9781118041581

pattern of (different) prices and market shares for the leading firms in the

industry. Consider what would happen if one of the firms unilaterally instituted

a significant reduction in the price of its chips. The law of demand predicts

that its microchip sales would increase. The sources of the increase are three-

fold: (1) increased sales to the firm’s current customers, (2) sales gained from

competing suppliers, and (3) sales to new buyers. Of course, each of these fac-

tors might be important to a greater or lesser degree.

Figure 2.2 graphically illustrates the law of demand by depicting the indi-

vidual firm’s downward-sloping demand curve.The horizontal axis lists the

quantity of microchips demanded by customers and sold by the firm each week.

For convenience, the quantity of chips is measured in lots consisting of 100

chips. The vertical axis lists the price per lot (measured in thousands of dollars)

charged by the firm. Three particular points along the downward-sloping

demand curve are noted. Point A corresponds to a quantity of 2 lots and a

price of $130,000; this means that if the firm charges $130,000 per lot, its weekly

32 Chapter 2 Optimal Decisions Using Marginal Analysis

0 246810

50

100

150

200

A

B

C

Price (Thousands of Dollars)

Quantity (Lots)

FIGURE 2.2

The Demand Curve for

Microchips

The demand curve

shows the total

number of microchips

that will be demanded

(i.e., purchased) by

buyers at different

prices.

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