Introduction to Macroeconomics

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Introduction to Macroeconomics

• Chapter 3.
• Microeconomic Laws of
• Demand and Supply

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Chapter 3. Laws of Demand Supply

• 1. Markets and the Role of Prices
• 2. Microeconomic Demand and Supply
• Demand
• Supply
• 3. Demand - Supply Equilibrium
• Equilibrium
• Disequilibrium
• 4. Shifts in Demand and Supply Curves
• 5. Case Studies

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1. Markets and the Role of Prices

• Competitive Free Market - many suppliers and many
  consumers (competitive) engaged in trade without
  government interference (free).
• Prices - provide a means of communication between
  suppliers and consumers regarding scarcity and
  wants.

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2. Micro Demand and Supply

• Demand
• Law of Demand
• Demand curve
• Ceteris paribus assumption
• Supply
• Law of Supply
• Supply curve
• Ceteris paribus assumption

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2. Micro Demand and Supply Law of Demand

• As the price of a product declines relative to
  the price of all other goods, the quantity
  demanded will increase, ceteris paribus.
• The demand curve, a graphic representation of the
  Law of Demand, slopes downward to the right

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2. Micro Demand and Supply Demand Curve
As price declines the quantity demanded increases
Demand
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2. Micro Demand and Supply Demand Curve
Ceteris Paribus Assumption

• All other non-price factors that can affect
  demand are unchanged
• Prices of all other goods
• Income
• Tastes

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2. Micro Demand and Supply Law of Supply

• As the price of a product declines relative to
  the price of all other goods, the quantity
  supplied will decline, ceteris paribus.
• The supply curve, a graphic representation of the
  Law of Supply, slopes upward to the right

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2. Micro Demand and Supply Supply Curve
As price increases the quantity supplied increases
Supply
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2. Micro Demand and Supply Supply Curve
Ceteris Paribus Assumption

• All other non-price factors that can affect
  supply are unchanged
• Prices of all inputs
• labor, raw materials, cost of capital
• Prices of all other goods
• Technology
• Environment (e.g., weather)

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3. Demand - Supply Equilibrium

• Equilibrium
• Disequilibrium
• Price floor
• Price ceiling

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3. Demand - Supply Equilibrium Equilibrium
Price at which quantity supplied equals the
quantity demanded
Supply
Equilibrium
Demand
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3. Demand - Supply Equilibrium Disequilibrium

• Price above the equilibrium level
• quantity demanded lt quantity supplied
• surplus (inventory build)
• price floor price prevented from
• dropping to equilibrium level
• Price below the equilibrium level
• quantity demanded gt quantity supplied
• shortage (inventory declines)
• price ceiling price prevented from
• rising to equilibrium level

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3. Demand - Supply Equilibrium Price Floor
Supply
Demand
Price Floor
Quantity Demanded
Quantity Supplied
lt
Surplus
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3. Demand - Supply Equilibrium Price Ceiling
Supply
Demand
Price Ceiling
Quantity Supplied
Quantity Demanded
lt
Shortage
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4. Shifts in Demand and Supply Curves

• Demand Curve
• Demand vs quantity demanded
• Demand curve shifters
• Supply Curve
• Supply vs quantity supplied
• Supply curve shifters
• Change in equilibrium

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4. Shifts in Demand and Supply Curves Demand
vs Quantity Demanded

• Quantity Demanded refers to a point on the
  demand curve. A Change in Quantity Demanded
  refers to a movement along a stable demand curve
• Demand refers to the entire curve. A Change in
  Demand refers to a shift in the demand curve.

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4. Shifts in Demand and Supply Curves Change
in Quantity Demanded
A change in price results in a movement along a
demand curve
As price declines the quantity demanded increases
Demand
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4. Shifts in Demand and Supply Curves Change
in Demand
A change in anything except price that affects
the quantity demanded results in a shift of the
demand curvve
Increase in Demand Demand Curve Shifts Right
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4. Shifts in Demand and Supply Curves Demand
Curve Shifters

• A change in any variable listed under the Ceteris
  Paribus assumptions

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4. Shifts in Demand and Supply Curves Income
Normal and Inferior Goods

• Demand curve will shift with change in income
• Normal Good - as income increases, demand for the
  good also increases (demand curve shifts right)
• Inferior Good - as income increases, demand for
  the good decreases (demand curve shifts left)

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4. Shifts in Demand and Supply Curves Price
of Related Goods

• Demand curve will shift with change in price of
  related goods
• Complements in Demand - demand decreases as price
  of complement increases
• big cars and gasoline
• Substitutes in Demand- demand increases as price
  of substitute increases
• butter and margerine

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4. Shifts in Demand and Supply Curves Supply
vs Quantity Supplied

• Quantity Supplied refers to a point on the
  supply curve. A Change in Quantity Supplied
  refers to a movement along a stable supply curve.
• Supply refers to the entire curve. A Change in
  Supply refers to a shift in the supply curve.

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4. Shifts in Demand and Supply Curves Change
in Quantity Supplied
A change in price results in a movement along a
supply curve
As price declines the quantity supplied decreases
Supply
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4. Shifts in Demand and Supply Curves Change
in Supply
A change in anything except price that affects
the quantity supplied results in a shift of the
supply curvve
Increase in Supply Supply Curve Shifts Right
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4. Shifts in Demand and Supply Curves Supply
Curve Shifters

• A change in any variable listed under the Ceteris
  Paribus assumptions

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4. Shifts in Demand and Supply Curves
Complements and Substitutes in Supply

• Supply curve will shift with change in price of
  related goods in the production process
• Complements in Supply - supply increases as price
  of the complement increases
• beef and leather
• Substitutes in Supply - supply decreases as price
  of the substitute increases
• wheat and rye

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4. Shifts in Demand and Supply Curves Supply
Curve Shift and Equilibrium
Supply Curve Shifts Right
Demand
Decrease in Price
Increase in Quantity
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5. Case Studies

• Recessions and microeconomic markets
• Rent control
• Import quotas