Macroeconomics Week 3b Maclachlan (Fall 04)

Principles and Policies I: Macroeconomics

Chapter 4: Supply and Demand

Macroeconomics Week 3b Maclachlan (Fall 04)

Chapter Four Learning ObjectivesYou should be able to:

• State the law of demand and draw a demand curve from a demand table.

• Explain the importance of substitution to the laws of supply and demand.

• Distinguish a shift in demand from movement along a demand curve.

• State the law of supply and draw a supply curve from a supply table.

• Distinguish a shift in supply from a movement along the supply curve.

• Explain how the law of demand and the law of supply interact to bring about an equilibrium.

• Show the effect of a shift in demand and supply on equilibrium price and quantity.

Macroeconomics Week 3b Maclachlan (Fall 04)

Competitive Market

Lots of buyers and sellers dealing in identical goods.

Macroeconomics Week 3b Maclachlan (Fall 04)

Catherine’s Demand Schedule and Demand Curve

Macroeconomics Week 3b Maclachlan (Fall 04)

Market Demand as the Sum of Individual Demands

Macroeconomics Week 3b Maclachlan (Fall 04)

Shifts in the Demand Curve

Macroeconomics Week 3b Maclachlan (Fall 04)

Shift Factors for Demand

1. Society’s income.

2. Prices of related goods (substitutes and complements).

3. Tastes.

4. Expectations.

5. Taxes or subsidies.

Macroeconomics Week 3b Maclachlan (Fall 04)

Shifts in the Demand Curve versus Movements along the Demand Curve

Macroeconomics Week 3b Maclachlan (Fall 04)

Ben’s Supply Schedule and Supply Curve (Catch the error in this slide!)

Macroeconomics Week 3b Maclachlan (Fall 04)

Market Supply as the Sum of Individual Supplies

Macroeconomics Week 3b Maclachlan (Fall 04)

Market Supply as the Sum of Individual Supplies

Macroeconomics Week 3b Maclachlan (Fall 04)

Shifts in the Supply Curve

Macroeconomics Week 3b Maclachlan (Fall 04)

Shift Factors for Supply

1. Input prices.

2. Technology.

3. Expectations.

4. Taxes or subsidies.

Macroeconomics Week 3b Maclachlan (Fall 04)

The Equilibrium of Supply and Demand

Macroeconomics Week 3b Maclachlan (Fall 04)

Markets Not in Equilibrium

Macroeconomics Week 3b Maclachlan (Fall 04)

A Three-Step Program for Analyzing Changes in Equilibrium

1. Decide whether the event shifts the supply or demand curve (or perhaps both).

2. Decide in which direction the curve shifts.

3. Use the supply-and-demand to see how the shift changes the equilibrium price and quantity.

Macroeconomics Week 3b Maclachlan (Fall 04)

How an Increase in Demand Affects the Equilibrium

Macroeconomics Week 3b Maclachlan (Fall 04)

How a Decrease in Supply Affects the Equilibrium

Macroeconomics Week 3b Maclachlan (Fall 04)

A Shift in Both Supply and Demand

Macroeconomics Week 3b Maclachlan (Fall 04)

Problem 4-1Price John Liz Alex Total

$ 2 4 36 24 64

4 4 32 20 56

6 0 28 16 44

8 0 24 12 36

10 0 20 8 28

12 0 16 4 20

14 0 12 0 12

16 0 8 0 8