1. PART 3 MICROECONOMICS OF PRODUCT MARKETS Prepared by Dr. Amy Peng Ryerson University © 2013 McGraw-Hill Ryerson Ltd.

2. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A (p=$1.50) Units of B (p=$1.00) Total expenditure 80$12 63 46 29 012$12 © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 2

3. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A (p=$1.50) Units of B (p=$1.00) Total expenditure 80$12 63 46 29 012$12 © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 3

4. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A (p=$1.50) Units of B (p=$1.00) Total expenditure 80$12 63 46 29 012$12 © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 4

5. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A (p=$1.50) Units of B (p=$1.00) Total expenditure 80$12 63 46 29 012$12 © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 5

6. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A (p=$1.50) Units of B (p=$1.00) Total expenditure 80$12 63 46 29 012$12 © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 6

7. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A (p=$1.50) Units of B (p=$1.00) Total expenditure 80$12 63 46 29 012$12 Attainable Unattainable © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 7

8. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 An increase in income makes the purchase of more of either or both items possible An increase in income makes the purchase of more of either or both items possible Income increases © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 8

9. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Price changes cause a change in the quantity demanded of the items Price changes cause a change in the quantity demanded of the items Price of A rises © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 9

10. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 combinationUnits of A Units of B j122 k64 l46 m38 j k l m I © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 10

11.  Indifference curves are downward slopping  Indifference curves are convex to origin  Marginal rate of substitution (MRS) is the slop of the indifference curve at any point Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 j k l m I MRS diminishes, so curve is convex © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 11

12. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Indifference map shows a series of indifference curves, for different levels of utility I4I4 I1I1 I2I2 I3I3 © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 12

13. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Point X represents the optimal attainable combination of products A and B X I4I4 I1I1 I2I2 I3I3 © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 13

14.  Marginal utility theory assumes utility is numerically measurable  Indifference curve approach requires only that a consumer specifies if a particular combination of products yield more or less utility than another  At equilibrium, MRS=P B /P A  Equivalent to marginal utility approach since © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 14

15. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 New budget line reflects the price change I2I2 I3I3 I1I1 I4I4 X P B =$1.00 P B =$1.50 © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 15

16. Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 When the price of product B is increased from $1.00 to $1.50, the equilibrium position moves from X to X’, decreasing the quantity of product B demanded from six to three units. When the price of product B is increased from $1.00 to $1.50, the equilibrium position moves from X to X’, decreasing the quantity of product B demanded from six to three units. X'X' I2I2 I3I3 I1I1 I4I4 X P B =$1.00 P B =$1.50 © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 16

17. Quantity of A Quantity of B 2 4 6 8 10 12 X'X' I2I2 I3I3 I1I1 I4I4 X PBPB QBQB $1.006 $1.503 2 4 6 10 12 8 Price of B Quantity of B 2 4 6 8 10 12 $0.50 $1.00 $1.50 DBDB FIGURE A6-5: Deriving the Demand Curve © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 17

18.  The indifference curve approach to consumer behaviour is based on the consumer’s budget line and indifference curves.  The budget line shows all combinations of two products that the consumer can purchase given product prices and money income.  An indifference curve shows all combinations of two products that will yield the same total utility to a consumer. Indifference curves are downward sloping and convex from the origin.  The consumer is in equilibrium (utility is maximized) at the point on the budget line that lies on the highest attainable indifference curve. At that point the budget line and indifference curve are tangent.  Changing the price of one product shifts the budget line and determines a new equilibrium point.  A price change causes a change in the quantity demanded. The change in the quantity demanded is due to the substitution and income effects. © 2013 McGraw-Hill Ryerson Ltd. Appendix 6.1 18