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lecture notes 4

The lecture notes cover the fundamentals of macroeconomics, focusing on the supply and demand model for new cars, detailing the relationships between endogenous and exogenous variables. It emphasizes the importance of using multiple models to understand various economic issues and the impact of price flexibility on market equilibrium. The notes also encourage practical application through exercises related to mobile phones and highlight the distinction between short-run sticky prices and long-run flexible prices.

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shfaisaljaved.713
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3 views

lecture notes 4

The lecture notes cover the fundamentals of macroeconomics, focusing on the supply and demand model for new cars, detailing the relationships between endogenous and exogenous variables. It emphasizes the importance of using multiple models to understand various economic issues and the impact of price flexibility on market equilibrium. The notes also encourage practical application through exercises related to mobile phones and highlight the distinction between short-run sticky prices and long-run flexible prices.

Uploaded by

shfaisaljaved.713
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Lecture notes by Faisal Javed (ECO-104)

LECTURE NOTES 4
THE SCIENCE OF MACROECONOMICS
The model can be used to show how a change in one of the exogenous variables affects both
endogenous variables.

Example Number 2
Supply & demand for new cars
• shows how various events affect price and quantity of cars
• assumes the market is competitive: each buyer and seller are too small to affect the
market price
Lecture notes by Faisal Javed (ECO-104)

Variables

Qd = quantity of cars that buyers demand

Qs = quantity that producers supply


P = price of new cars
Y = aggregate income
Ps = price of steel (an input)

• The demand for cars


d
demand equation: Q = D (P,Y )

• shows that the quantity of cars consumers demand is related to the price of cars and
aggregate income
• General functional notation
shows only that the variables are related.

d
Q = D (P,Y )

• A specific functional form shows the precise quantitative relationship.


• Example:
D (P,Y ) = 60 – 10P + 2Y
• Endogenous vs. exogenous variables
• The values of endogenous variables are determined in the model.
• The values of exogenous variables are determined outside the model:
the model takes their values & behavior as given. In the model of supply & demand
for cars,

endogenous: P, Qd, Qs
exogenous: Y, Ps

• NOW YOU TRY:


Supply and Demand
1. Write down demand and supply equations for mobile phones; include two
exogenous variables in each equation.
2. Draw a supply-demand graph for mobile phones.
3. Use your graph to show how a change in one of your exogenous variables affects
the model’s endogenous variables.
Lecture notes by Faisal Javed (ECO-104)

• The use of multiple models


Macroeconomists study many facets of the economy. For example, they examine the role of
saving in economic growth, the impact of minimum-wage laws on unemployment, the effect
of inflation on interest rates, and the influence of trade policy on the trade balance and
exchange rate.
• No one model can address all the issues we care about.
• e.g., a supply-demand model of the U.S. car market…
• can tell us how a fall in aggregate U.S. income affects price & quantity of cars.
• cannot tell us why aggregate income falls.
• The use of multiple models
• So we will learn different models for studying different issues (e.g., unemployment,
inflation, long-run growth).
• For each new model, you should keep track of
• its assumptions
• which variables are endogenous, which are exogenous?
• the questions it can help us understand, those it cannot
• Prices: flexible vs. sticky
Economists assume that markets are normally in equilibrium, so the price of any good or
service is found where the supply and demand curves intersect. This assumption is called
market clearing and is central to the model of the pizza market discussed earlier.
• Market clearing: An assumption that prices are flexible, adjust to equate supply and
demand.
• In the short run, many prices are sticky – adjust sluggishly in response to changes in
supply or demand. For example:
• many labor contracts fix the nominal wage for a year or longer
• many magazine publishers change prices only once every 3-4 years
• The economy’s behavior depends partly on whether prices are sticky or flexible:
• If prices sticky (short run), demand may not equal supply, which explains:
• unemployment (excess supply of labor)
• why firms cannot always sell all the goods they produce
• If prices flexible (long run), markets clear and economy behaves very
differently
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Lecture notes by Faisal Javed (ECO-104)

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