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
Law of Demand
Demand curve
Ceteris paribus assumption
Supply
Law of Supply
Supply curve
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
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
Examples of price floors:
- agricultural subsidies
- minimum wage
Quantity Demanded
<
Quantity Supplied
= Surplus
Introduction to Macroeconomics

15. 3. Demand - Supply Equilibrium Price Ceiling
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 market
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.
Change in “quantity demanded” results from a change in price arising from either
1. A shift in the supply curve
2. The imposition of a price ceiling or price floor
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
For a given price there is an increase in demand
Introduction to Macroeconomics

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

21. Demand curve will shift with change in income
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
For a given price there is an increase in supply
Introduction to Macroeconomics

26. 4. Shifts in Demand and Supply Curves Supply Curve Shifters
A change in any variable listed under the Ceteris Paribus assumptions
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
Shifts Right
Demand
Decrease in
Price
Increase in
Quantity
Refer to lecture notes for table outlining effects of combinations of demand curve shifts and supply curve shifts on equilibrium price and quantity.
In 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 - it depends on whether the increase in demand was greater or less than the increase in supply.
Introduction to Macroeconomics

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