Principles of Macroeconomics / Unit 2 MAC 0138 review, 2 to 3 minutes
One Model, Three Markets
The idea
This unit has drawn the same diagram three times. In the market for goods the price is a price, in the labor market it is a wage, and in the loanable funds market it is an interest rate, but the structure never changes. A downward-sloping demand curve, an upward-sloping supply curve, an equilibrium where the two quantities are equal, a surplus above it and a shortage below it, and shifters that move whole curves while the good's own price only moves you along one. The price controls behave identically too. A binding ceiling is below equilibrium and makes a shortage, whether it caps a rent, a wage that employers may pay, or an interest rate a lender may charge. A binding floor is above equilibrium and makes a surplus, whether it props up a crop price or a wage. And in every case the control leaves the underlying demand and supply untouched, which is why the pressure reappears in queues, in waiting lists, in side payments, or in unsold stock the government must buy.
In practice
Worked example: three events, one routine. Savers decide to save more, which shifts the supply of funds right, so the interest rate falls and the quantity rises. A drought ruins a harvest, which shifts the supply of the crop left, so its price rises and the quantity falls. A minimum wage is set above the equilibrium wage, which is a binding floor, so the quantity of labor supplied exceeds the quantity demanded and a surplus of labor appears. Three different markets, three different names for the price, and the same four steps each time.
Where people slip
Two cautions carry into the rest of the course. The first is that the model tells you the direction of a change, not its size, and when two shifts pull a variable opposite ways it tells you nothing at all about that variable. The second is that this is a model of one market at a time, holding everything else unchanged. The macroeconomics that begins in unit three asks what happens when every market moves at once, and the answer is not this diagram repeated.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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