PART 3 MICROECONOMICS OF
PRODUCT MARKETS
Prepared by Dr. Amy Peng
Ryerson University
© 2013 McGraw-Hill Ryerson Ltd.
12
Units of A
(p=$1.50)
Units of B
(p=$1.00)
Total
expenditure
8
0
$12
6
3
$12
4
6
$12
2
9
$12
0
12
$12
Quantity of A
10
8
6
4
2
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
2
12
Units of A
(p=$1.50)
Units of B
(p=$1.00)
Total
expenditure
8
0
$12
6
3
$12
4
6
$12
2
9
$12
0
12
$12
Quantity of A
10
8
6
4
2
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
3
12
Units of A
(p=$1.50)
Units of B
(p=$1.00)
Total
expenditure
8
0
$12
6
3
$12
4
6
$12
2
9
$12
0
12
$12
Quantity of A
10
8
6
4
2
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
4
12
Units of A
(p=$1.50)
Units of B
(p=$1.00)
Total
expenditure
8
0
$12
6
3
$12
4
6
$12
2
9
$12
0
12
$12
Quantity of A
10
8
6
4
2
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
5
12
Units of A
(p=$1.50)
Units of B
(p=$1.00)
Total
expenditure
8
0
$12
6
3
$12
4
6
$12
2
9
$12
0
12
$12
Quantity of A
10
8
6
4
2
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
6
12
Units of A
(p=$1.50)
Units of B
(p=$1.00)
Total
expenditure
8
0
$12
6
3
$12
4
6
$12
2
9
$12
0
12
$12
Quantity of A
10
8
Unattainable
6
4
2
Attainable
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
7
12
10
Quantity of A
An increase in
income
makes the purchase
of
more of either or
both
items possible
Income increases
8
6
4
2
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
8
12
10
Quantity of A
Price changes cause
a change in the
quantity
demanded of the
items
8
Price of A rises
6
4
2
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
9
Units of
A
Units of
B
j
12
2
k
6
4
l
4
6
m
3
8
j
12
10
Quantity of A
combination
8
k
6
l
4
m
I
2
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
10


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
10
Quantity of A

j
12
MRS diminishes, so
curve is convex
8
k
6
l
4
m
I
2
0
2
4
6
8
10
12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
11
12
10
Quantity of A
Indifference map
shows a series of
indifference curves,
for different levels of
utility
8
6
I4
4
2
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
12
12
Point X represents the
optimal attainable
combination of
products A and B
Quantity of A
10
8
6
X
4
I4
2
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
13
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=PB/PA
 Equivalent to marginal utility approach since

MU A MU B
PB MU B
MU B



 MRS 
PA
PB
PA MU A
MU A
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
14
12
New budget line
reflects the price
change
Quantity of A
10
PB=$1.00
8
6
X
4
2
I4
PB=$1.50
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
15
12
10
Quantity of A
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.
PB=$1.00
8
6
X'
X
4
2
I4
PB=$1.50
0
2
4
6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
16
FIGURE A6-5: Deriving the Demand Curve
Quantity of A
12
QB
$1.00
6
$1.50
3
8
X'
6
4
X
I4
2
2
4
6
8
10
12
Quantity of B
Price of B
PB
10
$1.50
$1.00
DB
$0.50
2 4 6
8 10 12
Quantity of B
© 2013 McGraw-Hill Ryerson Ltd.
Appendix 6.1
17






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