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1、PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice HallPrepared by:Fernando Quijano&Shelly TefftCASE FAIR OSTERP R I N C I P L E S O FMACROECONOMICST E N T H E D I T I O N2 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hall3 o
2、f 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice HallCHAPTER OUTLINE3Demand,Supply,andDemand,Supply,andMarket EquilibriumMarket EquilibriumFirms and Households:The Basic Decision-Making UnitsInput Markets and Output Markets:The Circular FlowDemand in Product/Out
3、put MarketsChanges in Quantity Demanded versus Changes in DemandPrice and Quantity Demanded:The Law of DemandOther Determinants of Household DemandShift of Demand versus Movement Along the Demand CurveFrom Household Demand to Market DemandSupply in Product/Output MarketsPrice and Quantity Supplied:T
4、he Law of SupplyOther Determinants of SupplyShift of Supply versus Movement Along the Supply CurveFrom Individual Supply to Market SupplyMarket EquilibriumExcess DemandExcess SupplyChanges in EquilibriumDemand and Supply in Product Markets:A ReviewLooking Ahead:Markets and the Allocation of Resource
5、s4 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hallfirm An organization that transforms resources(inputs)into products(outputs).Firms are the primary producing units in a market economy.entrepreneur A person who organizes,manages,and assumes the risks of a
6、 firm,taking a new idea or a new product and turning it into a successful business.households The consuming units in an economy.Firms and Households:The Basic Decision-Making Units5 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hallproduct or output markets
7、The markets in which goods and services are exchanged.input or factor markets The markets in which the resources used to produce goods and services are exchanged.Input Markets and Output Markets:The Circular Flow6 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentic
8、e Hall FIGURE 3.1 The Circular Flow ofEconomic ActivityDiagrams like this one show the circular flow of economic activity,hence the name circular flow diagram.Here goods and services flow clockwise:Labor services supplied by households flow to firms,and goods and services produced by firms flow to h
9、ouseholds.Payment(usually money)flows in the opposite(counterclockwise)direction:Payment for goods and services flows from households to firms,and payment for labor services flows from firms to households.Note:Color GuideIn Figure 3.1 households are depicted in blue and firms are depicted in red.Fro
10、m now on all diagrams relating to the behavior of households will be blue or shades of blue and all diagrams relating to the behavior of firms will be red or shades of red.Input Markets and Output Markets:The Circular Flow7 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing
11、as Prentice Halllabor market The input/factor market in which households supply work for wages to firms that demand labor.capital market The input/factor market in which households supply their savings,for interest or for claims to future profits,to firms that demand funds to buy capital goods.Input
12、 Markets and Output Markets:The Circular Flow8 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hallland market The input/factor market in which households supply land or other real property in exchange for rent.factors of production The inputs into the product
13、ion process.Land,labor,and capital are the three key factors of production.Input and output markets are connected through the behavior of both firms and households.Firms determine the quantities and character of outputs produced and the types and quantities of inputs demanded.Households determine th
14、e types and quantities of products demanded and the quantities and types of inputs supplied.Input Markets and Output Markets:The Circular Flow9 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice HallA households decision about what quantity of a particular output
15、,or product,to demand depends on a number of factors,including:The price of the product in question.The income available to the household.The households amount of accumulated wealth.The prices of other products available to the household.The households tastes and preferences.The households expectati
16、ons about future income,wealth,and prices.Demand in Product/Output Markets10 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hallquantity demanded The amount(number of units)of a product that a household would buy in a given period if it could buy all it wante
17、d at the current market price.Demand in Product/Output Markets11 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice HallThe most important relationship in individual markets is that between market price and quantity demanded.Changes in the price of a product affe
18、ct the quantity demanded per period.Changes in any other factor,such as income or preferences,affect demand.Thus,we say that an increase in the price of Coca-Cola is likely to cause a decrease in the quantity of Coca-Cola demanded.However,we say that an increase in income is likely to cause an incre
19、ase in the demand for most goods.Demand in Product/Output MarketsChanges in Quantity Demanded versus Changes in Demand12 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Halldemand schedule A table showing how much of a given product a household would be willin
20、g to buy at different prices.demand curve A graph illustrating how much of a given product a household would be willing to buy at different prices.Demand in Product/Output MarketsPrice and Quantity Demanded:The Law of Demand13 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishi
21、ng as Prentice HallTABLE 3.1 Alexs Demand Schedulefor GasolinePrice(per Gallon)Quantity Demanded(Gallons per Week)$8.0007.0026.0035.0054.0073.00102.00141.00200.0026 FIGURE 3.2 Alexs Demand CurveThe relationship between price(P)and quantity demanded(q)presented graphically is called a demand curve.De
22、mand curves have a negative slope,indicating that lower prices cause quantity demanded to increase.Note that Alexs demand curve is blue;demand in product markets is determined by household choice.Demand in Product/Output MarketsPrice and Quantity Demanded:The Law of Demand14 of 50PART I Introduction
23、 to Economics 2012 Pearson Education,Inc.Publishing as Prentice Halllaw of demand The negative relationship between price and quantity demanded:As price rises,quantity demanded decreases;as price falls,quantity demanded increases.It is reasonable to expect quantity demanded to fall when price rises,
24、ceteris paribus,and to expect quantity demanded to rise when price falls,ceteris paribus.Demand curves have a negative slope.Demand in Product/Output MarketsPrice and Quantity Demanded:The Law of DemandDemand Curves Slope Downward15 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Pu
25、blishing as Prentice Hall1.They have a negative slope.2.They intersect the quantity(X-)axis.3.They intersect the price(Y-)axis.Demand in Product/Output MarketsPrice and Quantity Demanded:The Law of DemandOther Properties of Demand CurvesThe actual shape of an individual household demand curvewhether
26、 it is steep or flat,whether it is bowed in or bowed outdepends on the unique tastes and preferences of the household and other factors.16 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hallincome The sum of all a households wages,salaries,profits,interest pa
27、yments,rents,and other forms of earnings in a given period of time.It is a flow measure.wealth or net worth The total value of what a household owns minus what it owes.It is a stock measure.Other Determinants of Household DemandDemand in Product/Output MarketsIncome and Wealth17 of 50PART I Introduc
28、tion to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hallnormal goods Goods for which demand goes up when income is higher and for which demand goes down when income is lower.inferior goods Goods for which demand tends to fall when income rises.Other Determinants of Household DemandDe
29、mand in Product/Output MarketsIncome and Wealth18 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hallsubstitutes Goods that can serve as replacements for one another;when the price of one increases,demand for the other increases.perfect substitutes Identical
30、plements,complementary goods Goods that“go together”;a decrease in the price of one results in an increase in demand for the other and vice versa.Other Determinants of Household DemandDemand in Product/Output MarketsPrices of Other Goods and Services19 of 50PART I Introduction to Economics 2012 Pear
31、son Education,Inc.Publishing as Prentice HallJeff Bezos,who runs Amazon,the producer of the Kindle,thinks the high prices of printed text books provides an opportunity for his company to increase the demand for the Kindle.Kindle in the College Market?E C O N O M I C S I N P R A C T I C EAmazon to La
32、unch Kindle for TextbooksThe Wall Street Journal20 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice HallIncome,wealth,and prices of goods available are the three factors that determine the combinations of goods and services that a household is able to buy.Chang
33、es in preferences can and do manifest themselves in market behavior.Within the constraints of prices and incomes,preference shapes the demand curve,but it is difficult to generalize about tastes and preferences.First,they are volatile.Second,tastes are idiosyncratic.Other Determinants of Household D
34、emandDemand in Product/Output MarketsTastes and Preferences21 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice HallWhat you decide to buy today certainly depends on todays prices and your current income and wealth.There are many examples of the ways expectation
35、s affect demand.Increasingly,economic theory has come to recognize the importance of expectations.It is important to understand that demand depends on more than just current incomes,prices,and tastes.Other Determinants of Household DemandDemand in Product/Output MarketsExpectations22 of 50PART I Int
36、roduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice HallTABLE 3.2 Shift of Alexs Demand Schedule Due to Increase in IncomeSchedule D0Schedule D1Price(per Gallon)Quantity Demanded(Gallons per Week at an Income of$550 per Week)Quantity Demanded(Gallons per Week at an Income of$730
37、 per Week)$8.0003 7.0025 6.0037 5.00510 4.00712 3.001015 2.001419 1.002024 0.002630 FIGURE 3.3 Shift of a Demand Curve following a Rise in IncomeWhen the price of a good changes,we movealong the demand curve for that good.When any other factor that influences demandchanges(income,tastes,and so on),t
38、he relationshipbetween price and quantity is different;there is a shift of the demand curve,in this case from D0 to D1.Gasoline is a normal good.Shift of Demand versus Movement Along a Demand CurveDemand in Product/Output Markets23 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Pub
39、lishing as Prentice Hallshift of a demand curve The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good.The shift is brought about by a change in the original conditions.movement along a demand curve The change in q
40、uantity demanded brought about by a change in price.Change in price of a good or service leads toChange in quantity demanded(movement along a demand curve).Change in income,preferences,or prices of other goods or services leads toChange in demand(shift of a demand curve).Shift of Demand versus Movem
41、ent Along a Demand CurveDemand in Product/Output Markets24 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hall FIGURE 3.4 Shifts versus Movement Along a Demand CurveShift of Demand versus Movement Along a Demand CurveDemand in Product/Output Marketsa.When inc
42、ome increases,the demand for inferior goods shifts to the leftand the demand for normal goods shifts to the right.25 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hall FIGURE 3.4 Shifts versus Movement Along a Demand Curve(continued)b.If the price of hamburg
43、er rises,the quantity of hamburger demanded declines this is a movement along the demand curve.The same price rise for hamburger would shift the demand for chicken(a substitute for hamburger)to the right and the demand for ketchup(a complement to hamburger)to the left.Shift of Demand versus Movement
44、 Along a Demand CurveDemand in Product/Output Markets26 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hallmarket demand The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service
45、.From Household Demand to Market DemandDemand in Product/Output Markets27 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice Hall FIGURE 3.5 Deriving Market Demand from Individual Demand Curves Total demand in the marketplace is simply the sum of the demands of a
46、ll the households shopping in a particular market.It is the sum of all the individual demand curvesthat is,the sum of all the individual quantities demanded at each price.From Household Demand to Market DemandDemand in Product/Output Markets28 of 50PART I Introduction to Economics 2012 Pearson Educa
47、tion,Inc.Publishing as Prentice Hallprofit The difference between revenues and costs.Firms build factories,hire workers,and buy raw materials because they believe they can sell the products they make for more than it costs to produce them.Supply in Product/Output Markets29 of 50PART I Introduction t
48、o Economics 2012 Pearson Education,Inc.Publishing as Prentice Hallquantity supplied The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.supply schedule A table showing how much of a product firms will sell at alt
49、ernative prices.Supply in Product/Output MarketsPrice and Quantity Supplied:The Law of Supply30 of 50PART I Introduction to Economics 2012 Pearson Education,Inc.Publishing as Prentice HallSupply in Product/Output MarketsPrice and Quantity Supplied:The Law of Supplylaw of supply The positive relation
50、ship between price and quantity of a good supplied:An increase in market price will lead to an increase in quantity supplied,and a decrease in market price will lead to a decrease in quantity supplied.supply curve A graph illustrating how much of a product a firm will sell at different prices.31 of