introduction to macroeconomics chapter 3. private markets and prices: laws of supply and demand
TRANSCRIPT
Introduction to Macroeconomics
Chapter 3. Private Markets and Prices:
Laws of Supply and Demand
Chapter 3. Laws of Supply & Demand
• Microeconomic Supply and Demand– Demand curve– Supply curve
• Supply - Demand Equilibrium– Equilibrium– Disequilibrium– Shifts in demand and supply curves
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
Demand Curve
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Quantity Demanded
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As price declinesthe quantity demanded increases
Demand
Demand CurveCeteris Paribus Assumption
Everything else that can affect demand is unchanged:
• Prices of all other goods
• Income
• Tastes
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
Supply Curve
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Quantity Supplied
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As price increasesthe quantity supplied increases Supply
Supply CurveCeteris Paribus Assumption
Everything else that can affect supply is unchanged:
• Prices of all inputs– labor, raw materials, cost of capital
• Prices of all other goods
• Technology
• Environment (e.g., weather)
Supply - Demand Equilibrium
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Equilibrium
Supply
Demand
Price at which quantity supplied equals the quantity demanded
Disequilibrium
• Price above the equilibrium level– quantity demanded < quantity supplied– surplus– price floor: price prevented from
dropping to equilibrium level
• Price below the equilibrium level– quantity demanded > quantity supplied– shortage– price ceiling: price prevented from
rising to equilibrium level
Price Floor
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SupplyDemand
PriceFloor
Quantity Demanded Quantity Supplied<Surplus
Price Ceiling
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SupplyDemand
PriceCeiling
Quantity Supplied Quantity Demanded<Shortage
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.
Change in Quantity Demanded
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Quantity Demanded
Pro
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the quantity demanded increases
Demand
A change in priceresults in a movement along a demand curve
Change in Demand
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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
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 Other Goods
See following slide on Complements and Substitutes
Normal and Inferior Goods
Demand curve will shift with change in income
• Normal Good - as income increase, demand for the good also increases (demand curve shifts right)
• Inferior Good - as income increase, demand for the good decreases (demand curve shifts left)
Complements and Substituesin Demand
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
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.
Change in Quantity Supplied
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A change in priceresults in a movement along a supply curve
As price declines the quantity supplied decreases
Supply
Change in Supply
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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
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 Other Goods
See next slide on complements and substitutes
Complements and Substitues 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
Supply Curve Shift and Equilibrium
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Supply CurveShifts RightDemand
Increase inQuantity
Decrease inPrice