Introduction to macroeconomics
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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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Introduction to macroeconomics

Introduction to Macroeconomics

Chapter 3.

Microeconomic Laws of

Demand and Supply


Chapter 3 laws of demand 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

    4. Shifts in Demand and Supply Curves

    5. Case Studies

Introduction to Macroeconomics


1 markets and the role of prices

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


2 micro demand and supply

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


2 micro demand and supply law of demand

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


2 micro demand and supply demand curve

2. Micro Demand and Supply Demand Curve

As price declines

the quantity demanded increases

Demand

Introduction to Macroeconomics


2 micro demand and supply demand curve c eteris paribus assumption

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


2 micro demand and supply law of supply

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


2 micro demand and supply supply curve

2. Micro Demand and Supply Supply Curve

As price increases

the quantity supplied increases

Supply

Introduction to Macroeconomics


2 micro demand and supply supply curve ceteris paribus assumption

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


3 demand supply equilibrium

3. Demand - Supply Equilibrium

  • Equilibrium

  • Disequilibrium

    • Price floor

    • Price ceiling

Introduction to Macroeconomics


3 demand supply equilibrium equilibrium

3. Demand - Supply Equilibrium Equilibrium

Price at which quantity supplied equals the quantity demanded

Supply

Equilibrium

Demand

Introduction to Macroeconomics


3 demand supply equilibrium disequilibrium

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


3 demand supply equilibrium price floor

3. Demand - Supply Equilibrium Price Floor

Demand

Supply

Price

Floor

Quantity Demanded

<

Quantity Supplied

= Surplus

Introduction to Macroeconomics


3 demand supply equilibrium price ceiling

3. Demand - Supply Equilibrium Price Ceiling

Demand

Supply

Price

Ceiling

Quantity Supplied

<

Quantity Demanded

= Shortage

Introduction to Macroeconomics


4 shifts in demand and supply curves

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


4 shifts in demand and supply curves demand vs quantity demanded

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


4 shifts in demand and supply curves change in quantity demanded

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


4 shifts in demand and supply curves change in demand

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


4 shifts in demand and supply curves demand curve shifters

A change in any variable listed under the Ceteris Paribus assumptions

4. Shifts in Demand and Supply Curves Demand Curve Shifters

Introduction to Macroeconomics


4 shifts in demand and supply curves income normal and inferior goods

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


4 shifts in demand and supply curves price of related goods

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


4 shifts in demand and supply curves supply vs quantity supplied

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


4 shifts in demand and supply curves change in quantity supplied

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


4 shifts in demand and supply curves change in supply

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


4 shifts in demand and supply curves supply curve shifters

A change in any variable listed under the Ceteris Paribus assumptions

4. Shifts in Demand and Supply Curves Supply Curve Shifters

Introduction to Macroeconomics


4 shifts in demand and supply curves complements and substitutes in supply

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


4 shifts in demand and supply curves supply curve shift and equilibrium

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


5 case studies

5. Case Studies

  • Recessions and microeconomic markets

  • Rent control

  • Import quotas

Introduction to Macroeconomics


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