There are two major branches of Economics, Microeconomics and Macroeconomics. Microeconomics studies the behavior of the individual decision making units in an economy whereas macroeconomics studies the economy as a whole.
Two Microeconomic and two macroeconomic principles:
The theory of the firm in which we study the cost, revenue and profit of a firm falls under the purview of microeconomics as it deals with an individual decision making unit that is a firm and how it operates.
Study of the consumer behavior is another area which fall sunder microeconomics. This deals with how consumers maximize their satisfaction from the consumption of different goods with their given income. This is the study of again another important unit of the economy, the consumers. So this sia concept of microeconomics.
The study of inflation is a subject area of macroeconomics. Inflation refers to the phenomenon of rising prices in the economy. This is macroeconomic concept because here do not consider the rise in price of an individual product but if almost all the prices in the whole economy is rising we term that as inflation. Since this considers the economy as a whole we say this is a macroeconomic concept.
Aggregate demand is another concept of macroeconomics. Demand as such is a concept of microeconomics as we consider the demand of the individuals for a particular product. But when we say ‘aggregate demand’ we are talking about the demand of all the individuals taken together for all good snad services in the economy and the principles that govern the demand of all of them taken together. We consider the cause and effect of the changes in the demand in an aggregative sense and hence it is a concept of macroeconomics.
Shift in supply curve and shift in demand curve:
Shift in demand curve: The demand curve shifts when any other factor that affects demand changes except for the price of the product. Shift in the demand curve occurs when there is a change in ‘demand’ and not ‘quantity demanded’ at a particular price. The quantity demanded changes for all price levels. An increase in demand will lead to a rightward shift in the demand curve for a normal good. This is because at any price level the individual will demand more owing to the increase in her income. For a n inferior good an increase in income will lead to a leftward shift in the demand curve as the individual consumes less of the good as income increases.
Shift in Supply curve: Supply curve shifts when the quantity supplied for each price level changes. This is a change in ‘supply’ as distinguished from the change in ‘quantity supplied’. Shift in the supply curve occurs when any factor affecting supply changes other than the price of the product. If the technology of production improves the firm can produce more with the same inputs. So th cost gets reduced and the firm is able to supply more at the existing prices. So the supply increase and the supply curve shifts to the right.
Causes and effects of shifts in demand and supply curves:
Shifts in the demand curve: Factors like the income of the individuals, price of the related products, tastes and preference of the consumers, government policies, demographic structures and such other factors lead to shift on the demand curve.
As the demand curve shifts to the right it indicates an increase in demand. With an increase in demand there is excess demand at the current equilibrium level of price. As a result the suppliers tend to increase the price along with the increase in quantity supplied. So the rightward shift in the demand curve leads to an increase in price and quantity. A decrease in supply reflected in a leftward shift in the supply curve will lead to a fall in price and quantity supplied of the product.
Shifts in the supply curve: Factors like production technology, price of raw materials, government policy, price of products in related industries, natural calamities and such others lead to a shift in the supply curve. As the supply curve shifts to the right there is excess supply at the given price level. So the price tends to fall and demand increases along the quantity demanded curve due to the fall in the price. Thus a rightward shift in the supply curve leads to a fall in the price and increase in the equilibrium quantity. Similarly, a leftward shift in the supply curve due to a decrease in supply will lead to a rise in the equilibrium price and the fall in equilibrium quantity.
Application of the concepts of supply and demand in the real world situation:
We can explain a number of interesting changes in the demand and supply conditions that we see in our everyday life through the concepts of demand and supply that we have learned in economics. We can see that the demand for woolens increase in the winter. There is a rightward shift in the demand for woolen products in the winter season. Similarly, if the number of babies increase in an economy there will be an increase in demand for baby care products leading to a rightward shift in the demand for baby care products.
We can also observe changes in the supply due to changes certain factors in the economy. We observe that the supply of certain fruits and vegetables increase in a particular season. Agricultural production is seasonal in nature. So the supply changes with seasons. The supply curve of the product shifts rightward in the season in which it is produced and shifts leftward in the lean season. If exports of a certain product increase there will be decrease in the supply of the product in the domestic market leading to a leftward shift in the supply curve.
In the above discussion we have considered microeconomic factors like changes in the preferences of individuals that affect demand. Microeconomic factors like changes in production technology, price of raw materials affects supply.
We have discussed macroeconomic factors like demographic structures and government policies that affect demand. We have discussed how increase in exports reduce supply. This is how a macroeconomic factor affects supply.
The price elasticity of demand is the degree of responsiveness of demand to the price. If the demand is price elastic that is elasticity is greater than 1 a rise in price will lead to a large fall in demand and vice versa. If the demand is price inelastic a fall in the price will lead to a small increase ein demand and vice versa. In case of inelastic demand a rise in the price will lead to an increase in revenue for the firms. So the firms tend to keep the price high if demand is inelastic. In case of elastic demand a firm will lose revenue if it raises the price as there will be a large fall in the quantity demanded. So the firm will keep the price low if the demand is elastic.
Khan Academy. (2015, October 29). Supply Curve. Retrieved from Khan Academy: https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-equilibrium/supply-curve-tutorial/v/long-term-supply-curve-1
Koutsoyiannis, A. (2003). Microeconomics. Pulgrave Macmillan.
Pindyck, R., & Rubinfield, D. (2009). Microeconomics (7th ed.). Prentice Hall.