Tuesday, January 22, 2019
ECON
The Demand and Supply Model
buyer only demands a product if the marginal benefit is at least as great as the price (the buyer’s
marginal opportunity cost)
seller only supplies a product if the price covers at least the marginal opportunity cost
Frustrated Buyers — market price too low
–Shortage, or excess demand
quantity demanded exceeds quantity supplied
–Shortages create pressure for prices to rise
–Rising prices provide signals and incentives for businesses to increase quantity supplied and for
consumers to decrease quantity demanded, eliminating the shortage
Frustrated Sellers — market price too high
–Surplus, or excess supply
quantity supplied exceeds quantity demanded
–Surpluses create pressure for prices to fall
–Falling prices provide signals and incentives for
businesses to decrease quantity supplied and for consumers to increase quantity demanded,
eliminating the surplus
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Tuesday, January 22, 2019
–Market-clearing price
the price that equalizes quantity demanded and quantity supplied
–There are no frustrated buyers or sellers
–Equilibrium price
the price that balances forces of competition and cooperation, so that there is no tendency for
change
Adam Smith’s Invisible Hand
When an individual makes choices
“…he intends only his own gain, and he is in this... led by an invisible hand to promote an end
which was no part of his intention.... By pursuing his own interest he frequently promotes that of
the society more effectually than when he really intends to promote it.”
Demand is a catch-all term summarizing all possible influences on consumers’ willingness and
ability to pay for a particular product or service
–Increase in demand
increase in consumers’ willingness and ability to pay. Rightward shift of demand curve.
–Decrease in demand
decrease in consumers’ willingness and ability to pay. Leftward shift of demand curve.
•Demand changes due to a change in
1.Preferences
2.Prices of related products
3.Income
4.Expected future prices
5.Number of consumers
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•Increase in demand causes
–Rise in equilibrium price
–Increase in quantity supplied
•Decrease in demand causes
–Fall in equilibrium price
–Decrease in quantity supplied
Supply changes due to a change in
1. Technology
2. Environment
3. Price of Inputs
4. Prices of related products produced
5. Expected future prices
6.
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Number of businesses
Tuesday, January 22, 2019
Macroeconomics: analyzes the performance of the whole Canadian Economy and global
economy - the combined outcomes of all individual microeconomic choices
Microeconomics: analyzes choices that individuals in households, businesses, and governments
make, and how those choices interact in markets
The Global Financial Crisis: (2008-2009) unemployment peaked at 8.7% currently 6.3%
Great Depression: (1929-1933) high unemployment, failing living standards
John Maynard Keynes: created macroeconomics, (1936) created The General Theory of
Employment, Interest, and Money (book) (hands-on approach)
*before this economists believed markets would self-adjust to any changes
Jean-Baptiste Say: (1767-1832) “supply creates its own demand” believed that market
economies with flexible prices would always quickly self adjust (hands-off approach)
Keynes rejected Says Law: five rules of thinking*
1. Short run
2. Effects of sticky prices that don’t adjust quickly (instead of flexible prices)
3. Importance of savings and investments
4. Roles of money, banks, and expectations
5. Connections between input and output markets
Market failure: market outcomes are inefficient or inequitable and fail to serve the public interest
Government failure: government policy fails to serve the public interest
Three key performance outcomes of the Canadian economy are GDP, unemployment, and
inflation; produced by the choices of five macroeconomic players — consumers, businesses,
government, Bank of Canada and the banking system, and the rest of the world.
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Input markets: determines income
Output markets: determine the value of all products and services sold
KEY PERFORMANCE OUTCOMES of Canadian Economy
Positive (+) outcomes are
1.higher gross domestic product (GDP)
2.lower unemployment
3.low and predictable inflation
1. Steady growth in living standards is measured by increases in real GDP per person.
2. Full employment is measured by the unemployment rate.
3. Stable prices are measured by the Consumer Price Index. All of these measures have
complications and limitations, which will be discussed in the chapters that follow.
Macroeconomic players
Households as consumers
• Spend income or save
• Buy Canadian products and services, or inputs
Business Choices
• Investment Spending business purchases of new factories and equipment
• Hiring workers or not
• Buying inputs domestically or importing
• Selling outputs domestically or exporting
Government Choices
• Buying products and services
• Fiscal policy government purchases, taxes/transfers to achieve the macroeconomic outcomes
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Tuesday, January 22, 2019
Bank of Canada and banking system choices
• Monetary policy Bank of Canada changes interest rates and supply of money to achieve the
macroeconomic outcomes
• Making loans or not
Rest of World (R.O.W.) choices
• Buying Canadian exports or not, selling important to Canada or not
• Investing money in Canada or not, accepting Canadian investments or not
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