Macroeconomics

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Question: What is Macro economic Model? How to use this method in practice? Answer: given current knowledge, Macroeconomics is the study of the behavior of the economy as a whole. It examines the forces that affect many firm, consumer and workers at the same time.

⇤# : This is a good start, but try to be more specific. What functions are used for demand and supply? Why these functions? Can polynomial functions be used? How is elasticity defined and calculated? I want to learn to build macroeconomic models and calculate them, not just hear something about the concepts. --Jouni 16:09, 2 February 2012 (EET)

Scope

The importance/issues/scope, which are addressed in macro economics are in brief as under:

• It helps in understanding the determination of income and employment. Late J.M. Keynes laid great stress on macro economic analysis. He, in his revolutionary book, "General Theory, Employment interest and Money", brought drastic changes in economic thinking. He explained the forces or factors which determine the level of aggregate employment and output in the economy.

• 'Economic growth: The macro economic models help us to formulate economic policies for achieving long run economic growth with stability. The new developed growth theories explain the causes of poverty in under developed countries and suggest remedies to overcome them.

• Determination of general level of prices. Macro economic analysis answers questions as to how the general price level is determined and what is the importance of various factors which influence general price level.

• Income shares from the national income. Mr. M. Kalecki and Nicholas Kelder, by making departure from Ricardo theory, has presented a macro theory of distribution of income. According to these economists, the relative shares of wages and profits depend upon the ratio of investment to national income.

• Global economic system. In macro economic analysis, it is emphasized that a nation's economy is a part of a global economic system. A good or weak performance of a nation's economy can affect the performance of the world economy as a whole.

Demand & Supply

The Analysis of supply and demand shows how a market mechanism solves the three problems of what, how and for whom. A market blends together demands and supplies. Demand comes from consumers and who are spreading their dollars votes among available goods and services, while business supply the goods and services with the goal of maximizing their profit.

A. The Demand Schedule

• A demand schedule shows the relationship between the quantity demanded and the price of a commodity other things held constant. Such a demand schedule, depicted graphically by a demand curve, holds constant other thing like family income, tastes and the price of other goods. Almost all commodities obey the law of downward-sloping demand, which hold that quantity demanded falls as a good's price rise. this law is represented by a downward-sloping demand curve.

• Many influence lie behind the demand schedule for the market as a whole: average family incomes, population, the prices of related goods, tastes, and special influence. When these influences change, demand curve will shift.

B.The Supply Schedule

• The supply schedule (or supply curve) gives the relationship between the quantity of a good that producers desire to sell- other things constant- and that good's price. Quantity supplied generally responds positively to price, so the supply curve will be upward sloping.

• Element other than the good's price affect its supply. The most important influence is the commodity's production cost, determined by the state of technology and by input prices. other elements in supply include the prices of related goods, government policies and special influence.

Functions of Demand & Supply

The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible.

A. The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more.

It is useful to abstract and to identify how the price and changes in the price of the good effect buyer behavior by “holding all other things constant,” or using ceterias paribus. If the prices of related goods, incomes and preferences are unchanged it is possible to describe the relationship between the price of the good (P_X) and the quantity that will be purchased (Q_X) in a given time (ut). If, Q_X = f_X(P_X, P_related, M, Preferences, …, #B) and the variables, Prelated, M, Preferences, …, #B do not change then Q_X = f_X(P_X) ceteris paribus. This can be considered a “demand curve” or “demand function.”

All these functions are talking into consideration to determine the following points

• Income
• Tastes and preferences
• Prices of related goods and services
• Consumers' expectations about future prices and incomes
• Number of potential consumers

B. The Law of Supply

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

The supply function often represents a positive relationship between the price of a good and the quantity that will be produced and offered for sale. If all the independent variables (P_inputs, technology, number of sellers, taxes, laws regulations,. . .except (P_X) were held constant the supply might be expressed:

Q_XS = fS (P_X) ceteris paribus

to determine the following matters this function is necessary to follow

• Production costs, how much a good costs to be produced
• The technology used in production, and/or technological advances
• The price of related goods
• Firms' expectations about future prices
• Number of suppliers

References

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