Macroeconomics

ECO 2302, Principles of Macroeconomics 1

Course Learning Outcomes for Unit II Upon completion of this unit, students should be able to:

2. Define the role of supply and demand in determining prices and quantities of goods and services. 2.1 State the difference between a movement along the demand and supply curves and a shift of

the demand and supply curves and what can cause each. 2.2 Tell how equilibrium is found. 2.3 Tell how a shift of the demand or supply curve can affect equilibrium.

Course/Unit Learning Outcomes

Learning Activity

2.1

Unit Lesson Chapter 3 Chapter 4 Article: “A Behavioral Economic Analysis of Demand for Texting While Driving” Unit II Essay

2.2 Unit Lesson Chapter 4 Unit II Essay

2.3

Unit Lesson Chapter 4 Article: “A Behavioral Economic Analysis of Demand for Texting While Driving” Unit II Essay

Required Unit Resources Chapter 3: Economic Decision Makers Chapter 4: Demand, Supply, and Markets In order to access the following resource, click the link below. Hayashi, Y., Friedel, J. E., Foreman, A. M., & Wirth, O. (2019, March 18). A behavioral economic analysis of

demand for texting while driving. The Psychological Record, 69(2), 225–237. https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc t=true&db=bsu&AN=136586128&site=ehost-live&scope=site

Unit Lesson In Unit II, we dive straight in to demand, supply, and equilibrium, which are fundamental concepts in economics. As you move through this unit, thinking about your own reactions to your environment and how you make decisions will help you understand this material. Pay special attention to the terminology used in this unit, as the terms used are very specific. As mentioned in the first unit lesson, you intuitively understand the material being addressed in this unit as you encounter these concepts on a daily basis. What you may not have been exposed to are the terms that are used.

UNIT II STUDY GUIDE

Supply, Demand, and Equilibrium

ECO 2302, Principles of Macroeconomics 2

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We begin our discussion with demand. In economics, demand refers to how much consumers are both willing and able to purchase at each price over a specific period of time (McEachern, 2019). Every element of this definition is important when discussing demand. First, take a look at the words “willing and able to purchase.” You may be willing to purchase a new car; however, you may not be able to purchase a new car because you do not have enough funds in your bank account. Likewise, you may be able to purchase the newest cell phone, but you may not be willing to purchase the newest cell phone because your current cell phone is working just fine. Demand in macroeconomics shows us how much all consumers are both willing and able to purchase an item. Next, we have the words, “at each price.” The demand curve shows us how much of an item all consumers are willing and able to purchase over a range of prices. For instance, the demand curve for a new cell phone will show us how many will be purchased at various prices. Specifically, a demand curve might show us that 1,000 new cell phones will be purchased per month in a community if the price is $199.99 per cell phone. However, if the price equals $999.99 per cell phone, only 200 new cell phones will be purchased. Suppose that we have two points, A and B, representing the demand situations mentioned above: Point A corresponds to 1,000 cell phones being purchased at a price of $199.99 per phone, while Point B corresponds to 200 cell phones being purchased at a price of $999.99 per cell phone. We can now plot these two points on a graph with the price of a new cell phone on the vertical axis and the number of new cell phones purchased on the horizontal axis. This is a drawing of the demand curve for cell phones in the community. Usually a demand curve will slope downward and to the right like the one on our graph below (because of the law of demand).

The drawing of the demand curve shows us not only the two end points but every amount that will be purchased at prices in between those end points. For instance, from the graph above, we could say that if the price was equal to $499.99 per phone, 500 cell phones would be purchased. Likewise, if the price was $399.99 per phone, 400 cell phones would be purchased. All price and quantity combinations are represented along this demand curve for cell phones. This also brings us to a very important point. When we move from Point A to Point B, we say we have a movement along the demand curve. This is also called a change in quantity demanded. This same terminology applies for any change in price and quantity. What this means is that only a change in the price of a good can cause a movement along the demand curve (change in quantity demanded) for that good. For an explanation of the demand curve, watch this brief video Demand. A transcript and closed captioning are available once you access the video.

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The last important piece of information in the definition of demand is “over a specific period of time.” The demand curve we have drawn for new cell phone purchases in a community will only be for a specific period of time (a year, a month, etc.). Our demand curve will only be valid during that time period. Once the defined period of time has passed, the demand curve will not be valid anymore. For instance, 20 years ago, a demand curve for cell phones in a community probably looked a lot different from the demand curve today. Thus, the demand curve is only valid for a specific period of time. The next concept addressed is the law of demand. The law of demand suggests that quantity demanded is inversely (or negatively) related to price as long as nothing else changes (McEachern, 2019). What this means is that more will be purchased at lower prices, and less will be purchased at higher prices as long as the only thing that changes is price. The graphic above of the demand curve for new cell phones shows the law of demand at work. The only thing changing in this graph is the price of new cell phones. When the price was high ($999.99), quantity purchased was low (200 new cell phones). When the price was low ($199.99), the quantity of new cell phones purchased was higher (1,000 new cell phones). You may have noticed that the words “as long as nothing else changes” was added to the law of demand. Remember, in economics, we try to keep things simple. Here, we are assuming that price and quantity are the only two things changing. However, we know that everything does not remain constant. If any factor other than the price and quantity changes, the demand curve that has been drawn will no longer be valid. When another factor changes, the demand curve will move to another location. This is called a shift of the demand curve. We can also say demand has changed. When the demand curve shifts to the right, we say demand has increased. When the demand curve shifts to the left, we say demand has decreased. See below for an illustration of these two situations.

There are only five factors that can cause the demand curve to shift. These factors include changes in consumer incomes, the price of other goods, consumer expectations, the number of consumers, and consumer tastes. For example, a city that sees a 50% increase in population of adults will see the demand curve for housing in the city shift to the right (demand has increased).

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Pay special attention to these factors that can cause the demand curve to shift as you read through the chapter. Also, the video Shifts of the Demand Curve explains this concept. A transcript and closed captioning are available once you access the video. Supply is another cornerstone economic term. From McEachern (2019), we find that supply refers to how much producers are willing and able to offer for sale over a specific period of time. Like demand, each word in this definition matters, as producers might be able to provide a good but might not be willing to provide the good (and vice versa). Similar to demand, supply is for a specified period of time. The law of supply is just the opposite of the law

of demand. The law of supply suggests that the quantity supplied is usually directly related to price as long as other things do not change (McEachern, 2019). What this means is that producers will supply more of a good at higher prices and less of a good at lower prices. Think back to our cell phone example above. When the price of a cell phone is $999.99, producers would be more willing to sell more than if the price were $199.99. This is because producers have the potential to earn more profit when prices are higher. For example, let’s say when the price of cell phones is $999.99, producers are willing and able to supply 1,000 cell phones (Point A). When the price is equal to $199.99, however, producers are willing and able to supply 200 cell phones (Point B). A drawing of the supply curve can be made similar to what we did above with the demand curve. Unlike the demand curve, which slopes downward and to the right, the supply curve will slope upward and to the right (because of the law of supply).

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When we move from one point to another on the supply curve, economists say we have a change in quantity supplied. A movement along the curve to the right means that there is an increase in quantity supplied. A movement along the supply curve to the left means there is a decrease in quantity supplied. Notice that price and quantity are the only two factors being examined here. This means that the price of a good is the only thing that can cause a movement along the supply curve (a change in quantity supplied). Again, we are assuming that nothing changes other than the price of the good. More information that helps explain the supply curve is provided in the video Supply. A transcript and closed captioning are available once you access the video. There are factors, though, that can cause the supply curve to move to a new location. When the supply curve moves to a new location, economists say the supply curve has shifted. When the supply curve shifts to the left, economists say supply has decreased. When the supply curve shifts to the right, economists say supply has increased.

There are five factors that can cause the supply curve to shift. These factors are changes in technology, resource (or input) prices, the price of other goods, producer expectations, and the number of producers. For example, if the price of wheat increases, the supply curve for bread would shift to the left (decrease) because wheat is used as an ingredient (input) in the production of bread. Since the price of an input has increased, producers will make less money making bread. That means producers will supply less bread to the market. All the factors that can cause the supply curve to shift are explained in the textbook as well as in the video Shifts of the Supply Curve. A transcript and closed captioning are available once you access the video.

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Make sure you go over the examples in the textbook as well as in the videos as it is very important to understand the differences between a change in quantity demanded and a change in demand as well as the differences between a change in quantity supplied and a change in supply. Also, remember that a change in the price of a good is the only thing that can cause a movement along the demand and supply curves. Additionally, review and put to memory those factors that can cause the demand and supply curves to shift. Equilibrium is probably the easiest concept to learn here. Equilibrium is where the supply and demand curves cross. When at equilibrium, the quantity supplied is exactly equal to the quantity demanded, and prices are stable. Pay special attention to the reading regarding shortages and surpluses and how those are created, as they tie back to the concept of equilibrium. You can find further help with understanding equilibrium by viewing the video Equilibrium. A transcript and closed captioning are available once you access the video.

As we know, the demand and supply curves can shift. When a shift of the supply or demand curve occurs, equilibrium moves to a new location. If the supply curve shifts to the right (and the demand curve does not shift), the equilibrium price will be lower and the equilibrium quantity will be higher. If the demand curve shifts to the left, the new equilibrium price will be lower and the equilibrium quantity will be lower as well. Review how shifts of the supply and demand curve affect equilibrium in the textbook as well as in the video Shifts in Supply and Demand on Equilibrium. A transcript and closed captioning are available once you access the video. As you go through this unit, look at goods around you, and think about the supply and demand of those goods. Has the demand and or supply curve of that good shifted over time? How has equilibrium price and quantity changed?

Reference

McEachern, W. A. (2019). Macro ECON6: Principles of macroeconomics (6th ed.). 4LTR Press.