Macroeconomics deals with topics of inflation and unemployment. This selection of readings introduces you to macroeconomics by looking at extreme episodes. We will also become familiar with how demand and supply affect the economy as a whole, mainly levels of employment and inflation, and we will learn different methods by which we can stimulate demand or supply in an economy.
Demand and Supply
Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.
A. The law of Demand :
If all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.This is illustrated in the figure above by the downward sloping curve for the demand which indicates that the quantity demanded decreases as prices increase.( movement along the demand curve).
B. The Law of Supply:
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.
C. Equilibrium:
When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding :
Now, try solving the following questions:
1. The law of demand applies to which of the following?
[A] As price falls, the quantity demanded falls.
[B] Price and quantity demanded have a positive relationship.
[C] As price increases, the quantity demanded increases.
[D] Price and quantity demanded move in the same direction.
[E] As price increases, the quantity demanded falls.
2. As the price of cars moves up, the car sales decrease. Which of the following best describes this statement?
[A] The demand curve for cars shifts out.
[B] A contraction of demand.(movement up along the demand curve)
[C] The demand curve for cars shifts inwards.
[D] An extension of demand.(movement down along the demand curve)
[E] none of the above.
3. Define Supply.
What is the factor that causes movement along the supply curve?
What factors cause a shift in the supply curve?
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