The law of demand holds that other things equal, as the price of a good or service rises, its

quantity demanded falls.

The demand curve shows the amount of goods consumers are willing to buy at each market price.
Qd = a b(P)
Q = quantity demand
a = all factors affecting price other than price (e.g. income, fashion)
b = slope of the demand curve
P = Price of the good.

Calculate quantity of demand: Qd = 20 2P

Catherines Demand Schedule and Demand Curve

The law of supply holds

price of a good rises, its
vice versa.

that other things equal, as the

quantity supplied will rise, and

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In economics, an equilibrium is a situation in which:

quantity demanded equals quantity supplied

A shortage occurs when quantity demanded exceeds quantity supplied.

A surplus occurs when quantity supplied exceeds quantity demanded.

Shift in the Demand Curve

A change in any variable other than price that influences quantity demanded produces a shift in
the demand curve or a change in demand.

Factors that shift the demand curve include:

Change in consumer incomes

Population change

Consumer preferences

Prices of related goods:

Substitutes: goods consumed in place of one another

Complements: goods consumed jointly

This demand curve has shifted to the right. Quantity demanded is now higher at any
given price.

Equilibrium After a Demand Shift

The shift in the demand curve moves the market equilibrium from point A to point B,
resulting in a higher price and higher quantity.

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Shift in the Supply Curve

A change in any variable other than price that influences quantity supplied produces a
shift in the supply curve or a change in supply.

Factors that shift the supply curve include:

Change in input costs

Increase in technology

Change in size of the industry

Equilibrium After a Supply Shift

The shift in the supply curve moves the market

equilibrium from point A to point B, resulting in a
higher price and lower quantity.

Price Ceilings & Floors

A price ceiling is a legal maximum that can be charged for a

good.

A price floor is a legal minimum that can be charged for a good.

A price ceiling is set at $2 resulting in a shortage of 20 units.

Price ceilings create five important effects:

1. Shortages (Qd > Qs When the price ceiling is below market price)

2. Reductions in product quality. (Sellers can evade the law by reducing quality
rather than raising price.)

3. Wasteful lines and other search costs. (if price is not allowed to rise, buyers
must compete in other ways, bribes, waiting in line)

4. A loss of gains from trade. (Profitable trades will not be made. This creates a
deadweight loss: the total of lost consumer and producer surplus when not all
mutually profitable gains from trade are exploited)

5. A misallocation of resources. (Resources do not flow to their highest valued

uses)

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Price Floor

A price floor is set at $4 resulting in a surplus of 20 units.

Price floors create: (e.g minimum wage)

1. Surpluses; (A minimum wage above the market price creates a surplus - the
quantity of labor supplied exceeds the
quantity demanded.

2. Lost gains from trade

(Deadweight loss: the total of lost
consumer and producer surplus when not
all mutually profitable gains from trade are
exploited.)

3. Wasteful increases in quality

4. A misallocation of resources

Slide 2: Calculating GDP

Nominal GDP, Real GDP, and the GDP Deflator

GDP: Currency value of all final goods and services produced within a countrys borders
Nominal GDP: Currency value of all final goods and services produced within a countrys borders
without the inflation adjustment.
Real GDP: Currency value of all final goods and services produced within a countrys borders minus the
effects of inflation
Inflation: A general rise in the price level of an economy
Consumption: Dollar value of all goods and services purchased by households
Investment: Dollar value of all goods and services purchased by business for the purpose of using in
their business
Government Spending: Dollar value of all goods and services purchased by the various agencies of
Maldives.
Net Exports: Dollar value of all goods and services produced in the country and shipped to other
countries MINUS the value of the goods and services imported from other countries
Aggregate Demand: The amount of goods and services ALL buyers in the economy are willing/able to
buy at all the possible price levels
Aggregate Supply: The amount of goods and services ALL companies are willing to produce at ALL
possible price levels
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GDP Per Capita: Currency value of all final goods and services produced within a countrys borders
divided by the population
Imports: Goods and services produced in other countries, then brought to the Maldives in exchange for
currency
Exports: Goods and services produced in the Maldives, then sent to other countries in exchange for
currency
Standard of Living: Intangible concept that seeks to represent a countrys level of economic prosperity.
Correlates with GDP growth

Expenditures Approach
GDP = C + I + G + (X - M)
C = Personal Consumption in the economy:
The purchases of finished goods and services (but not houses)
I = Gross Private Business Investment monies:
Factory equipment maintenance,
New factory equipment,
Construction of housing,
Unsold inventory of products built in a year
G = Government Spending:
Government purchases of products and services
Xn = Net Foreign Factor of Trade: Exports minus Imports
Exports = Dollars in, Imports = Dollars out

Nominal GDP can change from time to time because of two reasons:

An increase in the PRICES of goods and services.

An increase in the QUANTITY of goods and services.

Net Domestic Product (NDP) = GDP - total capital depreciation

Nominal GDP: NGDP current year = Q current year x P current year

(NGDP2006 = Q2006 x P2006)

Real GDP = Nominal GDP / GDP Deflator

Or RGDP Current year = Q current year x P base year

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(RGDP2007 = Q2007 x P2006)

Note: use Current Quantities and Constant Prices.

GDP _ Deflatort

NGDPt
100
RGDPt

GDP Deflator2007 = (NGDP2007/RGDP2007) x 100

Note: The GDP Deflator is always equal to 100 in the base-year.

Inflation Rate is The percentage increase in the price level from one year to the next

Inflation Rate Between 2006 and 2007 =

[(GDP Def.2007 GDP Def.2006)/GDP Def.2006] x 100

Macroeconomics is the branch of economics that studies economic aggregates (grand

totals):e.g. the overall level of prices, output and employment in the economy.

Anticipated changes are fully expected by economic participants. Decision makers have time to
adjust to them before they occur.

Unanticipated changes catch people by surprise.

The aggregate demand (AD) curve indicates the quantity of goods and services that will be
demanded at alternative price levels.

factors will cause a shift in aggregate demand outward (inward):

An increase (decrease) in real wealth, interest rate, expected rate of inflation, higher
(lower) real incomes abroad, exchange rate value of the nations currency.

Shifts in LRAS: Long Run Aggregate Supply

A long run change in aggregate supply indicates that it will be possible to achieve and sustain a
larger rate of output.

Factors that increase (decrease) LRAS:

Factors that increase (decrease) SRAS:

increase (decrease) in the supply of resources, technology and productivity, the

efficiency of resource use

a decrease (increase) in resource prices, production costs, expected inflation, supply

shocks, world price of a key imported resource

Shifts in Aggregate Supply

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Growth in Aggregate Supply

Increase in AD: Short Run

Decrease in AD: Short Run

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Decrease in AD: Long Run

Unanticipated Increase in SRAS

The AD-AS model indicates that unanticipated changes will disrupt macro equilibrium and result
in economic instability.

Two Forces Directing the Economy Back to Equilibrium

During a recession, real resource prices will tend to fall because the demand for
resources will be weak and the rate of unemployment high.

During a boom, real resource prices will tend to rise because demand for resources will
be strong and the unemployment rate low.

Question Slide 3

Distinguish between Anticipated changes Unanticipated changes?

Anticipated changes are fully expected by economic participants.

Decision makers have time to adjust to them before they occur.

Unanticipated changes catch people by surprise.

What Factors Affect Aggregate Demand?

an increase (decrease) in real wealth, interest rate, expected rate of inflation,

exchange rate

higher (lower) real incomes abroad

What Factors Affect Long-Run and Short-Run Aggregate Supply?

Factors that increase (decrease) LRAS:

increase (decrease) in the supply of resources

improvement (deterioration) in technology and productivity

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institutional changes that increase (reduce) the efficiency of resource use

Factors that increase (decrease) SRAS:

a decrease (increase) in resource prices hence, production costs

a reduction (increase) in expected inflation

favorable (unfavorable) supply shocks, such as good (bad) weather or a

reduction (increase) in the world price of a key imported resource

The Law of Demand tells us that: "all else equal, when the price of a particular good falls, the quantity
demanded for that good rises."

Price Elasticity of Demand

Ed = (% in quantity demanded of good X)/ (% in the price of good X)
Ed = (20%)/(+10%) = 2 or simply Ed = 2
If Ed > 1, demand is said to be "price elastic" for good X.
If Ed < 1, demand is said to be "price inelastic" for good X
If Ed = 1, demand is said to be "unit elastic" for good X.

Factors Determining Price Elasticity of Demand

o Availability of close substitute
o Consumers loyalty
o Necessities versus luxuries
o Proportion of income spent on the product
o Postponement of the Use
o Time
Elastic vs Inelastic
o Elastic when change in price has greater effect on demand
o Inelastic when change in price has lesser effect on demand

Five Coefficient of Price Elasticity of Demand

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o
o

Cross Elasticity of Demand:

Measures the responsiveness in quantity demanded of one good to changes in the price of another
good.

= % QD of A
% P of B

E > 1 Goods are substitutes

c

E < 1 Goods are complements

c

E = 1 Goods are independent

c

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Income Elasticity of Demand

= % Q/Q
% Y /Y
o
E > 1 Superior Good
y

E = 1 Normal Good
y

E < 1 Inferior Good

y

Price Elasticity of Supply

Measures the responsiveness of quantity supplied to changes in price.

Factors Determining Elasticity of Supply

o Nature of Inputs Used
o Natural Constraints
o Risk Taking
o Nature of Commodity
o Technique of Production
o Time

Slide 5: CONSUMER PRICE INDEX

Price Index is a normalized average of prices for a given class of goods or services in a given region,
during a given interval of time

Current year index = Current year price

Base year price

x 100

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CPI= Sum of all current year index/ Number of item

Inflation = (Price Index in Current Year Price Index in Base Year) * 100
Price Index in Base Year

Slide 6: Money & the Banking System

1. The Supply of Money
The components of M1 are:

Currency

Checking Deposits

Traveler's checks

M2 (a broader measure of money) includes:

M1,

Savings,

Time deposits, and,

Money mutual funds.

2. What is Money?

Money is anything of value that is widely accepted as payment for goods and
services

A medium of exchange:
An asset used to buy and sell goods and services.

A store of value:
An asset that allows people to transfer purchasing power from one period to
another.

A unit of account:
Units of measurement used by people to post prices and keep track of revenues
and costs

2. Discuss business banking?

The banking industry includes:

savings and loans,

credit unions, and,

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Banks are profit-seeking institutions:

Commercial banks.

Banks accept deposits and use part of

them to extend loans and make investments. This is their major source of revenue.

Banks play a central role in the capital market (loanable funds market):

They help to bring together people who want to save for the future with those who
want to borrow for current investment projects

1. Explain the Factors Changing the Nature of Money?

In addition, three other factors are altering the nature of money and reducing the value of the
money growth figures as an indicator of monetary policy:

Widespread use of the dollar abroad:

At least one-half and perhaps as much as two-thirds of U.S. dollar currency is held
abroad, and these holdings appear to be increasing. These dollars are included in the
M1 money supply even though they are not circulating in the U.S..

Increasing availability of low-fee stock and bond mutual funds:

Because stock and bond mutual funds are not included in any of the money aggregates,
movement of funds from various M1 and M2 components into these mutual funds will
distort both the M1 and M2 figures.

Debit cards and electronic money:

Increased use of debit cards and various forms of electronic money will reduce the
demand for currency. Like other changes in the nature of money, these innovations will
reduce the reliability of the money supply figures as an indicator of monetary policy.

Slide 7: fiscal policy: The Kenyesian view and historical perspective

Keynesian analysis indicated that fiscal policy could be used to maintain a high level of output
and employment.

If total spending is less than full employment output, inventories will rise and firms will reduce
output and employment.

Keynesian theory highlights the potential of fiscal policy as a tool capable of reducing
fluctuations in AD.

A budget deficit is present when total government spending exceeds total revenue from all
sources.

A budget surplus is present when total government spending is less than total revenue.

When inflation is a potential problem, Keynesian analysis suggests fiscal policy should be more
restrictive:
Reduction in government spending
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 Or increase in taxes

When an economy is operating below its potential output, the Keynesian economic model
suggests that fiscal policy should be more expansionary.
Increase in government purchases of goods & services
Or reduction in taxes

The centerpiece of classical economics is Says law

Says law states, Supply creates its own demand

This means that somehow, what we produce supply all gets sold

Slide 8: Modern Macroeconomics Monetary Policy1. What is 'Monetary Policy'?

Monetary policy consists of the actions of a central bank,(for example, In Maldives, Maldives Monetary
Authority (MMA)) currency board or other regulatory committee that determine the size and rate of
growth of the money supply, which in turn affects interest rates.
Monetary policy is maintained through actions such as modifying the interest rate, buying or selling
government bonds, and changing the amount of money banks are required to keep in the vault (bank
reserves).
1. Discuss Modern macroeconomics?
Macroeconomics is concerned with the structure, performance and behaviour of the economy as a
whole.
The prime concern of macroeconomists is to analyse and attempt to understand the underlying
determinants of the main aggregate trends in the economy with respect to the total output of goods
and services (GDP), unemployment, inflation and international transactions.
In particular, macroeconomic analysis seeks to explain the cause and impact of short-run fluctuations in
GDP (the business cycle), and the major determinants of the long-run path of GDP (economic growth).
the subject matter of macroeconomics is of crucial importance because in one way or another
macroeconomic events have an important influence on the lives and welfare.
1. Explain the Impacts of Monetary Policy ?
n

Evolution of Modern View:

u

The Keynesian View dominated during the 1950s and 1960s.

u

Keynesians argued that the money supply did not matter much.

Monetarists challenged the Keynesian view during 1960s and 1970s.

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u
u

According to monetarists, changes in the money supply caused of both inflation

and economic instability.

While minor disagreements remain, the modern view emerged from this debate.
-- Modern Keynesians and monetarists agree
that monetary policy applies an important impact on the economy.

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