will increase the price goods which is called price floor. It is a legal action
by the government to protect the sellers from losing income.

When sellers are charging illegal prices, they are considered as black markets. If price
ceiling is present in the market, black markets operate at the higher price. On the other hand,
black markets operate at the lower price during price floor.

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Exercise 3

1. Consider the following table and answer the following problems:

Quantity Demanded Quantity Supplied

Price (P)
(Qd) (Qs)
10 60 50
8 90 40
4 50 60
2 70 70
0 100 30
6 80 20

A. Arrange the above table based on law of demand and law of supply.
B. Derive the demand function using the table.
C. Derive the supply function using the table.
D. Determine the equilibrium price and quantity mathematically.
E. Plot the demand and supply schedules in a diagram. Identify the equilibrium price
and quantity.
F. Suppose the government sets a price floor of 10. Will there be a shortage or
surplus? How large will it be?
G. Suppose there is an effective price ceiling of 4. Will there be a shortage or surplus?
How large will it be?

2. Assume that demand for commodity is represented by the equations P=10-0.20Qd

and supply by the equation P=2+0.20Qs where Qd and Qs, are quantity demanded
and quantity supplied, respectively, and P is the price. Using the equilibrium condition
Qs=Qd, solve the equations to determine equilibrium price and equilibrium quantity.
Graph the two equations to substantiate your answer.

14
2.5 Change in Demand, Supply, and Equilibrium1

We will consider the determinants of demand and supply to change demand, supply, and
equilibrium. This section will answer the question, what will happen to equilibrium price and
equilibrium quantity if there is a change in demand ang supply. There are eight (8) scenarios to
be considered, first 4 are considered simple cases and the other 4 are complex cases.

The following cases are called simple cases, either demand or supply is constant in one
scenario.

1. Supply is constant while there is an increase in Demand

An increase in demand shifts

demand curve to the right from D1 to
D2. Keeping supply curve
unchanged, both equilibrium price
and equilibrium quantity will
increase.

2. Supply is constant while there is a decrease in Demand

Shifting of demand curve to the left from

D1 to D2 means decrease in demand.
This will result to a decrease in both
equilibrium price and equilibrium
quantity when supply is constant.

3. Supply increase while Demand is constant

An increase in supply will shift the

supply curve to the right from S1 to S2.
Given a constant demand, this change
will increase the equilibrium quantity
and will decrease the equilibrium price.

1The diagrams used in this section were collected from McConnel, C. & Brue, S. (2008). Economics: Principles,
Problems, and Policies. 17th edition, McGraw Hill-Irwin.

15
 4. Supply decrease while Demand is constant

Decrease in supply will shift the

supply curve to the left from S1 to S2.
Given a constant demand, this
change will decrease the equilibrium
quantity and will increase the
equilibrium price.

Using the four (4) simple cases above, we can discuss the following complex cases. Both
demand and supply will change in one scenario.

5. Demand increase and Supply increase

Referring to the diagrams above, increase in demand is in panel 1 and increase in
supply is in panel 3. Looking at the effects on Pe and Qe, both equilibrium quantities
increased while equilibrium prices have different directions. Therefore, equilibrium quantity
will increase while equilibrium price is indeterminate.

Indeterminate means that the effect it is not easily determined, it depends on how large
or small the change is.

6. Demand decrease and Supply increase

Panel 2 refers to demand decrease and panel 3 refers to supply increase. Both
equilibrium prices decreased while equilibrium prices of both panels have different
directions. Thus, equilibrium quantity is indeterminate while equilibrium price will decrease.

7. Demand increase and Supply decrease

Considering panel 1 as demand increase and panel 4 as supply decrease, both
equilibrium prices increased while equilibrium quantities move on different directions. Thus,
equilibrium quantity is indeterminate while equilibrium price will increase.

8. Demand decrease and Supply decrease

Panel 2 and panel 4 refer to demand decrease and supply decrease, respectively. The
movements of equilibrium quantities are the same, both decreased. On the other hand,
equilibrium prices move on different directions. Therefore, equilibrium quantity will decrease
while equilibrium price is indeterminate.

16
Exercise 4
In the space provided, determine the effect increase, decrease or indeterminate on the
equilibrium price and equilibrium quantity on the changes in demand and/or supply.
1. Constant demand; increase in supply
Pe________________ Qe__________________

2. Constant demand; decrease in supply

Pe________________ Qe__________________

3. Increase in demand; constant supply

Pe________________ Qe__________________

4. Decrease in demand; constant supply

Pe________________ Qe__________________

5. Decrease in demand; decrease in supply

Pe________________ Qe__________________

6. Decrease in demand; increase in supply

Pe________________ Qe__________________

7. Increase in demand; increase in supply

Pe________________ Qe__________________

8. Increase in demand; decrease in supply

Pe________________ Qe__________________

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