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Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply
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Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Mar 26, 2015

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Page 1: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

Chapter 3.

Microeconomic Laws of

Demand and Supply

Page 2: 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

Page 3: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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.

Page 4: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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

Page 5: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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

Page 6: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

2. Micro Demand and Supply Demand Curve

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Quantity Demanded

Pro

du

ct

Pri

ce

As price declinesthe quantity demanded increases

Demand

Page 7: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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

Page 8: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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

Page 9: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

2. Micro Demand and Supply Supply Curve

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Quantity Supplied

Pro

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Pri

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As price increasesthe quantity supplied increases Supply

Page 10: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and 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)

Page 11: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

3. Demand - Supply Equilibrium

• Equilibrium

• Disequilibrium– Price floor– Price ceiling

Page 12: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

3. Demand - Supply Equilibrium Equilibrium

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Quantity

Pro

du

ct P

rice

Equilibrium

Supply

Demand

Price at which quantity supplied equals the quantity demanded

Page 13: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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

Page 14: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

3. Demand - Supply Equilibrium Price Floor

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Quantity

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SupplyDemand

PriceFloor

Quantity Demanded Quantity Supplied<= Surplus

Page 15: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

3. Demand - Supply Equilibrium Price Ceiling

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SupplyDemand

PriceCeiling

Quantity Supplied Quantity Demanded<= Shortage

Page 16: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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

Page 17: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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.

Page 18: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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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Pri

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As price declinesthe quantity demanded increases

Demand

A change in priceresults in a movement along a demand curve

Page 19: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

4. Shifts in Demand and Supply Curves Change in Demand

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Quantity

Pro

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rice

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

Page 20: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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

Page 21: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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)

Page 22: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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

Page 23: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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.

Page 24: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

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

0

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0 10 20 30 40 50 60

Quantity

Pro

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ct

Pri

ce

A change in priceresults in a movement along a supply curve

As price declines the quantity supplied decreases

Supply

Page 25: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

4. Shifts in Demand and Supply Curves Change in Supply

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Quantity

Pro

du

ct

Pri

ce Increase in Supply:

Supply Curve Shifts Right

A change in anything except pricethat affects the quantity supplied

results in a shift of the supply curvve

Page 26: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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

Page 27: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

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

Page 28: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

4. Shifts in Demand and Supply Curves Supply Curve Shift and Equilibrium

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Quantity

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Supply CurveShifts RightDemand

Increase inQuantity

Decrease inPrice

Page 29: Introduction to Macroeconomics Chapter 3. Microeconomic Laws of Demand and Supply.

Introduction to Macroeconomics

5. Case Studies

• Recessions and microeconomic markets

• Rent control

• Import quotas