Macroeconomics-MCE T2

Lecture 2: October 5, 2021

Lecturer: Prof. Kalyan Kolukuluri Topic: Revisiting Economic Models & concepts

Note: LaTeX template courtesy: UC Berkeley EECS dept.

Disclaimer: These notes may be distributed outside this class only with the permission of the Instructor.

2.1 A market model - Evaluate Endogenous & Exogenous vari-

ables

Question: Looking at picture below can you assess what is endogenous and exogenous variables
in this market model?
Papple

P∗

D
Q
0 Q∗apple

Hint: The answer lies in understanding where Demand and Supply come from?

Look into the next page...

2-1
2-2 Lecture 2: October 5, 2021

2.1.1 Demand for Apples

Qdapple = 10 − 0.5(Papple ) + 1.5(Porange ) + 2(Inc) + 2(Tastes for apple pie)

• Porange = Orange Price (Substitute good) (Exogenous factor)

• Inc = Income (Exogenous factor)

• Papple = Apple Price (Good under consideration) (Endogenous factor)

• Qdapple = Apple Quantity demanded (Endogenous factor)

2.1.2 Supply of Apples

Qsapple = 3 + 2.2(Papple ) − 1.5(Bad Weather) − 3(Labor cost)

• Bad Weather = Bad weather (Exogenous factor)

• Labor cost = Input cost (Exogenous factor)

• Papple = Apple Price (Good which is under consideration) (Endogenous factor)

• Qsapple = Apple Quantity supplied (Endogenous factor)

2.2 Endogenous and Exogenous variables

Endogenous variables: Variables which have to be determined within the model using some pre-supposed
information. These variables cause movement along an existing curve.

Exogenous variables: Information on these variables is taken as given, and is used to determine other
variable values. These are called Shift factors, as they cause the curves to shift left or right.
Lecture 2: October 5, 2021 2-3

Papple

S (Input costs, Technology, Production conditions)

S (Reduced cost)

P∗

D (Increased Income)
D (Tastes/Preferences, Income, Substitute and complementary goods)
Q
0 Q∗apple