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Introduction to Macroeconomics

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

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Introduction to Macroeconomics

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

  2. 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

  3. 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

  4. 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

  5. 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

  6. 2. Micro Demand and Supply Demand Curve As price declines the quantity demanded increases Demand Introduction to Macroeconomics

  7. 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

  8. 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

  9. 2. Micro Demand and Supply Supply Curve As price increases the quantity supplied increases Supply Introduction to Macroeconomics

  10. 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

  11. 3. Demand - Supply Equilibrium • Equilibrium • Disequilibrium • Price floor • Price ceiling Introduction to Macroeconomics

  12. 3. Demand - Supply Equilibrium Equilibrium Price at which quantity supplied equals the quantity demanded Supply Equilibrium Demand Introduction to Macroeconomics

  13. 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

  14. 3. Demand - Supply Equilibrium Price Floor Demand Supply Price Floor Quantity Demanded < Quantity Supplied = Surplus Introduction to Macroeconomics

  15. 3. Demand - Supply Equilibrium Price Ceiling Demand Supply Price Ceiling Quantity Supplied < Quantity Demanded = Shortage Introduction to Macroeconomics

  16. 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

  17. 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

  18. 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 Introduction to Macroeconomics

  19. 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 Introduction to Macroeconomics

  20. A change in any variable listed under the Ceteris Paribus assumptions 4. Shifts in Demand and Supply Curves Demand Curve Shifters Introduction to Macroeconomics

  21. 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

  22. 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

  23. 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

  24. 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 Introduction to Macroeconomics

  25. 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 Introduction to Macroeconomics

  26. A change in any variable listed under the Ceteris Paribus assumptions 4. Shifts in Demand and Supply Curves Supply Curve Shifters Introduction to Macroeconomics

  27. 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

  28. 4. Shifts in Demand and Supply Curves Supply Curve Shift and Equilibrium Supply Curve Shifts Right Demand Decrease in Price Increase in Quantity Introduction to Macroeconomics

  29. 5. Case Studies • Recessions and microeconomic markets • Rent control • Import quotas Introduction to Macroeconomics

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