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MACROECONOMICS

Chapter Objectives
Define and explain demand in a
product
or service
Define and
explainmarket
supply..
Determine the equilibrium point.
Explain what causes shifts in demand
and supply.
Explain
how price ceilings cause
shortages.
Explain how price floors cause
surpluses.

Demand
the schedule of quantities of a good or service
that people are willing to buy at different prices.

Price

Willing
to buy

Price

quantity

demand curve is downward

sloping two reasons would be
SUBSTITUTION EFFECT and the
INCOME EFFECT.
Substitution effect if the price of the
product is high, the buyer would be
attracted to look for substitute product
with comparatively lower price to satisfy
his needs
Income Effect if the price of the
product is low, given a constant level of
income of a buyer, the demand of such
product would be higher.

Other determinants of demand:

Consumer Income if the consumer income is high, the

demand for normal good is also high while the demand for
inferior goods is low, and vice versa.
Normal goods goods that are normally prioritized by
buyers to satisfy their level of needs. Ex. Steak, Hamburger, Branded

clothes

Inferior goods goods that are least prioritized by the

buyer to satisfy his needs. Ex. Potatoes, Plain Bread, Ordinary Clothes
Consumer taste and preferences a shift in consumer taste
and preferences would affect a change in demand and a shift in
quantity demanded.

 Prices of closely related goods Closely-related goods refer

to either substitute goods or complementary goods, and their
effects to demand and prices.
Types of goods

Products

Substitutes

A or B

Complements

A and B

Price of Product A

Demand for
Product B

Supply
the schedule of quantities of a good or service
that people are willing to sell at different prices.

Price

Willing
to Sell

s1

Price

Quantity

supply curve is upward sloping

the law of supply states that the
price of a product and the quantity
supplied are directly (positively)
related; i.e., the lower the price the
lower the quantity supplied.
The

determinants of supply
Production prices
Prices of other goods
Prices expectations
Technology
Taxes
Subsidies

Equilibriu
m demanded equals
price at which quantity
quantity supplied. Qd=Qs
d
s

equilibrium
Price

quantity

d2

d1

Price

Quantity

Shifts in the
Demand Schedule can shift outward or to
Demand
the right (increase in demand
commodity) or shift in the demand
schedule inward or to the left (decrease
in demand commodity).
Factors affecting the shift in the demand
curve:
As to changes in
As to consumers
prices of related
Income
goods
Tastes
Substitutes
Complements
Preferences
Expectations
Number

s1

Shifts in the
Supply Schedule can shift to the right
Supply
(increase in supply commodity) or shift to
s2

Price

Quantity

the left (decrease in supply commodity).

Price Fixing
is the setting of mandatory or artificial prices. It often
interferes with the free operation of the market. Attempts to alter
the output and price can have an effect on equilibrium

Price Ceiling price is established below the

equilibrium price, causing shortages to
develop. The usual result is nonprice
competition among buyers, which allocates
the quantity that is supplied.

P* = Artificial ceiling set by

government (price not allowed to go
above ceiling)
Qs = Quantity supplied at P*
Qd = Quantity demanded at P*
Qd Qs = Amount of shortage

Price

P*
S

Shortage

Qd

Qs

Quantity

Price Floor A minimum price is set above the

equilibrium price causing surpluses to develop
Surplus

P* = Artificial floor set by government

(price not allowed to go down the
floor)
Qs = Quantity supplied at P*
Qd = Quantity demanded at P*
Qd Qs = Amount of shortage

Price

S
Qd

Quantity

Qs

Surplus occurs when market

price is above the equilibrium price
Shortage occurs when the
market price is below the
equilibrium price

surplu
s

equilibrium

Price

shortage

quantity

The pricing system acts to efficiently

distribute economic goods to consumers
willing to pay for them. When a shortage
exists, the market price will rise and the
quantity demanded will decrease,
eliminating the shortage, and vice versa.

The impact of Equilibrium of Shifts in the Supply and

Demand Schedules
1.An increase in supply (demand held constant) will
decrease the equilibrium price and increase the
equilibrium quantity.
2.An decrease in supply (demand held constant) will
increase the equilibrium price and decrease the
equilibrium quantity.
3.An increase in demand (supply held constant) will increase
the equilibrium price and increase the equilibrium quantity.
4.An decrease in demand (supply held constant) will
decrease the equilibrium price and the equilibrium
quantity.

1. An increase in supply (demand held constant) will decrease the

equilibrium price and increase the equilibrium quantity.

Equilibrium 1

Price

Equilibrium 2
D
S1

S2

Quantity

2. An decrease in supply (demand held constant) will increase the

equilibrium price and decrease the equilibrium quantity.

Equilibrium 2
Equilibrium 1

Price
S2
D
S1

Quantity

3. An increase in demand (supply held constant) will increase the

equilibrium price and increase the equilibrium quantity.

Equilibrium 2
Price
Equilibrium 1
D2

D1

Quantity

4. An decrease in demand (supply held constant) will decrease the

equilibrium price and the equilibrium quantity.

Price

Equilibrium 1
Equilibrium 2
D1
D2

Quantity