Price
($thousands/organ transplant)
95
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
40
Equilibrium @ Price=$40,000
Demand Curve:
What Buyers are
Willing and able
To buy at different
prices
Organ Transplants (number per year)
Markets Want to Work
• Markets = the process of procuring and
allocating a good
• The market can “fail” in that the resulting
allocation of goods is either inadequate
or viewed as inappropriate
Disequilibrium Due to Government Regulation
(A)
(B)
Current Price
P
(C)
Current Price
Supply
Demand
P
Demand
(D)
Current Price
Supply
P
Current Price
P
Demand
Supply
Demand
Supply
Supply Limit
Q
Q
Q
Q
Price
($thousands/organ transplant)
95
Surplus @ Price= $60,000
60
40
36
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
Equilibrium @ Price=$40,000
Demand Curve:
What Buyers are
Willing and able
Shortage @ Price = $36,000
To buy at different
prices
Organ Transplants (number per year)
Price
($thousands/organ transplant)
95
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Quantity demanded exceeds quantity supplie
Price
($thousands/organ transplant)
95
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Price
Quantity demanded exceeds quantity supplied
($thousands/organ transplant)
Black market prices exceed legal prices
95
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Quantity demanded exceeds quantity supplied
($thousands/organ transplant) Black market prices exceed legal prices
95
Lines of people with first-come-first-served
rationing
Price
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Price
Quantity supplied exceeds quantity demanded
($thousands/organ transplant)
95
Supply
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)
Quantity supplied exceeds quantity demanded
Price
($thousands/organ transplant)
Black market prices below legal prices
95
Supply
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)
Quantity supplied exceeds quantity demanded
Black market prices below legal prices
($thousands/organ transplant)
Lines of product (inventories) can’t be sold and
95
Supply are dumped.
Price
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)
Quantity supplied exceeds quantity demanded
($thousands/organ transplant) Black market prices below legal prices
Lines of product (inventories) can’t be sold and
95
are dumped.
Supply
Price
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)
GENERALIZED DEMAND FUNCTION
f = f( Price:
Taxes,
Price of Complements
Price of Substitutes
Tastes for good/service
Income,
Buyer Expectations,
Number of buyers)
GENERALIZED SUPPLY FUNCTION
f = f( Price:
Price of Resources
Technology,
Seller Expectations,
Number of Sellers)
HOW TO BE SHERLOCK HOLMES
IN READING BETWEEN THE LINES
If You Know P and Q then you know whether demand or supply
is involved as well as the direction of the shift.
If You Know the shift in demand or supply, then you know what
is likely to happen to price and quantity
If You Know the determinant that has changed and price,
then you know what is happening to quantity demanded.
If You Know the determinant that has changed and quantity demanded,
then you know what is happening to price.
Figure 1. Shifts of Supply and Demand
(A)
(B)
SUPPLY SHIFTS:
LEFTWARD (up)
P
Supply
Q
(C)
RIGHTWARD (down)
DEMAND SHIFTS:
LEFTWARD (down)
P
P
Supply
Q
(D)
RIGHTWARD (up)
P
Demand
Q
Demand
Q
Lower Price
Lower
Output
Higher Price
Leftward
(downward)
Shift of Demand
Leftward
(upward)
Shift of
Supply
Higher
Output
Rightward
(downward)
Shift of
Supply
Rightward
(upward)
Shift of Demand
Breakdown all shifts into their output and price vectors
THE GRAND MACRO DESIGN!!!
(the causes of aggregate demand shifts)
Injections
Leakages
Balance
Consumption
Consumption
0
Exports
- Imports
Trade Balance
Govt. Expenditures
Taxes
Federal Balance
Investment
Savings
___________________________________________________
E+G+I
= Imp + T + S
Which means:
X-M (Trade Balance)= T- G (Federal Balance) + S-I
Lower Price (deflation) Higher Price (inflation)
Lower
Output
(slow
Growth)
RECESSION/DEPRESSION
Leftward
(downward)
Shift of Aggregate
Demand:
STAGFLATION
Leftward
(upward)
Shift of
Aggregate
Supply:
less injections,
or more leakages
Less factors or
higher factor prices
Higher
Output
(fast
Growth)
HIGH GROWTH
-LOW INFLATION
Rightward
(downward)
Shift of
Supply :
More factors or
lower factor prices
HIGH GROWTH
-HIGH INFLATION
Rightward
(upward)
Shift of Demand:
mor injections,
or less leakages
Breakdown all shifts into their output and price vectors
Lower Price
Lower
Output
Higher Price
Less productivity (technological change)
Higher price of resources
Seller expectations of future surpluses
Less number of sellers
Leftward
(downward)
Shift of Demand
less income
less tastes for good
less buyers
less complement
lower priuce for substitutes
Buyer expectations about future
shortages
Higher
Output
Rightward
(downward)
Shift of
Supply
Leftward
(upward)
Shift of
Supply
More productivity (technological change)
Lower price of resources
Seller expectations of future shortages
More number of sellers
Rightward
(upward)
Shift of Demand
Breakdown all shifts into their output and price vectors
More income
More tastes for good
More buyers
More complement
Higher priuce for substitutes
Buyer expectations about future
shortages
B
A
L
A
N
C
E
O
F
P
A
Y
M
E
N
T
S
Currrent account = trade balance= net exports
Real goods and services - imports
Money
Home
Abroad
Real goods and services - exports
CAPITAL ACCOUNT
Titles to foreign wealth sold to Americans
Money
Home
Abroad
Titles to American wealth sold to foreigners
Unilateral transfers
Home
Money
Abroad
19
47
Percentage
20
15
10
5
0
-5
-10
-15
GDP%chg
Year
UnemplRate
20
01
19
95
19
89
19
83
19
77
19
71
19
65
19
59
19
53
Indexes
Prices,
Wages,
Interest
rates
Exchange
rates
1 to 2 years
GDP
Government.
Balance
Unemployment
Trade
Balance
Inventory
Change
6 mos.
Prices,
Wages,
Interest
rates
Exchange
rates
GDP
1 to 2 years
Prices,
Wages,
Interest
rates
Exchange
rates
Government.
Balance
Unemployment
Trade
Balance
Inventory
Change
6 mos.
Prices,
Wages,
Interest
rates
Exchange
rates
MODEL of the DETERMINANTS OF GDP
interest rate
Inflation rate
$ Exchange Rate
Taxes
Saving
Wage rate
Population
Growth
Education
Resource Chg
Technology
Change
Curb Pollution
Government.
Interest rate
Balance
DEMAND Side Plcy
Investment
Government
Expend.
Consumption
Exports
Imports
G
SUPPLY Side Plcy
Raise Tax Rates
Impose Stds. Regulation
Impose Price Controls
Impose Output Controls
Nationalization
Regulation
Restrict Immigration
Unionization,
Cut Welfare, Med Care,SSec.
MONETARY POLICY
Sell Bonds
Raise Discount Rate
Raise Reserve Requirement
D
P
Inflation rate
Unemployment
$ Exchange Rate
Trade
Balance
Saving
Inventory
Change
Taxes
Wage rate
MODEL of the DETERMINANTS OF GDP
interest rate
Inflation rate
$ Exchange Rate
Taxes
Saving
Wage rate
Population
Growth
Education
Resource Chg
Technology
Change
Curb Pollution
Government.
Interest rate
Balance
DEMAND Side Plcy
Investment
Government
Expend.
Consumption
Exports
Imports
G
SUPPLY Side Plcy
Raise Tax Rates
Impose Stds. Regulation
Impose Price Controls
Impose Output Controls
Nationalization
Regulation
Restrict Immigration
Unionization,
Cut Welfare, Med Care,SSec.
MONETARY POLICY
Sell Bonds
Raise Discount Rate
Raise Reserve Requirement
D
P
Inflation rate
Unemployment
$ Exchange Rate
Trade
Balance
Saving
Inventory
Change
Taxes
Wage rate