Money - Supply & Demand & Prices ECO 473 – Dr. Dennis Foster

Price = f(Supply, Demand) Supply – amount available now. An objective fact: it is what it is. Demand – amount we want to buy. Varies inversely with the price. It is the subjective value we have. Equilibrium – absence of surplus/shortage Q D S P P3 P2 P1

What affects price? S will P; S will P D will P; D will P Scarcity implies price; price implies rationing. () D will () S over time. Change isn’t in isolation: D(here) will D(there) Can Demand increase every- where in unison? Q D S P P1 S’ P3 D’ S* P2

Central Proposition about Money Demand can rise for all goods only if … … our incomes rise &/or the amt. of money rises! What does economic growth (incomes ) do? Increased supply will drive down prices at the current level of nominal income (i.e., real income). Rising material standards of living. Given no change in the money supply. Only 2 things can cause persistent inflation: Decreasing supply of goods (?) Increasing amount of money (!).

What determines the “price” of money? Supply & Demand!! Supply is still objective. Demand depends on our wanting to exchange. “Price” is purchasing power (PPM). Loaf of bread is $2 PPB = $2, PPM = ½ (loaf/$) PPM = 1/(price level) Equilibrium – absence of surplus/shortage $ D S PPM PPM3 PPM2 PPM1

What will affect price? S will PPM (raise prices); S will PPM Increasing supply of money causes inflation. D will PPM (raise prices); D will PPM Wanting to hold more money means spending less. Wanting to hold less money means spending more. Where does inflation come from? Persistent decrease in demand for money (?) Persistent increase in supply of money (!) $ D S PPM PPM1 PPM2 S’ D’ PPM2

Money - Supply & Demand & Prices ECO 473 – Dr. Dennis Foster