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PPC-Economics KT Session
PPC-Economics KT Session
KT SESSION
ECONOMY…
• Perfect Markets
• Monopoly
• Monopolistic Competition
• Oligopoly
Demand Curve
Price of
Ice-Cream
Cone
$3.00
2.50
2.00
1.50
1.00
0.50
Quantity of Ice-
0 1 2 3 4 5 6 7 8 9 10 11 12 Cream Cones
Why does the Demand Curve Slope
Downward?
• Law of Demand
– Inverse relationship between price and quantity.
• Law of Diminishing Marginal Utility.
– Utility is the extra satisfaction that one receives
from consuming a product.
– Marginal means extra.
– Diminishing means decreasing.
Market Demand
• Rule One
– When an independent variable changes and that
variable does not appear on the graph, the curve
on the graph will shift.
• Rule Two
– When an independent variable changes and does
appear on the graph, a movement along the
existing curve will occur. The curve will not shift.
Change in Quantity Demanded vs
Change in Demand
2.00 A
D1
0 12 20 Number of Cigarettes Smoked per Day
Change in Quantity Demanded vs
Change in Demand
Change in Demand
A shiftin the demand curve, either
to the left or right.
Caused by a change in a
determinant other than the price.
Determinants of Demand
Market price
Consumer income
Prices of related goods
Tastes
Expectations
What are some examples?
Consumer Income
Normal Good
Price of
Ice-Cream
Cone
$3.00 An increase
2.50 in income...
Increase
2.00 in demand
1.50
1.00
0.50 D2
D1
Quantity of Ice-Cream Cones
0 1 2 3 4 5 6 7 8 9 10 11 12
Consumer Income
Inferior Good
Price of
Ice-Cream
Cone
$3.00
2.50 An decrease
2.00
in income...
Decrease
1.50 in demand
1.00
0.50
D2 D1
Quantity of Ice-Cream Cones
0 1 2 3 4 5 6 7 8 9 10 11 12
Supply Curve
Price of
Ice-Cream
Cone
$3.00
2.50
2.00
1.50
1.00
0.50
Market price
Input prices
Technology
Expectations
Number of producers
What are some examples?
Change in Supply
Price of S3
Ice-Cream
Cone
S1 S2
Decrease in
Supply
Increase in
Supply
2.50 Equilibrium
2.00
1.50
1.00
0.50 Demand
Quantity of Ice-Cream Cones
0 1 2 3 4 5 6 7 8 9 10 11 12
Excess Supply
Price of
Ice-Cream
Cone
Supply
$3.00 Surplus
2.50
2.00
1.50
1.00
0.50 Demand
Quantity of Ice-Cream Cones
0 1 2 3 4 5 6 7 8 9 10 11 12
Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
$1.50
Shortage Demand
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
Three Steps To Analyzing Changes in
Equilibrium
Supply
D1
0 7 10 Quantity of
3. ...and a higher Ice-Cream Cones
quantity sold.
How a Decrease in Supply Affects the
Equilibrium
Price of
Ice-Cream 1. An earthquake reduces
Cone the supply of ice cream...
S2
S1
New
$2.50 equilibrium
0 1 2 3 4 7 8 9 10 11 12 13 Quantity of
3. ...and a lower Ice-Cream Cones
quantity sold.
Prices of Related Goods
Substitutes & Complements
Itis the total market value of all final goods and services
produced within a country in a given period of time.
GDP is:
the market value
Firms Households
GDP includes all items produced in the economy and sold legally
in markets.
GDP excludes services that are produced and consumed at home
and that never enter the marketplace.
Caring labor, the work that is normally produced by women.
National Income
Personal Income
Y = C + I + G + NX
Measuring Economic Growth
Real
GDP values the production of
goods and services at constant prices.
Real GDP and the Price Level
We use the GDP Deflator to take the air out of Nominal GDP.
The Consumer Price Index
Nominal GDP
GDP deflator = 100
Real GDP
Real and Nominal Interest Rates
Store of value
Money in the Indian Economy
Reserves are deposits that banks have received but have not
loaned out.
In a fractional reserve banking system, banks hold a fraction
of the money deposited as reserves and lend out the rest.
When a bank makes a loan from its reserves, the money
supply increases
Money Creation
Value of Price
Money (1/P) Money supply
Level (P)
(High) 1 1 (Low)
3/4 1.33
value of money
price level
Equilibrium
1/2 2
Equilibrium
1/4 4
Money
demand
(Low) 0 (High)
Quantity fixed Quantity of
by the Fed Money
The Effects of Monetary Injection
Value of Price
Money (1/P) MS1 MS2
Level (P)
(High) 1 1. An increase 1 (Low)
in the money
supply...
3/4 1.33
A
1/2 2
B
1/4 4
Money
demand
(Low) 0 (High)
M1 M2 Quantity of
Money
Velocity and the Quantity Equation
V = (P x Y)/M
Where: V = velocity
P = the price level
Y = the quantity of output
M = the quantity of money
Velocity and the Quantity Equation
Businesses Tourists
Appreciation of the Appreciation of the
INR will hurt Indian INR will help Indian
tourists by increasing
exports and thus
their purchasing
Indian business. power.
Depreciation of the Depreciation of the
INR will help Indian INR will hurt Indian
exports and thus tourists by decreasing
Indian businesses. their purchasing
power.
Aggregate Demand
Interest
Rate
Money
supply
r1
Equilibrium
interest rate
r2
Money
demand
r2 AD2
Aggregate
demand, AD1
0 Quantity 0 Y1 Y2 Quantity
2. …the equilibrium of Money of Output
interest rate falls…
Changes in the Money Supply
$20 billion
AD3
1. An increase in government
AD2
purchases of $20 billion
initially increases aggregate Aggregate demand, AD1
demand by $20 billion…
0 Quantity
of Output
A Formula for the Spending Multiplier