Microeconomic Tools

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.

100 200 300 400 500

2.50

5.00

7.50

10.00

Price

Apples

Demand for Apples

What affects demand?

• Price of the good

• Prices of other goods

• Consumer income

• Tastes

100 200 300 400 500

2.50

5.00

7.50

10.00

Price

Apples

Demand with higher income

Demand for Apples

Supply of Apples

100 200 300 400 500

2.50

5.00

7.50

10.00

Apples

What affects supply?

• Technological change

• Input prices

• Prices of Production-Related Goods

• Size of the Industry

• Weather

Supply of Apples

100 200 300 400 500

2.50

5.00

7.50

10.00

Apples

Improved technology

Poor weather

Equilibrium of Demand and Supply

100 200 300 400 500

2.50

5.00

7.50

10.00

Apples

SupplyDemand

Equilibrium of Demand and Supply

100 200 300 400 500

2.50

5.00

7.50

10.00

Apples

SupplyDemand

Total Revenue,Total Expenditures

Equilibrium of Demand and Supply

100 200 300 400 500

2.50

5.00

7.50

10.00

Apples

SupplyDemand

Shift in Demand

Equilibrium of Demand and Supply

100 200 300 400 500

2.50

5.00

7.50

10.00

Apples

SupplyDemand Shift in Supply

Equilibrium of Demand and Supply

100 200 300 400 500

2.50

5.00

7.50

10.00

Apples

SupplyDemand Shift in SupplyShift in Demand

Utility Analysis?

• In principles courses we often measure utility -- sometimes use “utils” ...

• which is dorky (most of the time).• For several analyses in health economics,

we’ll want to use more modern analysis …,• although for insurance, we’ll go back to

“utils” • Ordinal utility

Indifference Curves

Pounds of Spam

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lth

Clu

b V

isit

s

20 40 60 80 100

25

50

75

100

Indifference Curves

Pounds of Spam20 40 60 80 100

Higher level of utility

Hea

lth

Clu

b V

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s

25

50

75

100

How much is bought?

Pounds of Spam20 40 60 80 100

In a monthVisits = $20/visitSpam = $10/poundIncome = $1500

If price of Spam doubles?

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Clu

b V

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s

25

50

75

100

Putting them together

Pounds of Spam20 40 60 80 100

In a monthPrescriptions = $20/visitSpam = $10/poundIncome = $1500

Hea

lth

Clu

b V

isit

s

25

50

75

100

Putting them together

Pounds of Spam20 40 60 80 100

In a monthVisits = $20/visitSpam = $10/poundIncome = $1500

U1

U2

Hea

lth

Clu

b V

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s

25

50

75

100

Putting them together

Pounds of Spam20 40 60 80 100

In a monthVisits = $15/visitSpam = $10/poundIncome = $1500

U increases

More visits

More Spam

Why?

Hea

lth

Clu

b V

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s

25

50

75

100

A close look at the tangency

Pounds of Spam20 40 60 80 100

In a monthVisits = $20/visitSpam = $10/poundIncome = $1500

U2

-U/v = - Mgl. utility of visits

U/s =Mgl. utilityof Spam

-phv

+pssHea

lth

Clu

b V

isit

s

25

50

75

100

A close look at the tangency

Pounds of Spam20 40 60 80 100

U2

-U/v = - Mgl. utility of visits

U/s =Mgl. utilityof Spam

-phv

+pss

-pvv + pss = 0

v/s = ps/pv

Now, for utility

MUv/Mus = (U/v)/(U/s)

= s/v

ps/pv = v/s = MUs/Muv

or

Muv /pv = MUs/ ps

In a monthVisits = $20/visitSpam = $10/poundIncome = $1500

Hea

lth

Clu

b V

isit

s

25

50

75

100