Microeconomics Concept- Demand and Supply

Demand and Supply

Microeconomics focuses on the theories of supply and demand. It helps businesses understand how much of a good or service they should produce and how much they should charge for this good or service.

• Demand represents how much value consumers place on a good or service (their “valuation”). Demand curves plot this relationship as a function of Price and Quantity.
  • Linear Demand Curves take the form: 𝑑𝑃 =𝐴−𝐵(𝑃)
  • Log Linear Curves take the form: 𝑑𝑃 =𝐴(𝑃)−𝐵

• Supply represents how much producers are willing to produce for the price of a good or service. Supply curves represent this relationship as a function of Price and Quantity.
  • Cost Curves are formed of fixed (fc) and variable (vc) costs: 𝑐𝑄 =𝑓𝑐+𝑣𝑐(𝑄)

Market Equilibrium

Market Equilibrium is found at a Price and Quantity where:

𝐷𝑒𝑚𝑎𝑛𝑑 𝑑 (𝑃) = 𝑆𝑢𝑝𝑝𝑙𝑦 𝑠(𝑃)

Market Equilibrium is Pareto Efficient: it is a state where economic resources are most efficiently distributed. I.e. The consumer surplus and producer surplus are at its maximum and there are no deadweight loss.

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