1. Introduction to Macroeconomics
Chapter 3. Private Markets and Prices:
Laws of Supply and Demand

2. Chapter 3. Laws of Supply & Demand
Microeconomic Supply and Demand
Demand curve
Supply curve
Supply - Demand Equilibrium
Equilibrium
Disequilibrium
Shifts in demand and supply curves

3. 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

4. Demand Curve
As price declines
the quantity demanded increases
Demand

5. Demand Curve Ceteris Paribus Assumption
Everything else that can affect demand is unchanged:
Prices of all other goods
Income
Tastes

6. 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

7. Supply Curve
As price increases
the quantity supplied increases
Supply

8. Supply Curve Ceteris Paribus Assumption
Everything else that can affect supply is unchanged:
Prices of all inputs
labor, raw materials, cost of capital
Prices of all other goods
Technology
Environment (e.g., weather)

9. Supply - Demand Equilibrium
Price at which quantity supplied equals the quantity demanded
Supply
Equilibrium
Demand

10. Disequilibrium Price above the equilibrium level
quantity demanded < quantity supplied
surplus
price floor: price prevented from
dropping to equilibrium level
Price below the equilibrium level
quantity demanded > quantity supplied
shortage
price ceiling: price prevented from
rising to equilibrium level

11. Price Floor Demand Supply Price Floor Quantity Demanded <
Examples of price floors:
- Agricultural subsidies
- Minimum wage
Quantity Demanded
<
Quantity Supplied
Surplus

12. Price Ceiling Demand Supply Price Ceiling Quantity Supplied <
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

13. 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.
Two reasons for change in “quantity demanded”
1. A shift in the supply curve only.
2. The imposition of a price ceiling or price floor.

14. Change in Quantity Demanded
A change in price
results in a movement along a demand curve
As price declines
the quantity demanded increases
Demand

15. 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 .

16. Demand Curve Shifters
A change in any variable listed under the Ceteris Paribus assumptions

17. Normal and Inferior Goods
Demand curve will shift with change in income
Normal Good - as income increase, demand for the good also increases (demand curve shifts right)
Inferior Good - as income increase, demand for the good decreases (demand curve shifts left)

18. Complements and Substitues in Demand
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

19. 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.

20. Change in Quantity Supplied
A change in price
results in a movement along a supply curve
As price declines the quantity supplied decreases
Supply

21. 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

22. Supply Curve Shifters
A change in any variable listed under the Ceteris Paribus assumptions

23. Complements and Substitues 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

24. 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 equilibrium quantity.
If 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 - depends on whether the increase in demand was graeter or less than the increase in supply.