Download MACROECONOMICS SESSION 2 LECTURE NOTES

MACROECONOMICS SESSION 2 LECTURE
NOTES
DEMAND
Demand |Buying Basics
Topic: The Concept
The concept of demand is fundamental to the study of the market and economics.
It is the first of two sides of the market that we'll study.
A definition:
Demand is the willingness and ability to buy a range of quantities of a good at a
range of prices, during a given time.
Three points:



Willingness and ability.
Range of quantities and prices.
A given time period.
Topic: Demand Price
More we need to consider about demand. First the demand price.
Demand price is the maximum price that buyers would be willing and able to pay
for a given quantity of a good.



The emphasis is on maximum. Buyers have an upper limit on the price that
they would be willing and able to pay for a good.
Buyers are willing and able to pay a lower price. In fact, they would be glad to
get it for free.
The maximum demand price is based on the fact of economic life that people
prefer more to less.
Topic: Quantity Demanded
Second, quantity demanded.
Quantity demanded is the specific quantity of a good that buyers would be willing
and able to buy at a specific price.

Price and quantity demanded are a pair of numbers that go together.
Quantity demanded is not the same as demand.


Demand is the entire range of prices and quantities (all pairs of numbers).
Quantity demanded is a specific quantity at a specific price (a quantity paired
with a price).
Law of Demand
Topic: Definition
The law of demand is the basic principle underlying demand, one of our most
important economic laws.
A definition:
The law of demand is an inverse relationship between demand price and the quantity
demanded, ceteris paribus.


Inverse relationship means that people buy more of a good if the price is
lower and less if the price is higher.
In terms of scientific method, price causes quantity demanded. A change in
the price causes a change in the quantity demanded.
Ceteris paribus is important to the law of demand.





Ceteris paribus means other things remain unchanged.
Law of demand applies exclusively to the relationship between demand price
and quantity demanded.
All other things that can affect demand must remain constant to avoid
distorting this relationship.
Because demand is affected by many factors other than price, a buyer may
buy larger amounts of a good even with a higher price.
Other factors that affect demand are called demand determinants.
Topic: Income Effect
An important question is: Why does the law of demand work? Two reasons are
income effect and substitution effect.
First, the income effect. This is the change in quantity demanded that results
because a change in price gives a buyer more real income, even though money
income remains unchanged.


The reason is that buyers have limited income.
Any change in price affects the purchasing power of buyers' limited income. A
higher price means a given income can buy less and a lower price means a
given income can buy more.
Topic: Substitution Effect
The second reason for the law of demand is the substitution effect.



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The substitution effect exists because a change in the price of a good makes
this price relatively higher or lower than the prices of other goods.
The higher the price of a good, then the more expensive it is relative to other
goods. The lower the price of a good, then the less expensive it is relative to
other goods.
Other prices remain unchanged.
The substitution effect is usually more important than the income effect.
Demand Curve
Topic: Schedule
This table is a demand schedule presenting the
relationship between demand price and quantity
demanded.
Assumptions:


Ceteris paribus factors do not change.
Data is for a specific time period.
Observations:




First, higher prices go with lower quantities
demanded-the law of demand.
Second, the prices and quantities are maximum values.
Third, demand is the whole set of price/quantity pair numbers. Quantity
demanded is any single number at the specified price.
By the way, these numbers are hypothetical.
Demand Curve
Topic: Curve
A demand schedule can be use to plot a
demand curve.




The connected plotted points are
called a demand curve.
A demand curve has negative slope.
Higher prices correspond with smaller
quantities.
The demand curve embodies the law
of demand.
Topic: Space
The area beneath the demand curve is the
demand space.


The curve represents the maximum
price that buyers would be willing to
pay.
Buyers would be willing to pay less
than the demand price on the
demand curve, but not more.
Topic: Ceteris Paribus Factors
Ceteris paribus is the notion that other things remain constant. We make this
assumption because things other than price affect demand.



These other, ceteris paribus factors, give us useful analytical tools for
examining demand and the market.
We can turn these factors off and on to better understand how the market
works.
The ceteris paribus factors are called demand determinants.
Topic: Shifters: Increase
Demand determinants shift the demand
curve.



The demand curve is drawn assuming
that only price and quantity change.
The determinants are assumed to be
constant.
A change in one of the determinants
can cause:
An increase in demand, a rightward
shift, which means that for any price,
for every price, buyers are willing and
able to buy more of the good.
Topic: Shifters: Decrease
Demand determinants shift the demand
curve.



The demand curve is drawn assuming
that only price and quantity change.
The determinants are assumed to be
constant.
A change in one of the determinants
can cause:
A decrease in demand, a leftward
shift, which means that for any price,
for every price, buyers are willing and
able to buy less of the good.
Determinants
Topic: Types
The five determinants that cause the demand curve to shift are:
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Income: Income affects the ability of buyers to buy. It can affect a good in
two ways-normal or inferior.
Preferences: Preferences, our likes and dislikes, affect the willingness of
buyers to buy.
Prices of other goods: Other goods can be either substitutes or complements
to the good we're analyzing.
Expectations: Buyers' current demand depends on expectations of future
prices.
Number of buyers: More buyers, more demand. Fewer buyers, less demand.
These categories include all factors other than price that affect demand.
Topic: Ch...Ch...Changes
The difference between:


Demand, the whole range of prices and quantities
Quantity demanded, a specific quantity demanded at a specific price.
The difference between:




Change in demand, we are changing, moving, shifting, the entire demand
curve, the whole set of prices and quantities is changing. The five
determinants change the demand.
Change in quantity demanded, we have moved to a new quantity on an same
demand curve. Only the price of the good changes the quantity demanded.
This difference lets us analyze cause and effect.
Don't confuse these two.
Scarcity
Topic: Unlimited Wants
Demand is closely related to the scarcity problem, especially unlimited wants and
needs.


Scarcity arises because society has limited resources but unlimited wants and
needs.
The connection between demand and scarcity is:
o The demand side of the markets comes directly from the unlimited
wants and needs side of the scarcity problem, and
o
The supply side of the market comes from the limited resources side of
the scarcity problem.
SUPPLY
Supply | Selling Basics
Topic: The Concept
The concept of supply parallels the concept of demand. It too is fundamental to the
study of the market and economics. It is the second of the two sides of the market
that we'll study.
A definition:
Supply is the willingness and ability to sell a range of quantities of a good at a range
of prices, during a given time.
Like demand we have three points:



Willingness and ability.
Range of quantities and prices.
A given time period.
Topic: Supply Price
There's more we need to consider about supply. First the supply price.
Supply price is the minimum price that sellers would be willing and able to accept
for a given quantity of a good.
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

Sellers have an lower limit on the price that they would be willing and able to
accept for a good, compared to the upper limit of the demand price.
Sellers are willing and able to accept a higher price. In fact, they would be
glad to sell a good for a billion dollars... or more.
The minimum supply price is based on the fact of economic life that people
prefer more to less.
Topic: Quantity Supplied
Second, quantity supplied.
Quantity supplied is the specific quantity of a good that sellers would be willing and
able to sell at a specific price.

Price and quantity supplied are a pair of numbers that go together.
Quantity supplied is not the same as supply.


Supply is the entire range of prices and quantities (all pairs of numbers).
Quantity supplied is a specific quantity at a specific price (a quantity paired
with a price).
Law of Supply
Topic: Definition
The law of supply is the basic principle underlying supply.
A definition:
The law of supply is a direct relationship between supply price and the quantity
supplied, ceteris paribus.


Direct relationship means that people sell more of a good if the price is higher
and less if the price is lower.
The law of supply is not as rigid as the law of demand. The price and the
quantity supplied are not always directly related. Higher prices could cause an
increase or a decrease in the quantity supplied.
Ceteris paribus is also important to the law of supply.





Ceteris paribus means other things remain unchanged.
Law of supply applies exclusively to the relationship between supply price and
quantity supplied.
All other things that can affect supply must remain constant to avoid
distorting this relationship.
Because supply is affected by many factors other than price, the
price/quantity supply relationship can get lost when other things change.
Other factors that affect supply are called supply determinants.
Topic: Production Cost
An important question is: Why does the law of supply work?

The answer rests with production cost. In particular, the law of supply exists
because of the law of increasing opportunity cost.
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As we saw with production possibilities analysis, by increasing the production
of a good, the opportunity cost of production increases.
Production cost increases as we increase production. To supply a larger
quantity, producers need to cover these higher production costs with a higher
price.
Supply Curve
Topic: Schedule
This table is a supply schedule presenting the
relationship between supply price and quantity
supplied.
Our relationship is between the supply price in the
middle column and the quantity of stuffed animals
supplied in the right-hand column.
Assumptions:
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
Ceteris paribus factors do not change.
Quantities are supplied for a specific time
period, such as one year.
Some observations about the supply schedule:



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First, higher prices go with larger quantities supplied-the law of supply.
Second, the prices are minimum values for the given quantities.
Third, supply is the whole set of price/quantity pair numbers. Quantity
supplied is any single number at the specified price.
Fourth, these numbers are hypothetical, presenting a 'what if' relationship.
Supply Curve
Topic: Curve
A supply schedule can be use to plot a
supply curve.




The connected plotted points are
called a supply curve.
A supply curve has a positive slope.
Higher prices correspond with larger
quantities.
The supply curve embodies the law of
supply.
Supply Curve
Topic: Space
The area above the supply curve is the
supply space.


The curve represents the minimum
price that sellers would be willing to
accept.
Sellers would be willing to accept
more than the supply price on the
supply curve, but not less.
Use your mouse arrow to highlight the
supply curve and the supply space on this
graph
Supply Determinants
Topic: Ceteris Paribus Factors
Ceteris paribus is the notion that other things remain constant. We make this
assumption because things other than price affect supply.



These other, ceteris paribus factors, give us useful analytical tools for
examining supply and the market.
We can turn these factors off and on to better understand how the market
works.
The ceteris paribus factors are called determinants of supply.
Topic: Shifters: Increase
Supply determinants shift the supply curve.



The supply curve is drawn assuming
that only price and quantity change.
The determinants are assumed to be
constant.
A change in one of the determinants
can cause:
An increase in supply, a rightward
shift, which means that for any price,
for every price, sellers are willing and
able to sell more of the good.
Topic: Shifters: Decrease
Supply determinants shift the supply curve.



The supply curve is drawn assuming
that only price and quantity change.
The determinants are assumed to be
constant.
A change in one of the determinants
can cause:
A decrease in supply, a leftward shift,
which means that for any price, for
every price, sellers are willing and
able to sell less of the good.
Topic: Types
The five determinants that cause the supply curve to shift are:
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
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
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Resource prices: If the price of any resource (labor, capital, land, or
entrepreneurship) changes, so too does production cost and the ability to
supply a good.
Technology: Improving production techniques enhance the ability to supply a
good.
Prices of other goods: Goods using the same inputs can be either substitutes
or complements in production.
Expectations: Sellers' current supply depends on expectations of future
prices.
Number of sellers: More sellers, more supply. Fewer sellers, less supply.
These categories include all factors other than price that affect supply.
Topic: Ch...Ch...Changes


Supply, the whole range of prices and quantities
Quantity supplied, a specific quantity supplied at a specific price.
The difference between:




Change in supply, we are changing, moving, shifting, the entire supply curve,
the whole set of prices and quantities is changing. The five determinants
change the supply.
Change in quantity supplied, we have moved to a new quantity on an same
supply curve. Only the price of the good changes the quantity supplied.
This difference lets us analyze cause and effect.
Don't confuse these two.
Scarcity
Topic: Limited Resources
Supply is directly connected to the scarcity problem, especially limited resources.


Scarcity exists because society has limited resources, but unlimited wants
and needs.
Markets were developed as a means of addressing the problem of scarcity:
o The supply side of the market comes from the 'limited resources' side
of the scarcity problem.
o The demand side of the market comes from the 'unlimited wants and
needs' side of the scarcity problem.
THE MARKET
The Exchange
Topic: What It Is
Market is the term we used to indicate voluntary trades among buyers and sellers.
These trade involve a mutually agreeable quantity at a mutually agreeable price.
A definition:
A market is an organized exchange of commodities (including resources,
goods, and services) among buyers and sellers, during a given time period.
Four important points about markets.
1. Markets are voluntary trades among buyers who want something (the
demand side) and sellers who have something (the supply side).
2. The most important items traded are the goods and services that people
consume, and the resources used to produce these goods and services.
3. Markets are the voluntary means of facing the scarcity problem.
Government is the involuntary way of the facing scarcity problem.
4. Like demand and supply, markets are analyzed over a given time period.
Topic: Equilibrium
Equilibrium is the balance of opposing forces that remains unchanged until another
force intervenes.
For example:
If two people are pushing in opposite ways on a swinging door with equal strength,
then neither will be able to go through. Each pusher represents an opposing force.
For a market, the opposing forces are:
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
Demand. Buyers want to pay a lower price.
Supply. Sellers want to receive a higher price.
Market equilibrium is indicated by equilibrium quantity and equilibrium price.
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Equilibrium quantity is the quantity of a good traded among buyers and
sellers when a market is in equilibrium.
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Equilibrium price is the price agreed to by buyers and sellers when a market
is in equilibrium.
Buyers and sellers will continue to trade the equilibrium quantity at the
equilibrium price indefinitely.
But, the equilibrium quantity and price can be disrupted by ceteris paribus
determinants of demand and supply. Analyzing these disruptions help us
understand economic events.
Topic: Competition
Competition (especially our fourth rule of competition) brings out the best among
buyers and sellers, that is, efficient use of resources.
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Competition among sellers forces them to supply the most wanted products at
the lowest resource cost.
Competition among buyers forces them to spend their limited incomes on the
most satisfying goods.
Less competition among sellers than among buyers lets the sellers charge
higher prices.
Less competition among buyers than among sellers lets the buyers pay lower
prices.
Topic: Number
Competition depends on the number of buyers and sellers.

More buyers creates more competition to acquire a good. Sellers don't have
to sell a good below the going price with a lot of buyers willing and able to
pay the market price.
Competition prevents buyers from forcing the price down to it's lowest level.

More sellers creates more competition to offer a good for sale. Buyers don't
have to buy a good above the going price with a lot of sellers willing and able
to sell at the market price.
Competition prevents sellers from forcing the price up to it's highest level.
Topic: Schedule
This table combines the demand and supply
schedules for 8-track tapes.
The price of tapes ranges from 10 cents to 90
cents. The quantity demanded ranges from 800
tapes to 0 tapes. The quantity supplied ranges
form 0 tapes to 800 tapes.


Law of demand: As the price increases
from 10 to 90 cents, the quantity
demanded decreases from 800 tapes to 0
tapes.
Law of supply: As the price increases
from 10 to 90 cents, the quantity supplied increases from 0 tapes to 800
tapes
Topic: Market Agreement
What would happen if we had different prices in
the market?
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At 10 cents, the quantity demanded is
800 tapes and the quantity supplied is 0
tapes. This is not a suitable price. The
buyers can't buy all that they want.
At 90 cents, the quantity demanded is 0
tapes and the quantity supplied is 800
tapes. This is not a suitable price, either.
The sellers can't sell all that they want.
Buyers or sellers are not satisfied at these
prices and will take corrective action.
This is not equilibrium.
Topic: Equilibrium
What would happen if buyers and sellers faced a
price of 50 cents?
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At 50 cents, the quantity demanded is
400 tapes.
At 50 cents, the quantity supplied is 400
tapes.
The quantity demanded is the same as
the quantity supplied at this 50 cent
price.
This IS equilibrium.
This equilibrium price and equilibrium
quantity will remain until something else
changes.
This 50 cent price is the only one that matches the quantity demanded and
the quantity supply
Topic: The Curves
Combining the demand and supply curves
into a single graph gives us a market graph.
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Price is measured on the vertical axis
and quantity on the horizontal axis.
The negative slope indicates the law
of demand.
The law of supply is indicated by the
positive slope of this curve.
We now have a market
Topic: The Equilibrium
This market graph combines the forces of
demand and supply.




Equilibrium is achieved as each side
of the market seeks a mutually
agreeable exchange.
The equilibrium price is 50 cents and
the equilibrium quantity is 400 tapes.
At this 50-price, the quantity
demanded is equal to the quantity
supplied.
At no other price is the quantity
demanded and supplied equal.
That's equilibrium.
Topic: Self-Correction
Markets have a built-in self correction mechanism:
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

If a market is at equilibrium, it remains there.
If a market is not at equilibrium, it moves to equilibrium.
A market does not need someone (like government) controlling it to ensure
that it reaches equilibrium.
Three price alternatives:
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At equilibrium, nothing changes.
Below equilibrium, a shortage.
Above equilibrium, a surplus.
By creating shortages and surpluses, non-equilibrium prices induce the price
to change. These changing prices move the market back to equilibrium
Topic: Shortage
A shortage exists if the quantity demanded is
greater than the quantity supplied at the
current market price.



A shortage exists if the market price
is 30 cents.
The quantity supplied is 200 tapes
and the quantity demanded is 600
tapes, giving a shortage of 400 tapes.
This shortage induces the price to rise
up to the equilibrium level of 50
cents.
Topic: Surplus
A surplus exists if the quantity demanded is
less than the quantity supplied at the current
market price.



A surplus exists if the market price is
70 cents.
The quantity demanded is 200 tapes
and the quantity supplied is 600
tapes, giving a surplus of 400 tapes.
This surplus induces the price to
decline down to the equilibrium level
of 50 cents
Efficiency
Topic: What It Is
Efficiency is one of the five basic goals of the economy. It's nice to have, if you can.
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Efficiency is getting the most satisfaction of wants and needs from available
resources.
Scarcity is less of a problem when resources are used efficiently.
Economists like markets because they can achieve efficiency under the right
conditions. And because markets are self-correcting, they can achieve this
efficiency without intervention.
The Method
Topic: Efficient Markets
Rethinking demand and supply curves indicates efficiency of markets.
Market equilibrium has:
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

Equality between quantity demanded and quantity supplied.
Equality between demand price and supply price.
Equality between demand price and supply price means that the satisfaction
obtained from the good produced is equal to the opportunity cost of
production.
This equality between prices also means that the value of the good produced
is equal to the value of goods not produced
The Method
Topic: Too Little Production
This market has a 50-cent price and a 400tape quantity in equilibrium.

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
Note the demand price and the supply
price if the quantity is 300 tapes.
The demand price is 60 cents. This is
the value of the good produced.
The supply price is 40 cents. This is
the value of goods not produced.
Producing this quantity is the same as
giving up 40 cents and getting 60
cents in return.
300 tapes is not an efficient use of
resources
Topic: Too Much Production
This market has a 50-cent price and a 400tape quantity in equilibrium.





Note the demand price and the supply
price if the quantity is 500 tapes.
The demand price is 40 cents. This is
the value of the good produced.
The supply price is 60 cents. This is
the value of goods not produced.
Producing this quantity is the same as
giving up 60 cents and getting 40
cents in return.
500 tapes is not an efficient use of
resources
Topic: Inefficiency
Inefficient use of resources can result from:
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
The fourth rule of competition-with less competition buyers or sellers control
the price. The quantity is too little and the demand price is greater than the
supply price.
The seventh rule of complexity-costs or benefits external to the market
(externalities) cause differences between the value of goods produced and
goods not produced, even though market demand and supply prices are
equal.
The fifth rule of imperfection-markets are not perfect.
o Scarcity implies the lack of competition.
o Complexity implies externalities.
Efficiency is a goal, not a perpetual state of the world.
MARKET SHOCKS
Adjustments
Topic: Overview
In this lesson we use the market as a tool to understand our economic world,
specifically, we see how markets move from one equilibrium to another.
One goal of this lesson:

Use the market model to examine the why and how of market shocks,
adjustments to a new equilibrium.
Why do we do this?

Markets in the real world do not remain at the same equilibrium forever.
Markets move. Prices and quantities change.
 To understand real world changes, we need to analyze what happens to the
market when a shock disrupt it.
Unit 1: Adjustments
Topic: Three Questions
There are three basic questions about market changes which we need to ask in this
lesson.
Three questions:
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
What causes the market to move? What shocks the market? What disrupts
the market from it's existing equilibrium?
What are the consequences of the move to the market? What is the price and
quantity at the new market equilibrium?
Is the market move good or bad? How does the new equilibrium compare
with the old? Is the price higher or lower? Is the quantity greater or less?
Three Questions
Unit 2: Determinants
Topic: Shifts
Shifts in the demand curve are originated by
changes in the demand determinants and
shifts in the supply curve by changes in the
supply determinants.
Determinant changes cause shifts:




Increase in demand is a rightward
shift.
Decrease in demand is a leftward
shift.
Increase in supply is a rightward
shift.
decrease in supply is a leftward shift.
Note that:


An increase in demand and an increase in supply both are rightward shifts.
A decrease in demand and a decrease in supply both are leftward shifts.
Topic: Demand
Five basic demand determinants:
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Income: For a normal good an increase in income means an increase in
demand. For an inferior good an increase in income means a decrease in
demand.
Tastes: If people want more of a good, then demand increases.
Prices of other goods: A higher price of a substitute good means an increase
in demand. A higher price of a complement good means an decrease in
demand.
Buyer's expectations: If buyers expect higher prices tomorrow, they increase
demand today.
Number of buyers: More buyers mean more demand.
Topic: Supply
Five basic supply determinants:





Resource prices: Higher prices of inputs such as labor, land, and raw
material, decrease supply.
Technology: Improved technology means an increase in supply.
Prices of other goods: An increase in the price of a substitute-in-production,
decreases supply. An increase in the price of a complement-in-production,
increases supply.
Seller's expectations: If sellers expect higher prices tomorrow, they decrease
supply today.
Number of sellers: More sellers mean more supply.
Single Shifts
Topic: More Demand
An increase in demand caused by one of the
demand determinants.


Initial equilibrium market at price Po
and quantity Qo
Buyers acquire a sudden "appetite"
for hot fudge sundaes.
A summary:
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

The demand curve shifts rightward.
The initial equilibrium is no longer an
equilibrium.
The new equilibrium is at the
intersection of the original supply
curve with the new demand curve.
New equilibrium price is P1 and new equilibrium quantity is Q1.
The six steps of market adjustment for an increase in demand:
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


A determinant changes. We have a greater appetite for hot fudge sundaes.
A curve to shifts. The demand curve for hot fudge sundaes shifts rightward.
A shortage or a surplus occurs. The increase in demand causes a shortage of
hot fudge sundaes.
The price changes. The price of hot fudge sundaes goes up.
The quantities demanded and supplied change. The quantity supplied for hot
fudge sundaes increases while their quantity demand is reduced.
The market imbalance is eliminated and equilibrium is restored. The shortage
of hot fudge sundaes is eliminated. The price is higher and the quantity
exchanged is more.
Topic: Less Demand
The six steps for a decrease in demand:


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


A determinant changes. The price of
pecan pie, a substitute for hot fudge
sundaes, declines.
A curve to shifts. The demand curve
for hot fudge sundaes shifts leftward.
A shortage or a surplus occurs. The
decrease in demand causes a surplus
of hot fudge sundaes.
The price changes. The price of hot
fudge sundaes goes down.
The quantities demanded and
supplied change. The quantity
supplied for hot fudge sundaes
decreases while their quantity
demand is increased.
The market imbalance is eliminated and equilibrium is restored. The surplus
of hot fudge sundaes is eliminated. The price is lower and the quantity
exchanged is less.
Topic: More Supply
The six steps for an increase in supply:
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A determinant changes. The price of
ice cream, a key resource input for
hot fudge sundaes, declines.
A curve to shifts. The supply curve for
hot fudge sundaes shifts rightward.
A shortage or a surplus occurs. The
increase in supply causes a surplus of
hot fudge sundaes.
The price changes. The price of hot
fudge sundaes goes down.
The quantities demanded and
supplied change. The quantity
supplied for hot fudge sundaes
decreases while their quantity
demand is increased.
The market imbalance is eliminated and equilibrium is restored. The surplus
of hot fudge sundaes is eliminated. The price is lower and the quantity
exchanged is more.
Topic: Less Supply
The six steps for a decrease in supply:
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A determinant changes. Sellers
expect higher prices.
A curve to shifts. The supply curve for
hot fudge sundaes shifts leftward.
A shortage or a surplus occurs. The
decrease in supply causes a shortage
of hot fudge sundaes.
The price changes. The price of hot
fudge sundaes goes up.
The quantities demanded and
supplied change. The quantity
supplied for hot fudge sundaes
increases while their quantity demand
is reduced.
The market imbalance is eliminated and equilibrium is restored. The shortage
of hot fudge sundaes is eliminated. The price is higher and the quantity
exchanged is less.
Double Shifts
Topic: More Demand and More Supply
Market equilibrium is disrupted if both the
demand (higher income) and supply
(technological breakthrough) curves shift.
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An increase in demand creates a
shortage. Price and quantity tend to
increase.
An increase supply creates a surplus.
Price declines and quantity increases.
The combined effect is an obvious
increase in quantity but a
questionable change in price.
At the new equilibrium the price is
indeterminant.
If demand shifts relatively more than
supply, price is higher.
If demand shifts relatively less than supply, price is lower.
Topic: More Demand and Less Supply
Here we have demand increasing (higher
income) and supply decreasing (number of
sellers declines).
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An increase in demand causes an
increase in both price and quantity.
A decrease supply causes price to
increase and quantity to decrease.
The combined effect is an obvious
increase in price but a questionable
change in quantity.
At the new equilibrium the quantity is
indeterminant.
If demand shifts relatively more than
supply, quantity is greater.
If demand shifts relatively less than
supply, quantity is less.
Topic: Less Demand and Less Supply
Here we have demand decreasing (tastes
change) and supply decreasing (number of
sellers declines).
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A decrease in demand causes a
decrease in both price and quantity.
A decrease supply causes price to
increase and quantity to decrease.
The combined effect is an obvious
decrease in quantity but a
questionable change in price.
At the new equilibrium the price is
indeterminant.
If both demand and supply curve shift
in the same direction, then quantity
also changes in that direction, but
price is indeterminant.
Topic: Less Demand and More Supply
Here we have demand decreasing (tastes
change) and supply increasing (technological
breakthrough).
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A decrease in demand causes a
decrease in both price and quantity.
An increase supply causes price to
decrease and quantity to increase.
The combined effect is an obvious
decrease in price but a questionable
change in quantity.
At the new equilibrium the quantity is
indeterminant.
If demand and supply curve shift in
opposite directions, then quantity is
indeterminant, but price is known.
Cause and Effect
Topic: Economic Science
Economic analysis lets us examine market shocks in a systematic manner.
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Many things affect the market. Prices and quantities can fall or raise for
many different reasons.
Ceteris paribus lets us isolate particular changes in the demand and supply
determinants to analyze how price and quantity are affected.
This market-shock analysis lets us isolate the basic cause and effect principles
of economic science.
Topic: Link Sequence
The sequence of the cause and effect links is an essential element in economic
analysis.
Six steps for market adjustment:
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First, a determinant change always starts the process.
Second, the determinant change causes a shift in either the demand or the
supply curve.
Third, the shift in the curve causes market disequilibrium, either a shortage or
surplus.
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Fourth, the disequilibrium causes the price to change.
Fifth, the price change causes a change in quantity demanded and quantity
supplied.
Sixth, changes in quantity demand and supplied cause the market equilibrium
to be restored.