Microeconomics Theory

Microeconomics Theory

In this theory we get an idea that how households and firms take decision and how they interact with each other in the market (Mankiw, 2012). In competitive market there are number of buyers and sellers. Therefore Economist uses the model of demand and supply so they can analyze the competitive market. In competitive market buyers and sellers have little or no influence on market.so let’s discuss about the demand and supply.

 Demand

Consumers are buying goods and services and willing to pay at different prices is called demand .as per the law of demand, when price increase consumer’s demand decreases and when the price decrease demand increase. If the demand increase then curve shift to right side (D2) and if demand decreases then curve shifted to left side d3.

 Quantity demanded: the quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.

Elasticity of demand:

A measure of responsiveness of quantity supplied to a change in one of its determinants. And how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price is called Price Elasticity of Demand.

Price elasticity of demand: % change in quantity demanded

% change in price

Types of Price Elasticity of Demand

1) Perfect Inelasticity demand

Here even if the price increase or decrease, quantity demanded stays the same. And the demand curve is vertical. Elasticity=0

2) Inelastic Demand

Quality demanded is changing less than the price. Elasticity<1

3) Unit Elastic Demand

Here both price and quantity demanded change in equal percentage. Elasticity=1

4) Elastic Demand

Quantity demanded is changing greater than the price. Elasticity>1

5) Perfectly Elastic Demand

A very small amount of change in price affect huge changes in quality demanded. Moreover, the demand curve becomes horizontal. Elasticity =∞

Factors affecting demand