Graphing Shocks and Equilibrium

1 Introduction

This section lists some examples of shifts in the Good Market Equilibrium as well as the labor market equilibrium.

Additionally, I am leaving my tikz code– these provide decent examples for making these kinds of graphs.

2 Supply Shock Example

Imagine the cost of energy increasing. This rising cost would make each worker less productive at any level of output (supply side shock). This subsequent reduction of the marginal product of labor would shift the equilibrium such that firms would require less workers in order to achieve equilibirium.

\begin{tikzpicture}[scale=1]

% Axis

\draw [thick] (-0.3,0) node [below] {O} (-0.5,0)-- (0,0) -- (5.5,0) node [right] {y};

\node [above] at (0,5.5) {Current Real Wages, w};

\node [below] at (5.5,-0.2) {Labor, N};

\draw [thick] (0,-0.5)-- (0,0) -- (0,5.5);

\node [left] at (0,5.3) {w};


%Downward slopping line

\node [above] at (0.5,5) {w};

\draw [thick] (0.5,5) to [out=280,in=140] (4.5,1);

\node [above] at (4.5,0.2) {$ND1$};

%Downward slopping line after shock

\node [above] at (0.5,5) {w};

\draw [thick] (0.5,3) to [out=290,in=130] (3.5,.5);

\node [above] at (3,0.1) {$ND2$};


% Upward Slopping PQ

\draw [thick] (0.3,0.5) to [out=38,in=232] (3.8,4);

\node [left] at (0.43,0.5) {};

\node [right] at (3.8,4) {$NS$};



% dashed lines

\draw [dashed] (0,2.4)--(2.5,2.4);

\node [left] at (2.5,-.2) {$N1$};

% New Equilibrium
\draw [dashed](1.8,0)--(1.8,1.7);
% Old Equilibrium
\draw [dashed](2.5,0)--(2.5,2.4);

\draw [dashed](0,1.7)--(1.8,1.7);

\node [left] at (1.8,-.2) {$N2$};

\node [left] at (0,1.7) {$w2$};

\node [left] at (0,2.4) {$w1$};

\end{tikzpicture}

Figure 2.1: Supply Shock Reducing MPN And Thus Increasing Unemployment from N1 to N2 and Decreasing Real Wages from w1 to w2

3 Future Oriented-Households

As consumers become more future orienting their saving rate increases. As the volume of savings the savings curve will shift outward reflecting an increased supply of savings. This will result in a new equilibrium point with the interest rate, which will reduce the equilibrium interest rate.

\begin{tikzpicture}[scale=1.1]

% Axis

\draw [thick] (-0.3,0) node [below] {O} (-0.5,0)-- (0,0) -- (5.5,0) node [right] {y};

\node [above] at (0,5.5) {Real Interest Rate, r};

\node [below] at (5.5,-0.2) {Desired National Savings/ Investment, Sd, Id};

\draw [thick] (0,-0.5)-- (0,0) -- (0,5.5);

\node [left] at (0,5.3) {r};


%Downward slopping line
\node [right] at (0.5,5) {Investment Curve};
\draw [thick] (1,5) to [out=280,in=140] (4.5,1);
\node [above] at (4.5,0.2) {$Investment/ National Saving$};

%Initial Savings
\draw [dashed] (0.5,0.5) to [out=38,in=232] (3.8,4);
\node [left] at (0.43,0.5) {};
\node [right] at (3.8,4) {$Saving After Recession$};

\draw [thick] (0.5,1.5) to [out=38,in=232] (3.8,5);
\node [left] at (0.43,0.5) {};
\node [right] at (3.8,5) {$Saving Before Recession$};


\end{tikzpicture}

Figure 3.1: Shift in Savings Curve Due to Recession: At any value new value of r, more private saving

4 Government Spending

Should the government launch on a debit financed spending campaign, this new debt will shift the saving curve to the lft resulting in higher real interest rates and potentially crowding out private investment.

\begin{tikzpicture}[scale=1.1]

% Axis

\draw [thick] (-0.3,0) node [below] {O} (-0.5,0)-- (0,0) -- (5.5,0) node [right] {y};

\node [above] at (0,5.5) {Real Interest Rate, r};

\node [below] at (5.5,-0.2) {Desired National Savings/ Investment, Sd, Id};

\draw [thick] (0,-0.5)-- (0,0) -- (0,5.5);

\node [left] at (0,5.3) {r};


%Downward slopping line
\node [right] at (0.5,5) {Investment Curve};
\draw [thick] (1,5) to [out=280,in=140] (4.5,1);
\node [above] at (4.5,0.2) {$Investment/ Nat'l Saving$};

%Initial Savings
\draw [thick] (0.5,0.5) to [out=38,in=232] (3.8,4);
\node [left] at (0.43,0.5) {};
\node [right] at (3.8,4) {$Saving Before War$};

\draw [dashed] (0.5,1.5) to [out=38,in=232] (3.8,5);
\node [left] at (0.43,0.5) {};
\node [right] at (3.8,5) {$Saving After War$};


\end{tikzpicture}

Figure 4.1: Debt Shifts the Saving Curve to the Left Resulting in Higher Real Interest Rates and Crowding Out Private Investment

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Intermediate Macroeconomics
me.dewitt.jr@gmail.com

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