Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply
Mar 26, 2015
Introduction to Macroeconomics
Chapter 3.
Microeconomic Laws of
Demand and Supply
Introduction to Macroeconomics
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
Introduction to Macroeconomics
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.
Introduction to Macroeconomics
2. Micro Demand and Supply
• Demand– Law of Demand– Demand curve– Ceteris paribus assumption
• Supply– Law of Supply– Supply curve– Ceteris paribus assumption
Introduction to Macroeconomics
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
Introduction to Macroeconomics
2. Micro Demand and Supply Demand Curve
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Quantity Demanded
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As price declinesthe quantity demanded increases
Demand
Introduction to Macroeconomics
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
Introduction to Macroeconomics
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
Introduction to Macroeconomics
2. Micro Demand and Supply Supply Curve
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Quantity Supplied
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As price increasesthe quantity supplied increases Supply
Introduction to Macroeconomics
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)
Introduction to Macroeconomics
3. Demand - Supply Equilibrium
• Equilibrium
• Disequilibrium– Price floor– Price ceiling
Introduction to Macroeconomics
3. Demand - Supply Equilibrium Equilibrium
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Equilibrium
Supply
Demand
Price at which quantity supplied equals the quantity demanded
Introduction to Macroeconomics
3. Demand - Supply Equilibrium Disequilibrium
• Price above the equilibrium level– quantity demanded < quantity supplied– surplus (inventory build)– price floor: price prevented from
dropping to equilibrium level
• Price below the equilibrium level– quantity demanded > quantity supplied– shortage (inventory declines)– price ceiling: price prevented from
rising to equilibrium level
Introduction to Macroeconomics
3. Demand - Supply Equilibrium Price Floor
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SupplyDemand
PriceFloor
Quantity Demanded Quantity Supplied<= Surplus
Introduction to Macroeconomics
3. Demand - Supply Equilibrium Price Ceiling
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SupplyDemand
PriceCeiling
Quantity Supplied Quantity Demanded<= Shortage
Introduction to Macroeconomics
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
Introduction to Macroeconomics
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.
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves Change in Quantity Demanded
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Quantity Demanded
Pro
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As price declinesthe quantity demanded increases
Demand
A change in priceresults in a movement along a demand curve
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves Change in Demand
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Quantity
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Increase in Demand:Demand Curve Shifts Right
A change in anything except pricethat affects the quantity demanded
results in a shift of the demand curvve
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves Demand Curve Shifters
A change in any variable listed under the Ceteris Paribus assumptions
Change in Variable
Demand Curve Shift
Income See following slide on
Normal and Inferior Goods
Tastes Increase in Preference
Right
Prices of Related Goods
See following slide on Complements and Substitutes
Introduction to Macroeconomics
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)
Introduction to Macroeconomics
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
Introduction to Macroeconomics
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.
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves Change in Quantity Supplied
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Quantity
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A change in priceresults in a movement along a supply curve
As price declines the quantity supplied decreases
Supply
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves Change in Supply
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Quantity
Pro
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Supply Curve Shifts Right
A change in anything except pricethat affects the quantity supplied
results in a shift of the supply curvve
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves Supply Curve Shifters
A change in any variable listed under the Ceteris Paribus assumptions
Change in Variable
Supply Curve Shift
Price of Inputs Increase Left
Technology Improvement Right
Weather Hurricane Left
Prices of Related Goods
See next slide on complements and substitutes
Introduction to Macroeconomics
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
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves Supply Curve Shift and Equilibrium
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Supply CurveShifts RightDemand
Increase inQuantity
Decrease inPrice
Introduction to Macroeconomics
5. Case Studies
• Recessions and microeconomic markets
• Rent control
• Import quotas