Chapter_3 (1)

Introduction to Macroeconomics

• Focus: Understanding Supply and Demand as fundamental economic concepts.

• Importance: Prices are determined through supply and demand; changes can lead to economic fluctuations.

Benefits of Trade

• Differences in preferences lead to:

  • Improved utility for consumers.

  • Increased specialization and productivity.

  • Better division of knowledge.

Absolute vs. Comparative Advantage

• Absolute Advantage: A country’s ability to produce more of a good with the same resources.

• Comparative Advantage: A country's ability to produce a good at a lower opportunity cost.

• Example: Labor requirement for producing desks and laptops in Mexico and the U.S.

Market Overview

• Concept: Markets consist of two sides: Demand (consumers) and Supply (producers).

• Assumptions of perfect competition:

  • Homogeneous goods.

  • Many consumers and producers.

  • Costless entry and exit for producers.

  • Rational preferences.

Understanding Demand

• Demand Curve: Representation of quantity demanded at various prices.

• Quantity Demanded: The amount consumers are willing and able to buy at a specific price.

• Example: Oil demand varies with price.

Reading the Demand Curve

• Horizontal Interpretation: Quantity consumers are willing to buy at a specific price.

• Vertical Interpretation: Maximum price consumers are willing to pay for a specific quantity.

Law of Demand

• The demand curve illustrates that quantity demanded increases as price decreases.

• Factors affecting demand include consumer preferences and availability of substitutes.

Consumer Surplus

• Consumer Surplus: Difference between what consumers are willing to pay and what they actually pay.

• Area representation: Under the demand curve and above the market price.

Effects of Shifting Demand Curve

• Increase in Demand: Shifts curve to the right; higher quantity at each price.

• Decrease in Demand: Shifts curve to the left; lower quantity at each price.

Factors That Shift Demand

1. Income Changes: Normal goods versus inferior goods.

2. Population Changes: Affects overall demand.

3. Prices of Substitutes: Affects demand for the related goods.

4. Prices of Complements: Affects demand positively.

5. Expectations: Future expectations can shift current demand.

6. Tastes: Changes in consumer preferences.

Understanding Supply

• Supply: Quantity sellers are willing to sell at various prices.

• Supply Curve: Function depicting quantity supplied at different prices.

Reading the Supply Curve

• Horizontal Interpretation: Quantity suppliers are willing to sell at a certain price.

• Vertical Interpretation: Price suppliers must be paid to produce a certain quantity.

Price Elasticity of Supply

• Measures responsiveness of quantity supplied to price changes.

• Types include perfectly inelastic, unit elastic, and perfectly elastic supply.

Producer Surplus

• Producer Surplus: The difference between the market price and the minimum price producers are willing to accept for a good.

• Area representation: Above the supply curve and below the price.

Effects of Shifting Supply Curve

• Increase in Supply: Curve shifts right; sellers offer more goods at each price.

• Decrease in Supply: Curve shifts left; sellers offer less at each price.

Factors That Shift Supply

1. Technological Advancements: Reduce production costs, increasing supply.

2. Taxes and Subsidies: Affect producers' costs and supply dynamics.

3. Expectations of Future Prices: Influence current supply availability.

4. Changes in Opportunity Costs: Impact producer decisions regarding resource allocation.

Summary of Concepts

• Demand Curve: Reflects consumer willingness to buy at varied prices.

• Supply Curve: Reflects producer willingness to sell at varied prices.

• Consumer Surplus: Measures the benefit to consumers from purchases.

• Producer Surplus: Measures the benefit to producers from sales.

• Changes in demand and supply impact prices and quantities in the market.