Presentation on theme: "Introduction to Macroeconomics"— Presentation transcript:
1Introduction to Macroeconomics Chapter 3. Private Markets and Prices:Laws of Supply and Demand
2Chapter 3. Laws of Supply & Demand Microeconomic Supply and DemandDemand curveSupply curveSupply - Demand EquilibriumEquilibriumDisequilibriumShifts in demand and supply curves
3Law of DemandAs 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
5Demand Curve Ceteris Paribus Assumption Everything else that can affect demand is unchanged:Prices of all other goodsIncomeTastes
6Law of SupplyAs 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
8Supply Curve Ceteris Paribus Assumption Everything else that can affect supply is unchanged:Prices of all inputslabor, raw materials, cost of capitalPrices of all other goodsTechnologyEnvironment (e.g., weather)
9Supply - Demand Equilibrium Price at which quantity supplied equals the quantity demandedSupplyEquilibriumDemand
10Disequilibrium Price above the equilibrium level quantity demanded < quantity suppliedsurplusprice floor: price prevented fromdropping to equilibrium levelPrice below the equilibrium levelquantity demanded > quantity suppliedshortageprice ceiling: price prevented fromrising to equilibrium level
12Price Ceiling Demand Supply Price Ceiling Quantity Supplied < Examples of price ceilings:- Rent controls - in a 1979 survey of economists, 98% agreed that a ceiling on rent reduces the quantity and quality of housing available- California electricity prices- Black marketQuantity Supplied<Quantity DemandedShortage
13Demand 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.Two reasons for change in “quantity demanded”1. A shift in the supply curve only.2. The imposition of a price ceiling or price floor.
14Change in Quantity Demanded A change in priceresults in a movement along a demand curveAs price declinesthe quantity demanded increasesDemand
15Change in Demand A change in anything except price that affects the quantity demandedresults in a shift of the demand curvveIncrease in Demand:Demand Curve Shifts Right.
16Demand Curve ShiftersA change in any variable listed under the Ceteris Paribus assumptions
17Normal and Inferior Goods Demand curve will shift with change in incomeNormal 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)
18Complements and Substitues in Demand Demand curve will shift with change in price of related goodsComplements in Demand - demand decreases as price of complement increasesbig cars and gasolineSubstitutes in Demand- demand increases as price of substitute increasesbutter and margerine
19Supply 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.
20Change in Quantity Supplied A change in priceresults in a movement along a supply curveAs price declines the quantity supplied decreasesSupply
21Change in Supply A change in anything except price that affects the quantity suppliedresults in a shift of the supply curvveIncrease in Supply:Supply Curve Shifts Right
22Supply Curve ShiftersA change in any variable listed under the Ceteris Paribus assumptions
23Complements and Substitues in Supply Supply curve will shift with change in price of related goods in the production processComplements in Supply - supply increases as price of the complement increasesbeef and leatherSubstitutes in Supply - supply decreases as price of the substitute increaseswheat and rye
24Supply Curve Shift and Equilibrium Shifts RightDemandDecrease inPriceIncrease inQuantityRefer to lecture notes for table outlining effects of combinations of demand curve shifts and supply curve shifts on equilibrium price and equilibrium quantity.If there is an increase in both supply and demand what happens to equilibrium price and quantity. Quantity definitely increases. The change in price is ambiguous - depends on whether the increase in demand was graeter or less than the increase in supply.