of 51 /51
Introduction MACROECONOMICS Dr. Nimantha Manamperi

Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Embed Size (px)

Text of Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Page 1: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Introduction

MACROECONOMICSDr. Nimantha Manamperi

Page 2: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

• What is Economics?

• The difference between

Microeconomics and Macroeconomics.

• What is Production Possibility Frontier?

• Dynamics of Production Possibility

Frontier.

• What is Supply and Demand?

• Supply and Demand Curves

• Market Equilibrium.

• Shifts in Demand and Supply curves.

WHAT YOUWILL LEARN

IN THIS CHAPTER

Page 3: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

What is Economics ?

• Economics is the study of how people allocate

their limited resources to satisfy their nearly

unlimited wants.

• Resources : Water, Crude Oil, Time, Air, Soil, labor etc …

• Scarcity : Limited amount of resources, given unlimited

wants.

Page 4: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

MICRO VS. MACRO

• Economics can be divided in to two main areas.

Microeconomics

Macroeconomics

• Microeconomics : The study of the individual units

that make up the economy.

• Macroeconomics : The study of the overall

economy as a whole.

Page 5: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

MICRO VS. MACROLet’s begin by looking more carefully at the difference between microeconomic and macroeconomic questions.

MICROECONOMIC QUESTIONS MACROECONOMIC QUESTIONS

Go to business school or take a job?

How many people are employed in the economy as a whole?

What determines the salary offered by Citibank to Cherie Camajo, a new Columbia MBA?

What is the annual economic growth rate in Saint Cloud in 2013?

Page 6: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

MACRO VS. MICRO

MICROECONOMIC QUESTIONS

MACROECONOMIC QUESTIONS

What determines the cost to a university or college of offering a new course?

What determines the overall level of prices in the economy as a whole?

What is the selling price of a Dell computer in the market?

What government policies should be adopted to promote full employment and growth in the economy as a whole?

What determines whether Citibank opens a new office in Shanghai?

What determines the overall trade in goods, services and financial assets between the United States and the rest of the world?

Page 7: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

MICRO VS. MACRO

• Microeconomics focuses on how decisions are made by individuals and firms and the consequences of those decisions.

• Macroeconomics examines the aggregate behavior of the economy (that is, how the actions of all the individuals and firms in the economy interact to produce a particular level of economic performance as a whole).

Page 8: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

MACRO VS. MICSO

TOPIC MICROECONOMICS MACROECONOMICS

IncomeIncome of a Person, the revenue of a Firm

The income of an entire nation or a national economy

OutputThe production of a single worker

The production of an entire economy

EmploymentThe job status of an individual or a firm

The job status of a national population, particularly the number of people unemployed

PricesThe Price of a single good or service

The combined prices of all good and services in an economy

Page 9: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

The Production Possibility Frontier (PPF)• PPF is a model that illustrates the combinations of outputs

that a society can produce if all of its resources are being used efficiently.

• Example :

Page 10: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

The Production Possibility Frontier

2820 400

30

9

15

Quantity of Dreamliners

Production possibility frontier

A

B

D

C

Attainable and

efficientin production

Not Attainabl

e

PPF

Quantity of small jets

Attainablebut not efficient

Page 11: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

The PPF Dynamics • Economic Growth and PPF

Page 12: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Supply and Demand

• A Competitive market: Many buyers and sellers. With very low impact on market

price or out put. Same good or service.

• An Imperfect Market is one in which the buyer or the seller has an influence on the market price.

• The Supply and Demand model is a model of how a competitive market works.

• Five key elements: Demand curve , Supply curve , Demand and supply curve shifts Market equilibrium , Changes in the market equilibrium

Page 13: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Demand• Lets assume that your favorite Singer is coming to Atwood

to Perform music. You all get the same seating. There are no transportation cost and any other extra costs for you to attend this event.

How much are you willing to pay for the admission ticket?

Page 14: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Demand

• Law of Demand : There is an inverse relationship between price and the quantity demanded for that product.

• http://youtu.be/898OUCyBulM

Page 15: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Demand Schedule

• A demand schedule shows how much of a good or service consumers will want to buy at different prices. 7.1

7.5

8.1

8.9

10.0

11.5

14.2

Price of cotton (per pound)

Quantity of cotton demanded

(billions of pounds)

1.75

1.50

1.25

1.00

0.75

0.50

$2.00

Demand Schedule for Cotton

Page 16: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Demand Curve

A demand curve is the graphical representation of the demand

schedule. It shows how much of a good or

service consumers want to buy at any given price.

70 9 11 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Price of cotton

(per pound)

Quantity of cotton (billions of pounds)

Demand curve, D

As price rises, the quantity demanded

falls

Page 17: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Because of high taxes, gasoline and diesel fuel are more than twice as expensive in most European countries as in the United States.

According to the law of demand, Europeans should buy less gasoline than Americans, and they do.

Europeans consume less than half as much fuel as Americans, mainly because they drive smaller cars with better mileage.

1.0 1.40.60.2

$8

7

6

5

4

3

Price of gasoline

(per gallon)

0

ItalyFrance

Canada

United States

Japan

Germany

Spain

United Kingdom

Consumption of gasoline (gallons per

day per capita)

GLOBAL COMPARISON: Pay More, Pump Less…

Page 18: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

An Increase in Demand

• An increase in population and other factors generate an increase in demand.

a rise in the quantity demanded at any given price

• This is represented by the two demand schedules—one showing demand in 2007, before the rise in population, the other showing demand in 2010, after the rise in population.

7.1

7.5

8.1

8.9

10.0

11.5

14.2

8.5

9.0

9.7

10.7

12.0

13.8

17.0

in 2007 in 2010

$2.001.75

1.50

1.25

1.00

0.75

0.50

Price of cotton (per pound)

Quantity of cotton demanded

(billions of pounds)

Demand Schedules for Cotton

Page 19: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

An Increase in Demand

A shift of the demand curve is a change in the quantity demanded at any given price, represented by the change of the original demand curve to

a new position, denoted by a new demand curve.

Increase in population more cotton

clothing users

Price of cotton

(per pound)

70 9 11 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50 D1 D2

Demand curve in 2010

Demand curve in 2007

Quantity of cotton (billions of pounds)

Page 20: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Movement Along the Demand Curve

7 8.1 9.70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50 D1 D2

A C

B

A shift of the demand curve…

… is not the same thing as a movement along the

demand curve

Price of cotton (per

pound)

Quantity of cotton (billions

of pounds)

A movement along the demand curve is a change in the quantity demanded of a good that is the result

of a change in that good’s price.

Page 21: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Shifts of the Demand Curve

A “decrease in demand” means a leftward shift of

the demand curve: at any given price,

consumers demand a smaller quantity than

before. (D1D3)

Price

Quantity

D3

D1 D2

Increase in demand

Decrease in demand

An “increase in demand” means a rightward shift of

the demand curve: at any given price,

consumers demand a larger quantity than before.

(D1D2)

Page 22: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

What Causes a Demand Curve to Shift?

Changes in the Prices of Related Goods

Substitutes: Two goods are substitutes if a fall in the price of one of the goods makes consumers less willing to buy the other good. Examples :

Complements: Two goods are complements if a fall in the price of one good makes people more willing to buy the other good. Examples:

Page 23: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

What Causes a Demand Curve to Shift?Changes in Income

Normal Goods: When a rise in income increases the demand for a good — the normal case — we say that the good is a normal good. Examples :

Inferior Goods: When a rise in income decreases the demand for a good, it is an inferior good. Examples :

Changes in Tastes

Changes in Expectations

Page 24: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Individual Demand Curve and the Market Demand Curve

The market demand curve is the horizontal sum of the individual demand curves of all consumers in that market.

DDarla D Dino

0 0 2 343 0

$30

1

$30

1

$30

1

5 6 7

DMarket

(a) Darla’s Individual

Demand Curve

(b) Dino’s Individual Demand Curve

(c) Market Demand Curve

Price of blue jeans (per pair)

Quantity of blue jeans (pounds)

Quantity of blue jeans (pounds)

Quantity of blue jeans (pounds)

Price of blue jeans (per pair)

Price of blue jeans (per pair)

Page 25: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

ECONOMICS IN ACTIONBeating the Traffic• If we think of an auto trip to the city center as a good that

people consume, we can use the economics of demand to analyze anti-traffic policies.

• One common strategy is to reduce the demand for auto trips by lowering the prices of substitutes. Many metropolitan areas subsidize bus and rail service, hoping

to lure commuters out of their cars.

• An alternative is to raise the price of complements: several major U.S. cities impose high taxes on commercial parking garages and impose short time limits on parking meters, both to raise revenue and to discourage people from driving into the city.

Page 26: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

ECONOMICS IN ACTION

Beating the Traffic

• A few major cities—including Singapore, London, Oslo, Stockholm, and Milan—have been willing to adopt a direct and politically controversial approach: reducing congestion by raising the price of driving. Under “congestion pricing” (or “congestion charging” in the

United Kingdom), a charge is imposed on cars entering the city center during business hours.

• The current daily cost of driving in London ranges from £9 to £12. And drivers who are caught not paying are issued a fine of £120 for each transgression.

Page 27: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

ECONOMICS IN ACTION

Beating the Traffic

• Studies have shown that after the implementation of congestion pricing, traffic does indeed decrease. The introduction of its congestion charge in 2003 immediately

reduced traffic in the London city center by about 15%, with overall traffic falling by 21% between 2002 and 2006.

And there was increased use of substitutes, such as public transportation, bicycles, motorbikes, and ride-sharing.

Page 28: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Supply Schedule

• A supply schedule shows how much of a good or service would be supplied at different prices.

Supply Schedule for Cotton

Price of cotton

(per pound)

Quantity ofcotton

supplied(billions of

pounds)

$2.00 11.6

1.75 11.5

1.50 11.2

1.25 10.7

1.00 10.0

0.75 9.1

0.50 8.0

Page 29: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Supply Curve

Quantity of cotton (billions of pounds)

Price of cotton (per pound)

70 9 11 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

As price rises, the quantity supplied

rises.

A supply curve shows graphically how much of a good or service people are willing to sell at any given

price.

Supply curve, S

Page 30: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

An Increase in Supply• The adoption of

improved cotton-growing technology generated an increase in supply — a rise in the quantity supplied at any given price.

• This event is represented by the two supply schedules — and their corresponding supply curves

one showing supply before the new technology was adopted

the other showing supply after the new technology was adopted

Supply Schedule for Cotton

Price of cotton

(per pound)

Quantity of cotton supplied

(billions of pounds)Before new technology

After new technology

$2.00 11.6 13.9

1.75 11.5 13.8

1.50 11.2 13.4

1.25 10.7 12.8

1.00 10.0 12.0

0.75 9.1 10.9

0.50 8.0 9.6

Page 31: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

An Increase in Supply

A shift of the supply curve is a change in the quantity supplied of a good at any given price.

Technology adoption in

cotton-growing business

more cotton producers

70 9 11 13 15 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

S1

S2

Price of cotton (per pound)

Quantity of cotton (billions of pounds)

Supply curveafter

new technology

Supply curve before

new technology

Page 32: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Movement Along the Supply Curve

A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that good’s price.

70 10 11.2 12 15 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

S1S2

AC

B

Price of cotton (per pound)

Quantity of cotton (billions of pounds)

… is not the same thing as a

shift of the supply curve

A movement along the supply curve…

Page 33: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Any “increase in supply” means a

rightward shift of the supply curve:

at any given price, there is an increase in the quantity supplied.

(S1 S2)

Shifts of the Supply Curve

S3

S1

S2

Price

Quantity

Decrease in supply

Increase in supply

Any “decrease in supply” means a

leftward shift of the supply curve:

at any given price, there is a decrease in

the quantity supplied. (S1 S3)

Page 34: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

• Changes in input prices An input is a good that is used to produce

another good. • Changes in the prices of related goods and services• Changes in technology• Changes in expectations• Changes in the number of producers

• Quick Question : - Internet technology allows colleges to offer more and more online courses and resources in economics. What happens to the supply of economics knowledge?

What Causes a Supply Curve to Shift?

Page 35: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Individual Supply Curve and the Market Supply Curve

The market supply curve is the horizontal sum of the individual supply curves of all firms in that market.

SSilva SLiu

1 2 31 22 31 4 500 0

$2

1

$2

1

$2

1

SMarket

(a) Mr. Silva’s Individual

Supply Curve

(b) Mr. Liu’s Individual Supply

Curve

(c) Market Supply Curve

Price of cotton (per

pound)

Price of cotton (per

pound)Price of

cotton (per pound)

Quantity of cotton (thousands of pounds)

Quantity of cotton (thousands of pounds)

Quantity of cotton (thousands of pounds)

Page 36: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

ECONOMICS IN ACTION

Only Creatures Small and Pampered

• According to a recent article in the New York Times, the United States has experienced a severe decline in the number of farm veterinarians over the past two decades. The source of the problem is competition. Vets are being drawn away from the business of caring

for farm animals into the more lucrative business of caring for pets.

Page 37: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

ECONOMICS IN ACTION

Only Creatures Small and PamperedHow can we translate this into supply and demand curves?Farm veterinary services and pet veterinary services are related goods that are substitutes in production.

A veterinarian typically specializes in one type of practice or the other, and that decision often depends on the going price for the service.

America’s growing pet population, combined with the increased willingness of doting owners to spend money on their companions’ care, has driven up the price of pet veterinary services.

So, the supply curve of farm veterinarians has shifted leftward—fewer farm veterinarians are offering their services at any given price.

Page 38: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Supply, Demand and Equilibrium

• Equilibrium in a competitive market: when the quantity demanded of a good equals the quantity supplied of that good

• The price at which this takes place is the equilibrium price (or market-clearing price)

Every buyer finds a seller and vice versa.

The quantity of the good bought and sold at that price is the equilibrium quantity.

Page 39: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Market equilibrium occurs at point E, where the supply curve and the demand curve intersect.

Price of cotton

(per pound)

Quantity of cotton (billions of pounds)

70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

E EquilibriumEquilibrium price

Equilibrium quantity

Market Equilibrium

Page 40: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

There is a surplus of a good when the quantity supplied

exceeds the quantity demanded. Surpluses

occur when the price is above its equilibrium level.

70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

8.1 11.2

E

Surplus

Quantity demanded

Quantity supplied

Price of cotton (per pound)

Quantity of cotton (billions of pounds)

Surplus

Page 41: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

9.1 11.5

E

Shortage

Quantity demanded

Quantity

supplied

Price of cotton (per pound)

Quantity of cotton (billions of pounds)

There is a shortage of a good when the quantity demanded exceeds the

quantity supplied. Shortages occur when the

price is below its equilibrium level.

Shortage

Page 42: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Equilibrium and Shifts of the Demand Curve

Q2Q

1

P2

P1

D2

Supply

D1

E2

E1

Price of cotton

Quantity of cotton

Price rises

Quantity rises

An increase in demand…

… leads to a movement along the supply curve due

to a higher equilibrium price and higher equilibrium

quantity.

Page 43: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Equilibrium and Shifts of the Supply Curve

P2

P1

Q1

Q2

Demand

E1

S1

S2

E 2

Price of cotton

Quantity of cotton

Price rises

Quantity falls

A decrease in supply…

… leads to a movement along the demand curve

due to a higher equilibrium price and lower equilibrium

quantity.

Page 44: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Technology Shifts of the Supply Curve

Price

Quantity

S1

Demand

E1

E2

An increase in supply …

P2

P1

Q1 Q2

… leads to a movement along the demand curve to a lower

equilibrium price and higher equilibrium quantity.

Price falls

Quantity increases

S2

Technological innovation: In the early 1970s, engineers learned how to put microscopic electronic components onto a silicon chip; progress in the technique has allowed ever more components to be put on each chip.

Page 45: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Simultaneous Shifts of Supply and Demand

Two opposing forces determining the equilibrium

quantity.

The increase in demand dominates the decrease in

supply.

Quantity of cottonQ2Q

1

P2

P1

S2

D2D

1

S1

E1

E2

(a) One Possible Outcome: Price Rises, Quantity Rises

Price of cottonSmall

decrease in supply

Large increase in demand

Page 46: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Simultaneous Shifts of Supply and Demand

Two opposing forces determining the

equilibrium quantity.

Q1

Q2

P2

P1

S2

D2

D1

S1

E1

E2

(b) Another Possible Outcome: Price Rises, Quantity Falls

Price of cotton

Quantity of cotton

Large decrease in

supply

Small increase in demand

The decrease in supply dominates the increase in

demand.

Page 47: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

Simultaneous Shifts of Supply and Demand

We can make the following predictions about the outcome when the supply and demand curves shift simultaneously:

Simultaneous Shifts of

Supply and Demand

Supply Increases Supply Decreases

Demand Increases

Price: ambiguousQuantity: up

Price: upQuantity:

ambiguous

Demand Decreases

Price: downQuantity:

ambiguous

Price: ambiguousQuantity: down

Page 48: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

ECONOMICS IN ACTION

The Great Tortilla Crisis • There was a sharp rise in the price of tortillas, a staple food

of Mexico’s poor. The price rose from 25 cents a pound to between 35 and 45 cents a pound in just a few months in early 2007.

Why were tortilla prices soaring? • It was a classic example of what happens to equilibrium

prices when supply falls. Tortillas are made from corn, and much of Mexico’s corn is

imported from the United States, with the price of corn in both countries basically set in the U.S. corn market.

And U.S. corn prices were rising rapidly thanks to surging demand in a new market: the market for ethanol.

Page 49: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

• A recent drought in Australia reduced the amount of grass on which Australian dairy cows could feed, thus limiting the amount of milk these cows produced for export.

• At the same time, a new tax levied by the government of Argentina raised the price of the milk the country exported, thereby decreasing Argentine milk sales worldwide.

• These two developments produced a supply shortage in the world market, which dairy farmers in Europe couldn’t fill because of strict production quotas set by the European Union.

Demand and Supply Shifts at Work in the Global Economy

Page 50: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

ECONOMICS IN ACTION

The Rice Run of 2008

• The factors that lay behind the surge in rice prices were both demand-related and supply-related: growing incomes in China and India, traditionally large consumers of rice; drought in Australia; and pest infestation in Vietnam. But it was hoarding by farmers, panic buying by consumers,

and an export ban by India, one of the largest exporters of rice, that explained the breathtaking speed of the rise in price.

Page 51: Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi

ECONOMICS IN ACTION