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Introduction to Macroeconomics Chapter 3. Private Markets and Prices: Laws of Supply and Demand.

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Presentation on theme: "Introduction to Macroeconomics Chapter 3. Private Markets and Prices: Laws of Supply and Demand."— Presentation transcript:

1 Introduction to Macroeconomics Chapter 3. Private Markets and Prices: Laws of Supply and Demand

2 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

3 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

4 Demand Curve As price declines the quantity demanded increases Demand

5 Demand Curve Ceteris Paribus Assumption Everything else that can affect demand is unchanged: Prices of all other goods Income Tastes

6 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

7 Supply Curve As price increases the quantity supplied increases Supply

8 Supply Curve Ceteris 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)

9 Supply - Demand Equilibrium Equilibrium Supply Demand Price at which quantity supplied equals the quantity demanded

10 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

11 Price Floor SupplyDemand Price Floor Quantity DemandedQuantity Supplied< Surplus

12 Price Ceiling SupplyDemand Price Ceiling Quantity SuppliedQuantity Demanded< Shortage

13 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. AChange in Demand refers to a shift in the demand curve.

14 Change in Quantity Demanded As price declines the quantity demanded increases Demand A change in price results in a movement along a demand curve

15 Change in Demand Increase in Demand: Demand Curve Shifts Right A change in anything except price that affects the quantity demanded results in a shift of the demand curvve

16 Demand Curve Shifters A change in any variable listed under the Ceteris Paribus assumptions

17 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)

18 Complements and Substitues in 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

19 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.

20 Change in Quantity Supplied A change in price results in a movement along a supply curve As price declines the quantity supplied decreases Supply

21 Change in Supply Increase in Supply: Supply Curve Shifts Right A change in anything except price that affects the quantity supplied results in a shift of the supply curvve

22 Supply Curve Shifters A change in any variable listed under the Ceteris Paribus assumptions

23 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

24 Supply Curve Shift and Equilibrium Supply Curve Shifts Right Demand Increase in Quantity Decrease in Price


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