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Macro Economics - Coursework Example

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Reverse causality is a causal relationship that arises when there is a cause and effect relationship between variables. This means that the fact that events…
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Macro Economics
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Macro and microeconomics Error of omitted variable and reverse causality Error of omitted variable is the error that occurs due toomission of a certain variable in determining a correlation. Reverse causality is a causal relationship that arises when there is a cause and effect relationship between variables. This means that the fact that events follow each other does not prove that the first event caused the other event. For instance, there is a relationship between high-income levels and good health whereby high incomes can lead to good health and at the same time good health can enable a person to work hard to increase productivity (Hill 2014).
Demand curve
Demand curves are curves that show a relationship between the price of a product and the quantity demanded. It is shown when the values of price are plotted against the values of quantity demand. It shows what consumers are willing to buy at various prices.
Demand for widgets
Price
50 D
40
10 D
2 8 10 Demand
The demand curve has a negative slope (-5) which indicates that an increase in there is an inverse relationship between price and the quantity demanded. The demand curve therefore shows a negative relationship between the variables, which means that an increase in price causes a decrease in demanded quantity and a decrease in price causes an increase in quantity demanded. The two therefore have an inverse relationship.
Equation for demand curve
Increase in the income of consumers will lead to increase in demand for widgets. This is because widgets are normal goods and change in income results to a positive change to demand of normal goods. There will therefore be a shift in demand curve for widgets to the right as a result of the increased demand. The shift in the demand curve will cause to an increase in the quantity of widgets demanded at each level of price. The shift to the right will cause an increase in demand and therefore the demand value in the equation will increase with increase in income.
Supply curve
A supply curve is a curve that shows a relationship between price and quantity supplied by the sellers. The supply curve slopes from the left to the right. This shows the direct relationship between quantity supplied and price.
Price
50 S

10
3 15 supply
The slope of the supply curve has a positive value (+3.3). This indicates that there is a positive relationship between price and the quantity supplied. Price and supply are therefore directly related.
Effects to the supply curve
Change in price of the input used to produce will result to a decrease in supply of the widgets. This will result to a shift in the supply curve upwards indicating a decrease in supply. Less quantity of the widgets will therefore be supplied at the same price levels to enable the suppliers to cover for the increased production cost (Hill 2014).
Equilibrium price and quantity
Price D
S
20
6 Quantity
The equilibrium point is the point at the intersection of the demand and the supply curve. This is the point where demand curve equals the supply curve. In the case of widgets, the two curves intersect at the point where price is 20 and the quantity is 6. These are therefore the equilibrium price and quantity respectively.
At a price of 50
At a price of 50, the consumer will buy less number of widgets, which will be below what is supplied by the suppliers. This will then result to surplus in the market and a state of disequilibrium. Price reduction will be used to clear the surplus.
At a price of 10
This will be a price below the equilibrium and therefore it will result to excess demand. This is because consumer will be willing to supply more than suppliers can supply. This situation will be cleared by increasing the price to get back to the equilibrium.
Price
D Di Si S
Si Di
S D
Quantity
An increase in the cost of oranges will result to a decrease in supply for the juice, causing a shift of the supply curve to the left. A fall in the price of apple juice, which is a substitute, will lead to a decrease in demand for orange juice thus a shift of demand curve outwards to the right. An increase in price of apple juice will lead to a shift in demand curve to the right and reduction in cost of producing oranges will result to a shift in supply curve to the right.
Reference
Hill, B. (2014). An introduction to economics: Concepts for students of agriculture and the rural sector. Read More
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