Lectures in Microeconomics

Prajapati Trivedi

December 14, 2022

Micro foundations of Macroeconomics

What is the 1. Microeconomics is the study of individuals
difference and business decisions,
while macroeconomics looks at the
between decisions of countries and governments.
Microeconomics
2. Microeconomics looks at individual
versus markets Macroeconomics looks at the
Macroeconomics? whole economy
 By developing a Microeconomic Model

Market
Supply

How did we study

microeconomics? P0

Market
Demand

Q0
 Determinants of Market demand

1. Price of Commodity’s own price

2. The Price of Related Goods

• Substitutes Price D
• Complements Price D
3. Income of Individual
Non-Price • Normal Goods Income D
Determinants • Inferior Good Income D
4. Taste of the Individual
5. Expectations
6. Size of the population
 Determinants of Market Supply

1. Price of Commodity’s own price

2. The Price of Related Goods

3. Price of Resources
4. Price Expectations
Non-Price 5. The Goals of the firm
Determinants 6. The State of Technology
7. Taxes and Subsidies
8. Weather – Force Majeure
9. Number of Firm / producers
 How did we arrive at
Market Demand Curve?
 From Individual to Market Demand Curve

Horizontal summation of all individual demand curves for one commodity

 What if we carry this process of Horizontal Summation to its logical end?

Horizontal summation of all individual demand curves for one commodity

Horizontal summation of all individual demand curves for ALL commodities

Aggregate
Demand

Economy
 From Individual to Market Supply Curve

Horizontal summation of all individual supply curves for one commodity

 What if we carry this process of Horizontal Summation to its logical end?

Horizontal summation of all individual supply curves for one commodity

Horizontal summation of all individual supply curves for ALL commodities

Aggregate
Supply

Economy
 Microeconomic Model Macroeconomic Model
What are the axes CPI Aggregate
in this Supply
Price/
unit Macroeconomic
Market
model? Supply

P0
P0

Aggregate
Market Demand
Demand

Q0 Y0 GDP
Quantity/
time
Market for Wine The Economy
1. Consumer Price Index

2. Price of Traded Goods

3. Incomes of Population

4. National Preferences
5. Expectations
6. Size of Population
1. Consumer Price Index

2. Price of Traded Goods

3. Price of Resources
4. Price Expectations
5. Goals of the Nation
6. Technological Change
7. Taxes and Subsidies
8. Weather / Divine
Interventions
9. Number of Firms
 A Macroeconomic Model
Aggregate
CPI Supply What was the
first post World
We now have a
War II
macroeconomic
macroeconomic
model that
event to affect
looks like so
the US
Aggregate economy?
Demand

GDP
The US Economy
 A Macroeconomic Model
CPI What was the next big event
with macroeconomic
consequences?
AS0

P0

AD0 (1948 Marshall Plan)

Y0
GDP
The US Economy
 A Macroeconomic Model
CPI
P5
AS0

What was the

next big event
with P1
P0
macroeconomic
consequences?
AD1 (Korean War 1950s)
AD0 (1948 Marshall Plan)

Y0 Y1
GDP
The US Economy
 A Macroeconomic Model
CPI

AS0

What was the

next big event P
2
with P1
P0
macroeconomic
consequences?
AD2 (Vietnam War 1960s)
AD1 (Korean War 1950s)
AD0 (1948 Marshall Plan)

Y0 Y1 Y2
GDP
The US Economy
 A Macroeconomic Model
CPI AS1 (AFL-CIO and Labor Movement) mid 60s

AS0

What was the

next big event PP3
2
with P1
P0
macroeconomic
consequences?
AD2 (Vietnam War 1960s)
AD1 (Korean War 1950s)
AD0 (1948 Marshall Plan)

Y0 Y1Y2 Y4
GDP
The US Economy
 A Macroeconomic Model
CPI AS1 (AFL-CIO and Labor Movement) mid 60s

AS0

What was the P4

next big event PP3
2
with P1
P0
macroeconomic AD3 (Great Society Programs)

consequences?
AD2 (Vietnam War 1960s)
AD1 (Korean War 1950s)
AD0 (1948 Marshall Plan)

Y0 Y1 Y2 Y4
GDP
The US Economy
 A Macroeconomic Model
AS2 (OPEC 1 and OPEC 2 – 1970s)
CPI AS1 (AFL-CIO and Labor Movement) mid 60s
P5
AS0

P4
P3
P2
P1
P0
AD3 (Great Society Programs)

AD2 (Vietnam War 1960s)

AD1 (Korean War 1950s)
AD0 (1948 Marshall Plan)

Y5 Y0 Y1 Y2 Y4
GDP
The US Economy
 A Macroeconomic Model
AS2 (OPEC 1 and OPEC 2 – 1970s)
CPI AS1 (AFL-CIO and Labor Movement) mid 60s
Stagflation
= P5
AS0

Stagnation
+ P4
Inflation
P3
P2
P1
P0
AD3 (Great Society Programs)

AD2 (Vietnam War 1960s)

AD1 (Korean War 1950s)
AD0 (1948 Marshall Plan)

Y5 Y0 Y1 Y2 Y4
GDP
The US Economy
Policy Options to deal with Stagflation
 Policy Options to deal with Stagflation
CPI
CPI
AS0 AS0
AS1

P0 P0
P1 P1

AD0 AD0 AD

Y1 Y0 GDP Y0 Y1 GDP

Demand Management Policy Supply Management Policy

The Essence of Supply-Side Economics
 The Essence of Supply-Side Economics

Increased Increased Increased

Tax Increased
Disposable Investment Supply
Cuts Savings
Income

Voodoo Economics
 Policy Options

Demand Wage-Price Supply

Management Freeze Management

Fiscal Monetary
Policy Policy

Taxes Subsidies Bank Reserve Open

Rate Ratio Market
Operations
The End