Microeconomics, Module 1: "Consumer’s Demand, Producer’s Supply, and Equilibrium"
Reading: Landsburg, Chapter 1
(The attached PDF file has better formatting.)
Updated: 25 May 2005
The laws of supply and demand are the foundation of microeconomic models. Chapter 1 of Landsburg’s text explains the principles of supply and demand and shows how to apply them to sales taxes, excise taxes, and other scenarios.
Section 1.1: A non-economist might say: when the price is high, demand is low, and as the price rises, demand increases. But demand is a relation (the demand curve), not a number; the quantity demanded is the number. Demand shows the relation between the price and the quantity demanded.
The demand curve assumes that other items are held constant, such as consumers’ income, their tastes, and the prices of other goods.
Illustration: the demand for beef depends on the consumer’s income (rich people eat more beef than poor people), their tastes (vegetarians avoid beef), and the prices of other goods (such as poultry and fish).
Section 1.2: Supply is the relation between the price and the quantity supplied. The supply curve assumes that other items are held constant, such as the size of the industry, the cost of resources, and the technology used to produce the good.
Illustration: The supply of beef depends on the size of the industry (the more cattle growers, the more beef can be supplied), the cost of resources (such as the cost of land), and the technology used to produce the good (affecting the time needed to raise a herd of cattle).
Section 1.3: The intersection of the supply and demand curves is the equilibrium price and quantity. Sales and excise taxes have the same effect on price and quantity. We state this concept as "the economic incidence of a tax is independent of the legal incidence."
Exam Topics: The final exam, following Landsburg’s text, uses linear supply and demand curves. In truth, supply and demand curves can not be modeled by simple mathematical curves, but we use linear curves to keep the economic concepts clear.
The final exam tests the intersection of supply and demand curves with and without a sales tax or an excise tax. The practice problems show the type of problem you will get.