if price rises, what happens to supply of a product?
Demand and Supply:
How Prices are determined in a Market place Economic system
How Prices are determined in a Market place Economic system
REVIEW: For review exercises click Here
Introduction
Structural Adjustment Policies
In our introductory lecture on Structural Adjustment we discussed diverse policies that countries are adopting all around the give-and-take to promote economic growth (increasing output rather than increasing their ability) and achieve productive and allocative efficiency. It is hoped that equally economies move away from command economies (Chapter 23) toward mzrket economies or capitalism (chapter 4).
These policies are:
i. Privatization
2. Promotion of Competition
3. Limited and Reoriented Role for Government
four. Price Reform: Removing Controls
v. Joining the Earth Economy
6. Macroeconomic Stability
Even though the concepts of SUPPLY and Need are microeconomic concepts, they are reviewed in this macroeconomics course because not all students take taken micro (ECO 211) and they are central principles that all economic student should master. We will report supply and demand in this "Macroeconomics of the Gloabal Econaomy" class to better understand why there is a worldwide movement to remove cost controls and let Supply and Demand determine prices.
In a backer economy, prices are very important. They have 2 key functions:
- they RATION goods and services, and
- the GUIDE resources to where they are wanted most
Past doing this they help the economy maintain allocative efficiency and productive efficiency.
In the 5Es lesson on allocative efficiency we discussed that information technology was skillful for the price of plywood to increase in Florida subsequently a hurricane. When the price increased ii things happened: (i) plywood was rationed to its well-nigh important uses (not doghouses or decks), and (two) the loftier prices were an incentive for more plywood to be guided to Florida and then that they had more plywood. If the toll of plywood was kept likewise depression the result was allocative inefficiency (a shortage).
Prices are also very of import in maintaining productive efficiency. In the 5Es lecture on Productive efficiency we defined it every bit producing at a minimum cost. In order to minimize costs, producers must know the prices of the resources. If these resource prices are determined by demand and supply then they will reverberate the relative scarcity of the resources and their relative importance (more than scarce and important resources will have a higher price) and the economy can achieve productive efficiency.
In a capitalist society prices are determined past the interaction of need and supply. Since prices are so of import, nosotros need to better sympathize how they are determined. why is the price of gasoline $1.59 a gallon. Why does a candy bar cost $0.75? Why is the price of plywood ordinarily $10 a sail, but $thirty a sheet after a hurricane?
Need
If the price of a product increases what happens to demand for that product? For case, If the price of pizza increases, then the demand for pizza does what?
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NOTHING! If the toll of pizza increases, the demand for pizza does not alter. This is considering in economics we accept a more precise definition of demand. Demand is Not the quantity that people buy.
DEFINITION: So what is need?
Demand is a schedule that shows the various quantities that consumers are willing and able to buy at various prices in a given time menstruum, ceteris paribus. We should look more closely at this definition.
Demand is a tabular array of numbers. Look at the table below. The whole tabular array might correspond my demand for pizza.
Demand Schedule and Curve
As we learned in a previous lesson, whatever indicate on a graph represents 2 numbers, so we tin plot our need table as in the graph below.
If we assume that there are quantities and prices in-between those in the tabular array (for example if the price was $iv.50 how many pizzas would I buy?) we tin can connect the points and we go the demand curve (graph).
This is my demand for pizza. This demand curve does Non tell the states what the toll will be. To know what the cost will be nosotros need both demand and supply.
But we can run into what happens to need if the price of pizzas increases. If the price of pizza increases, say from $six to $9, aught on the table changes (demand does non change) considering demand already includes various prices and diverse quantities. Demand (the table or the graph) does non modify when the price changes considering need INCLUDES various prices and various quantities. Demand is Non how much nosotros buy.
Note that our definition of demand includes the ceteris paribus assumption. When we develop a demand curve just the cost and quantity demanded change. Everything else is assumed to remain constant. I don't get a large increase in my income. I don't win the lottery. There isn't a new study out that states pizzas crusade cancer. All other factors remain the aforementioned - only the price and quantity demanded change.
Police force of Demand
Every bit nosotros tin run into on the demand graph, in that location is an inverse relationship between cost and quantity demanded. Economists phone call this the Law of Demand. If the price goes up, the quantity demanded goes downward (but demand itself stays the same). If the price decreases, quantity demanded increases. This is the Police force of Demand. On a graph, an inverse relationship is represented by a downward sloping line from left to right.
Why?
Why is the police force of demand true? Why is the demand bend downward sloping from left to right? Why do people purchase more at lower prices and less at higher prices?
Equally social scientists, economists try to explicate human behavior. It is mutual sense that people acquit this way - but how can nosotros explain it? Economists have three explanations:
- diminishing marginal utility
- income furnishings
- exchange effects
Diminishing Marginal Utility
We learned in the 5Es lesson that equity helps reduce scarcity because of the law of diminishing marginal utility. This economic principle also explains why the need curve is downward sloping.
Utility is the reason we consume a good or service. Y'all might call information technology satisfaction. I get satisfaction (utility) when I drive my boat. I get utility (satisfaction?) when I go to the dentist. "Marginal" means EXTRA or ADDITIONAL. And then, co-ordinate to the police force of diminishing marginal utility, the Extra (not the total) utility diminishes for each boosted unit of measurement consumed. If nosotros are receiving less extra utility when nosotros purchase ane more of a product, we won't exist willing to pay the same toll. After all, it is the marginal utility that nosotros are paying for.
The start piece of pizza that I swallow I really bask. Information technology gives me a lot of utility. But after a few pieces, I don't get equally much additional satisfaction from one more piece as I did from the first slice. So, I will only buy a second piece if information technology has a lower price, since I am getting less additional utility from the 2d piece. this explains why we buy more when the toll goes down and why we purchase less when the price goes up. It explains the constabulary of demand.
Income Effects
Another explanation of why the police force of need explains human being behavior is "income furnishings".
If the toll of price of pizza decreases what happens to your income?
(NOTE: the "
" means "causes".)
? Nothing happens to your income when the toll of pizza decreases? (Do you get a raise when Pizza Hut has a sale?), Merely your REAL income (or the purchasing ability of your income will increase.
And so, when pizza prices decrease your real income increases. (This is like the cost of pizza staying the aforementioned but you go a heighten.) The outcome is that we purchase more pizza (The quantity of pizza demanded increases when the price decreases.) this explains why the law of demand is true.
Substitution Effects
The third caption of the law of demand is "substitution effects".
? If the price of pizza decreases what happens to the toll of Chinese food at the restaurant down the street? Probably nothing. (I know that the Chinese restaurant where My wife and I eat does non modify their prices when Pizza Hut has a auction.) But the RELATIVE price of Chinese nutrient does increase
Now, as my wife and I drive past Pizza Hut on our way to the Chinese eating place and we see that Pizza Hut has a auction (
price of pizza) we commencement to think that the Chinese food seems more expensive compared to the now cheaper pizza (
Marketplace Demand
Definition:
Market demand is the horizontal summation of the individual demand curves. Or, instead of just my individual demand for a product what if there were two people, or more than, in the marketplace. the consequence would be tat for each price, the quantities demanded would exist greater since there are more than people. The prices stay the same, but the quantities get larger, or the need graph shifts horizontally (to the right).
Graphically:
Sample Problem:
Given the following individuals' demand schedules for product X, and assuming these are the only three consumers of 10, which set up of prices and output levels below volition be on the market demand bend for this product?
ANSWER
Determinants of Need
The price of the product
Economists stress the importance of cost in determining how much people will buy. That is why they put cost on the demand graph, but at that place are other things that affect how much of a product nosotros buy besides the price. When we adult my demand curve for pizza we employed the ceteris paribus assumption. I didn't go a large increase in my income. I didn't win the lottery. There wasn't a new study out that stated pizzas cause cancer. All other factors remained the same - only the cost and quantity demanded inverse.Simply there are other determinants of how much we need (or buy) besides the price. We call these the Non-Price determinants of Need.
The not-cost determinants of demand
Let's non talk about pizzas anymore and use a new product in our examples. - - - How about vodka? We know that when the price of vodka goes up we buy less and when the price goes downwardly we buy more (this is the police of demand). Simply what else might cause us to buy more vodka besides the price? In other words, IF THE PRICE OF VODKA STAYED THE SAME, what might cause the states to buy more or less vodka?Economists classify the non-cost determinants of demand into v groups:
- expected price (Pe)
- toll of other appurtenances (Pog)
- income (I or Y) (In Macroeconomics "I" usually stands for "investment" and "Y" stands for "income".)
- number of POTENTIAL consumers (Npot), and
- tastes and preferences (T).
Permit's briefly look at each one here and in more item later.
Pe - If nosotros hear that there will be a new $5 tax on a bottle of vodka commencement next calendar week, what happens to the amount of vodka sold this week at the current price? It probably increases since some people will purchase more now to avoid the higher time to come prices.
Pog - What happens to the amount of vodka sold if the price of gin increases? Might not some people who were going to purchase gin buy vodka instead since the price of gin went up? Or what might happen to vodka sales if the price of tomato juice goes downwardly? perchance now with the cheaper love apple juice prices some people might desire to drinkable more bloody marys (vodka mixed with tomato juice)? If so, vodka sales would go upward.
Y (or I) - If I become a raise and my income increases I might buy more vodka - or if my income goes downwards I would probably buy less vodka. (And if I lost my chore I might purchase a lot of vodka :-)
Npot - What would happen to vodka sales if they lowered the drinking age. This would increase the number of potential vodka consumers and they would probably sell more vodka.
Finally T - Tastes and preferences actually means "everything else". There are hundreds of factors that touch the quantity of vodka sold. We don't want to memorize hundreds of different determinants for each product, and then economists group everything else into "tastes and preferences". Anything that might make consumers want more than or less vodka will change the quantity sold. For example, if a new study says that drinking vodka causes incomprehension - people will buy less. Right before a holiday people may buy more.
In lodge to remember these determinants of need, recall of somebody who has had besides much vodka to drink and they come staggering into a liquor shop enervating, "G-chiliad-give m-me an-due north-n-nother p-p-p-pint of v-v-vodka".
Get it? "p-p-p-pint " or P, P, P, I, Due north, T or Px, Pe, Pog, I, Npot, T
In guild to salve me fourth dimension in typing, I volition type "P, P, I, Due north, T" instead of "the not-price determinants of demand".
Ii Kinds of Changes Involving Need
If the toll of a product increases what happens to demand for that product? For example, If the toll of pizza increases, then the demand for pizza does what? NOTHING, demand does non modify when the price changes, but the quantity demanded does change. This department will help u.s. to meliorate understand the departure between a change in quantity demanded ( 
Change in Quantity Demanded (
A change in quantity demanded caused ONLY past a change in the PRICE of the production. On a graph it is represented past a movement ALONG a SINGLE need curve.
And so if the toll of pizza increase from $6 to $nine we will get an subtract in quantity demanded ( 
Alter in Demand (
When at that place is a change in demand itself we get a new demand schedule and curve. Nosotros have to change the numbers in the demand schedule and this volition SHIFT the demand curve.
If at that place is an increment in demand (
When we say that the demand curves shift to the right, it means that we have to change the numbers on the demand schedule. For the same prices, the quantities increase. This shifts the curve to the RIGHT.
A decrease in need will then shift the demand curve to the LEFT. For each price on the need schedule, the quantities decrease.
Be sure to draw your arrows to the RIGHT and LEFT. Many students want to draw the arrows perpendicular to the demand curve. Don't do this. Ever describe your arrows horizontally because this indicates the the prices are the aforementioned, and only the quantities change.
A alter in demand is caused by a CHANGE in the non-price determinants of demand:
Pe, Pog, I, Npot, T If these change we get a new need schedule and curve. To sympathize why prices are what they are, and why they change, we need to understand very well how these determinants motility the demand bend. This is where information technology all begins. In our definition of need we held these things constant (ceteris paribus), just in the real earth these things do change, changing demand, and ultimately changing prices. And so let's await at each determinant individually to understand how they each affect need.
If you expect the price to get upward in the future demand today will increment (shift to the correct). For example, if nosotros read that there will be a new revenue enhancement on vodka starting next week, people will desire to buy more now before the price increases. Retailers empathise this. How often have you heard "Sale ENDS Mon"? They want you to expect the price to increase in the future then you'll buy information technology today.
The opposite happens when you expect the price to become downwardly in the futurity. In the past when my wife and I were shopping whenever I put something in the cart, she would take it out and put information technology back on the shelf! I'd ask, "why are you doing that?". She would say that she expected it to go on auction presently and we should look until it does. If yous expect the price to go downwardly in the hereafter demand today decreases. (f ¯Pe in the future Þ ¯D today). But, whenever I put something in the cart, she would take it out proverb that she expects it to go on sale before long. After awhile I got a piddling upset, when I'd ask her about the items she put in the cart and she'd say that they were on auction last week and we missed it. Finally, I went to talk to the store manager and explained the situation to him. He saved our marriage past explaining that near concatenation store take a policy stating that if an item goes on sale later on you lot have purchased information technology, you can bring in the receipt inside 30 days and get a refund. Retailers sympathise how price expectations affect demand.
The result of a change in the cost of other goods on demand depends on what type of other goods we are talking about. There are three types:i) substitute goods
Substitute goods are goods where if y'all purchase more of one, you purchase less of the other ane. Examples of substitutes include vodka and gin, hot dogs and hamburgers, chicken and beef, Coca-Cola and Pepsi.
Let'due south look at Coke and Pepsi. If the toll of Coke increases it will increase the need for Pepsi (the graph shifts to the correct).I f you are going to buy a can of Coke, you may walk right past the Pepsi automobile, merely when you notice that the price of Coke has increased, you'll probably plow around and buy the Pepsi. You weren't going to buy Pepsi before, but now, at the aforementioned price, y'all are willing to buy it. So the demand for Pepsi has increased. The demand bend has shifted to the right. At the same prices, the quantities demanded are greater.
If the price of Coke increases, what happens to the demand for Coke? - - - Zippo. Toll does not change demand (as nosotros accept defined it) merely information technology will change the quantity demanded.
Yous've seen a good example of this in your local grocery store. For case, I may desire to buy some coffee. So I go to the coffee aisle and grab a can of Folgers and continue down the aisle. But at the finish of the aisle I see a display of Maxwell Business firm coffee on sale! What do I do with the Folgers in my shopping cart? - - - - - No, I don't put information technology dorsum. I take it out of my cart and put it on the Maxwell House display. Oasis't you lot seen various brands mixed in with such displays? The demand for Folgers decreased (I no longer desire it at that price, so I take information technology out of my cart) considering the cost of Maxwell House decreased.
If:
two) complementary goods
Complementary goods are goods where if you buy more of one you also buy more of the other one. they go together like vodka and tomato juice, rum and Coke, pic and film developing, hot dogs and hot canis familiaris buns.
Allow'due south say that you want to eat hot dogs tonight and you go to your local grocery store and put a bag of buns in your cart and caput down the aisle to the wieners. When you get to the wiener display you notice that their price has increased significantly then you lot make up one's mind not to eat hot dogs. What are you lot going to practise with the buns? Yous should put them back, but if you are similar many people you'll put them in the wiener display and motion on quickly. Simply the point is, you were going to buy the buns at their nowadays price (they were already in your cart), but when you lot learned the cost of hot dogs increased your demand for buns decreased (the demand curve shifted to the left - at the same prices the quantities demanded decreased).
Of course, if the price of one product decreases (cheaper film developing), the need for its complement (film) increases.
three) independent appurtenances
Independent appurtenances are goods where if the price of ane changes, it has no effect on the demand for to other one. For case, what happens to the demand for paper clips if the price of surfboards increases? Nothing.
Summary (Pog):
1) normal goodsFor most goods, called normal goods, if consumer incomes increase, demand volition increase and vice versa.
So if incomes increase, the demand bend for restaurant meals, and cars, and boats, will shift to the right. At the aforementioned prices people volition buy more than.
2) junior appurtenances
For some appurtenances, called junior goods, if consumer incomes increase demand will decrease, and vice versa. If but you had more money, you would buy less of that production
The term "inferior proficient" does non mean they are of low quality. the definition of an inferior good is one where if your income increases, need decreases. There is an inverse relationship between income and demand.
Examples of junior goods might include used habiliment, potatoes, rice, perchance generic foods. If you lose your task (so your income decreases) y'all may shop for dress at the Salvation Regular army Austerity Store (need for used wearable increases).
What is a normal good for ane consumer might be an junior good for another. For example, if the income of i family increases they may buy a second small car (a normal proficient), but for another family, an increase in income may mean that they don't buy a pocket-sized car (an inferior practiced) anymore and they buy a mini van instead.
An increment in the number of potential consumers volition increase demand and vice versa.
Earlier we say that if they lowered the drinking historic period, the demand for vodka would increase.
Often economists say that an increment in the "number of consumers" volition increase need. I prefer to use the terminology "number of POTENTIAL consumers" considering if K-Mart has a auction on Pepsi (price of Pepsi decreases) what happens to need for Pepsi? -- Nothing (price does not change the demand schedule). But, if K-Mart has a auction on Pepsi (toll of Pepsi decreases) what happens to the number of consumers buying Pepsi? Information technology volition increase. (The law of demand says that if price goes downwardly, quantity demanded goes upwards.) Then, if they have more than customers because the price went down, what happens to need? Nothing - (price does not change the demand schedule).
Merely, if the number of POTENTIAL customers changes, demand will change.
Four circumstances tin change the number of potential consumers:
- population change
If a new housing development is built in the empty field backside a small store, the number of potential consumers increases, and need will increase.
- expanded marketing area
Coors beer used to sold only out Due west. President Ford used to have to have it flown in to the While Firm considering you couldn't buy it anyplace else. And so when Coors expanded to all states, demand increased considering at present in that location are more potential consumers.
- new competitor (changes the need curve facing and private shop, but NOT market demand curve)
If a new liquor shop moves in beyond the street from and existing store, the need for liquor of the existing store will subtract since at present there are fewer potential consumers since some of the consumers walking past the store volition have already bought something at the new store.
- change in eligible consumers (i.east. drinking age)
If they lower the drinking age at that place will be more potential vodka drinkers so need for vodka will increment.
There are hundreds of factors that bear upon the quantity of vodka sold. We don't want to memorize hundreds of different determinants for each product, and then economists group everything else into "tastes and preferences". Tastes and preferences really refers to "everything else". Anything that increases a consumer's preference for a product volition increment need for that product. This will include advertising and fads.
Supply
Introduction
Supply is more hard for students to understand than demand. We are all consumers (demanders), just few of us ain a concern (suppliers). And so, call back to think of yourself as a business possessor when we discuss supply.
Definition
Supply is a schedule which shows the diverse quantities businesses are willing and able to offering for sale at various prices in a given time period, ceteris paribus.
Supply is NOT the quantity available for sale. This is the way the term is often used in the popular press. Supply is the whole schedule with many prices and many quantities.
Just like with demand, there is a difference between a change in quantity supplied and a change in supply itself. So, if the price increases what happens to supply? The best WRONG answer would be "supply increases", but it doesn't. Cost does not change supply, it changes quantity supplied, considering supply means the whole schedule with various prices and various quantities.
Supply Schedule and Curve
Below is a hypothetical supply schedule for pizza.
If nosotros plot these points (think any betoken on a graph only represents 2 numbers) We get the graph below.
If we assume in that location are quantities and prices in-between those on the schedule we get a supply curve.
Police force of Supply
The law of supply states that there is a directly relationship between cost and quantity supplied. In other words, when the price increases the quantity supplied besides increases. This is represented by an up sloping line from left to right.
Why?
Why is the law of supply true? Why is the supply bend upward sloping? Why will businesses supply more pizzas only id the price is higher? I recall it is just mutual sense. If you desire the pizza places to work harder and longer and produce more than pizzas, y'all have to pay them more, per pizza. Simply economists, as social scientific discipline, want to explain common sense. We know businesses carry this way, but why?
There are two explanations for the law of supply and both take to do with increasing costs. Businesses crave a higher price per pizza to produce more pizzas because they accept higher costs per pizza. Why?
First, at that place are increasing costs because of the police of increasing costs. In a previous lecture nosotros explained that the production possibilities curve is concave to the origin because of the law of increasing costs. the law of increasing costs is true considering not all resources are identical. Let's say a pizza place is merely opening. The owner figures that they volition need five employees. After putting an advert in the newspaper there are 20 applicants. Five have had experience working in a pizza place before. They came to the interview clean and on time. The other 15 had no work experience. Many came late. A few were defenseless steeling pepperoni on the manner out. 1 spilled flour all over the floor. Which applicants will exist hired? Of course it volition be the 5 with experience and the other 15 will be rejected because they would be too costly to hire. NOW, if the pizza identify wants to produce more pizzas they will demand more workers. This ways they will have to hire some of those who were rejected because they were more costly (less experienced, etc.). So, they will simply hire the more than costly employees if they can get a college price to cover the higher costs. this is one caption why the supply curve is up sloping.
Second, at that place are increasing costs because some resources are fixed. This should not make sense to you. Why would there exist increasing costs if we utilize the aforementioned quantity of some resource? Well, let's say that the size of the kitchen and the number of ovens (uppercase resources) are fixed. This means that they don't change. Now, if nosotros want to produce more than pizzas you will accept to cram more workers into the same size kitchen. As they bump into each other and await for an oven to be free they withal get paid, but the cost per pizza increases. Therefore they will non produce more pizza unless they tin get a higher price to cover these college per unit costs. So the supply curve should be upward sloping.
Marketplace Supply
Market place supply is the horizontal summation of the individual supply curves. Instead of looking at how many pizzas one pizza identify is willing and able to produce at dissimilar prices (individual supply), we go along the prices the aforementioned and add the quantities of boosted pizza places. Prices stay the same, merely quantities increase considering there are more pizza suppliers. And then the market supply of pizzas is further to the correct (horizontal) than the private pizza place supply curves.
determinants of Supply
The cost of the product (
Economists stress the importance of price in determining how much will be produced. That is why they put price on the supply graph, just at that place are other things that impact how much of a product will exist produced too the cost. When we developed the supply bend for pizza we employed the ceteris paribus assumption. we assumed all other things stayed abiding. For case there were no new technological discoveries, the prices of resources stayed the same, or no change in taxes. All other factors remained the same - only the price and quantity supplied inverse.But there are other determinants of how much business supply besides the price. We telephone call these the Non-Price determinants of Supply.
The non-price determinants of Supply
Economists classify the not-price determinants of supply into 6 groups:a. Pe -- expected toll
b. Pog -- toll of other goods Also PRODUCED BY THE FIRM
c. Pres -- price of resources
d. T --technology
e. T --taxes and subsidies
f. Due north -- number of producers/sellers
Two Kinds of Changes Involving Supply
Change in Quantity Supplied (
A change in Quantity supplied caused But by a alter in the Toll of the product. It is represented by a movement ALONG a SINGLE supply curve.
Change in Supply (
A change in supply is a shifting the supply curve because at that place is a new supply schedule. The supply curve either moves left or correct (horizontally) since the prices stay the aforementioned and only the quantities change and quantity is on the horizontal axis. Exist certain to depict your arrows to the RIGHT and LEFT. Many students want to draw the arrows perpendicular to the supply bend. Don't do this. Always describe your arrows horizontally because this indicates the the prices are the same, and only the quantities change. As well, if you draw you arrows perpendicular to the supply curve and arrow pointing UP volition point a DECREASE in supply. That could get confusing!
A change in supply is caused by a change in the not-cost determinants of supply. these are the factors that we assumed were constant when nosotros used the ceteris paribus assumption to develop the supply curve.
Increase in Supply
If at that place is an increase in supply (
Decrease in Supply
If there is an decrease in supply (
Changes in supply are acquired by a Modify in the non-toll determinants of supply
Let'due south expect at these determinants on at a time. We must know how they shift the supply curve if we are to use the supply and demand tool to sympathize how prices are determined in a market economy.
If a business concern expects that they can become a higher price in the future, what will happen to supply today? They volition be less willing to sell in that location products today because they volition know that if they waited they could get a higher toll so supply today would decrease, shift to the left. (Remember, supply is not the quantity available for sale.)Permit'south say that you want to sell you machine, somebody offers you $1500 today, and y'all accept information technology. You are willing to sell your machine for $1500 today. And so, somebody says that they will dive you $2000 for your car if y'all could await iii days. At present you expect that you can get a higher price ($2000) in the future, so you will probably no longer want to sell your car for $1500 today.
Beginning, recollect of a business that produces 2 products, like farmers who can either grow corn or soybeans. And so the cost of one increases, what happens to the supply of the other one.And so if the price of soybeans increases, what happens to the supply of corn?
If the cost of soybeans increases the supply of corn will decrease. The supply curve of corn will shift to the left as farmers constitute more soybeans and less corn.
If the toll of soybeans increases, what happens to the supply of soybeans?
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Nada. Remember, price does not change supply, information technology changes the quantity supplied. and so if the price of soybeans increases, nosotros would get an increase in the quantity supplied (same supply bend, higher quantity).
The price of resource (
If the price of a resource used to produce the product increases, this volition increment the costs of product and the producer volition no longer exist willing to offer the same quantity at the same price. They will want a college price to cover the higher costs. This shifts the supply curve to the left (For Example: if the autoworkers unions receives a significant wage increase, this will increase the costs of producing cars and subtract the supply of cars (
Does improved engineering increase or decrease the costs of producing a product?Improved technology DECREASES costs and therefore increases supply. If the technology did not decrease costs, then it wouldn't be used. If there is a loftier-tech expensive way to produce a production and a low-cost, low-tech, way to produce the same production, companies that apply the low-cost methods will be able to sell the production at a lower price and beat out the loftier-toll producers.
Improved technology
What has improved technology washed to the costs of medical care? Improved medical technology has INCREASED the price of medical intendance BUT information technology has besides changed the event. For instance allow's say that there is a illness where with existing depression-cost technology, half the patients die. Now, if they invent a new high-cost applied science that will save all lives which technology will be used? Of course the new high-cost engineering volition be used, Just THE Product HAS Inverse. One product is when half the patients die, the other product is when all patients live. We can't put two products on one supply curve.
Let's utilise ane more than medical case. Why do doctors nevertheless employ low-tech stethoscopes? they were using like stethoscopes a hundred years agone. Isn't hither a high-tech electronic stethoscope? Aye in that location is, so why don't doctors use information technology? Because it is more than expensive AND Information technology GIVES THE SAME RESULTS. Doctors volition employ the cheaper technology as long as the results are the same. just obstetricians do use the more expensive loftier-tech stethoscope because it gives them better results. The depression-tech stethoscopes tin can't e'er pick out the fetal heart crush. the newer high-tech and higher-cost electronic stethoscopes can. The product changes.
So, improved engineering will subtract costs and increase supply OR it will increase costs and change the production which nosotros cannot put on one graph.
Hither we will hash out excise taxes. Excise taxes are a "per-unit" tax imposed on the product or sale of a product. Examples include the gasoline tax (so much per gallon), the cigarette revenue enhancement (and so much per pack) and the liquor tax (so much per bottle).Let's discuss the gasoline revenue enhancement. If the tax on gasoline increases volition this affect the demand for gasoline or the supply of gasoline? If yous said need - then which non-price determinant of need has changed? remember price does not change need.
If the taxation on gasoline increases, this will raise the cost of SELLING gasoline, and DECREASE SUPPLY.
Who pays the gasoline tax? Who pays the wages of the gas station employees? Whether you answer the consumer of the gas station possessor, yous accept to give the aforementioned answer for both questions. Both taxes and wages are costs to the producer or seller. Higher gasoline taxes exercise not shift the demand bend, but they may event in a higher price and therefore a subtract in quantity demanded.
Subsidies are the contrary of taxes. Instead of the business paying the regime, the government pays the business. There are fewer subsidies than taxes. But permit's say the the regime wants to encourage the use of solar energy so they put a subsidy (or increase one) on solar energy equipment. this volition decrease the costs of producing or selling the equipment because when they produce or sell i they get a refund (subsidy) from the government.
An increment in the number of producers of a production will increase supply of that product. If the number of computer manufacturers increases, the supply of computers will increase (shift to the right).
Market Equilibrium -- Equilibrium Toll and Quantity
Now nosotros are ready to discuss PRICES. At the peak of this online lecture I said:
"In a capitalist order prices are determined by the interaction of need and supply. Since prices are and then important, we need to better empathize how they are adamant. why is the price of gasoline $1.59 a gallon. Why does a processed bar toll $0.75? Why is the price of plywood normally $ten a sheet, but $30 a sheet after a hurricane?"
Market Equilibrium
Equilibrium means that there is no further tendency to alter. When something is at equilibrium, it is at rest, not changing. Like a pendulum. when it is swinging, it is irresolute. We call this disequilibrium. Eventually, information technology volition cease swinging and attain equilibrium.
Prices practice something like. They motion toward an equilibrium where they come up to rest and don't modify. Simply merely like yous can push a pendulum and crusade it to swing and and so wearisome down and reach equilibrium again, prices can be "pushed" and they volition change to a new equilibrium. It is the not-price determinants of demand and supply that "push" prices to a new equilibrium. Nosotros call this "market equilibrium".
The equilibrium cost is the toll where the quantity demanded equals the quantity supplied.
Sometimes I hear people say that equilibrium is where demand equals supply. It is impossible for the whole need curve to exist the same equally the whole supply curve (Not: D = S), simply in that location is i price where the quantity demanded equals the quantity supplied.
Market Disequilibrium
Why will the price of pizzas be $ix? Well, let'southward accept a look at what happens if the price is not at equilibrium.
If the price is $12, the quantity demanded is 2000 (Qd = 2000) and the quantity that businesses are willing to supply is 4000 (Qs = 4000). The result will be a surplus of 2000 pizzas (4000 - 2000 = 2000). If there is a surplus (more available than consumers are willing to purchase) the price will change - decrease. Twelve dollars is non equilibrium - information technology will change.
Meet graph.
If the price is $6, the quantity demanded is 5000 (Qd = 5000) and the quantity that businesses are willing to supply is 2000 (Qs = 2000). The issue will be a shortage of 3000 pizzas (5000 - 2000 = 3000). If in that location is a shortage (consumers are willing to buy more is available) the cost will modify - increase. Six dollars is not equilibrium - it will change.
See graph.
Changes in Need AND Supply
Now that nosotros can find equilibrium AND we know what causes supply or demand to change, allow's see what happens to the equilibrium price and quantity if supply and/or demand changes. After nosotros do this, we will put it all together. It all begins with a alter in 1 of the eleven non-cost determinants:
DEMAND:
SUPPLY:
so you must know how they affect the graphs. Nosotros discussed this above and volition review it over again before long. Here, let'southward just concentrate on what happens to price and quantity if demand and/or supply changes.
Case i: D changes and supply stays the same
If demand increases (shifts to the right) what effect will this take on Cost and QUANTITY. Be sure to Draw THE GRAPHS. You can probably guess what will happen to price and quantity and get it correct quite often, but why guess when you can describe the graphs and become information technology right near all the fourth dimension? BE Sure TO DRAW THE GRAPHS!
Then, if demand increases and supply stays the aforementioned you become (run across graph):
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| Demand increases:
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If need decreases (shifts to the left) and supply stays the same you go (see graph):
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| Demand decreases:
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This is quite easy, but the primal to agreement this are the not-price determinants of supply and need. Nosotros volition review them soon.
Case 2: S changes and need stays the aforementioned
If supply increases (shifts to the right) what effect will this have on Cost and QUANTITY. Exist sure to Depict THE GRAPHS. You can probably approximate what will happen to cost and quantity and become it correct quite often, but why guess when you tin draw the graphs and go it right almost all the time? Exist SURE TO DRAW THE GRAPHS!
So, if supply increases and demand stays the same you get (see graph):
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| Supply increases:
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If supply decreases (shifts to the left) and demand stays the aforementioned yous get (see graph):
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| Supply decreases:
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Example 3: D and S both change
What if BOTH supply and demand modify at the same time? This means what happens to cost and quantity if a not-toll determinant and supply AND a non-price determinant of demand alter shifting the graphs at the same time?
ane. S increases, D decreases
DON'T LOOK!!!Graph it right now and determine what would happen to price and quantity if supply increases and demand decreases.
In a face-to-face class I would accept my students do this themselves and tell me what happens to P and Q. So permit'southward do information technology in this distance learning grade.
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What do you get? What happens to price and quantity if supply increases (shifts to the right) and need decreases (shifts to the left)?
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If supply increases and demand decreases:
- price decreases
- quantity is INdeterminant
The cost will decrease, but nosotros cannot tell what happens to quantity. Quantity could increase, it could decrease or it could stay the same. What happens to quantity depends on how much the supply and demand curves shift and since we were not told this, we cannot determine what happens to quantity. Quantity is indeterminant.
Run into the graph below where nosotros can run across that if demand decreases a little (D2) then the equilibrium quantity will increment, but if the demand curve decreases a lot (D4) the equilibrium quantity will decrease.
2. South decreases, D increases
What happens to price and quantity if supply decrease and need increases?GRAPH IT!
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If supply decreases and need increases:
- price increases
- quantity is indeterminant
The price will increase, but we cannot tell what happens to quantity. Quantity could increase, it could decrease or it could stay the aforementioned. What happens to quantity depends on how much the supply and demand curves shift and since we were non told this, we cannot decide what happens to quantity. Quantity is indeterminant. Effort graphing different shifts in D and S and run across what happens to quantity.
3. S increases, D increases
What happens to price and quantity if both supply and need increase (shift to the right)?GRAPH IT before scrolling (or looking) lower on this page.
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If supply increases and need increases:
- quantity increases
- price is INdeterminant
The quantity volition increment, simply we cannot tell what happens to price. The price could increase, it could decrease or information technology could stay the same. What happens to the toll depends on how much the supply and need curves shift and since we were not told this, we cannot decide what happens to price. Cost is indeterminant.
Meet the graph beneath where we tin run across that if supply increases a fiddling (S1) then the equilibrium toll will increase, simply if the supply curve increases a lot (S3) the equilibrium price will subtract.
4. S decreases, D decreases
What happens to cost and quantity if supply decrease and need increases?GRAPH It!
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If supply decreases and demand decreases:
- quantity decreases
- price is indeterminant
The quantity will decrease, but we cannot tell what happens to price. price could increase, it could subtract, or it could stay the same. What happens to price depends on how much the supply and demand curves shift and since we were non told this, we cannot determine what happens to toll. Toll is indeterminant. Endeavour graphing different shifts in D and S and see what happens to price.
Using Supply and Demand
Now let'southward put it all together. We can use our supply and demand model to empathize why prices modify. It all begins with the not-price determinants of demand (
Nosotros will use supply and demand curves to illustrate how changes in these non-price determinants will affect the price and quantity of a product, ceteris paribus. Before you gauge, answer the following questions:
(1) Which determinant has inverse?
(ii) Will it touch on supply or demand?
(3) Will supply or demand increase or decrease?
(4) GRAPH IT! What happens to cost and quantity?
EXAMPLE 1
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Our goal is to sympathize what happens to PRICE and QUANTITY, but don't just judge. If y'all do just think about it and try to figure it out in your head, you lot'll probably get it right a lot of the time. But wouldn't you rather get it right nearly, or all, of the time? We now have a tool (supply and demand) that we can use to improve understand changes in price and quantity. So use the tool. Once you get used to it you'll come across its benefits.
Answer the four questions and the graph (tool) will requite you the answer.
(ane) Which determinant has inverse?Sometimes this is obvious. In this example it is income.(2) Volition it affect supply or need?
Income is a determinant of DEMAND. But at other times this is more difficult. For example Pe and Pog are determinants of BOTH demand and supply.(3) Will supply or need increase or subtract?
This is the key to using the tool correctly. Nosotros discussed above how the not-price determinants shift the curves. Computers are normal goods. This ways that if incomes increase, demand for computers will increase.(4) Finally, GRAPH IT! the graph will tell you what happens to cost and quantity. See graph below.
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Respond: And so if consumer incomes increase, ceteris paribus, the price of computers volition increase and consumers will buy more.
Instance 2
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(1) Which determinant has changed?Technology(2) Will it affect supply or need?
SUPPLY(3) Will supply or demand increase or subtract?
SUPPLY Volition Increment (shift to the right)(four) GRAPH IT! What happens to price and quantity?
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Instance 3
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If the graph above is for Nintendo 64 Video Game Systems, what will happen to the price and quantity if at that place is a decrease in the price of personal computers?
(one) Which determinant has inverse?Pog - the product on the graph is Nintendo Video Game Systems and the price of another product, computers, has changed(2) Will it affect supply or need?
The non-price determinant, Pog, is a determinant for both supply and need. With supply we said it refers to the price of other good PRODUCED By THE Same FIRM. Does Nintendo also produce computers? NO.With need, Pog refers to the cost of substitute and the price of complements. Are video game systems and habitation computers substitutes or compliments? About people would say they are substitutes. If y'all buy a new dwelling computer, you can play games on the calculator and perchance you won't buy a new video game organization.
So, if there is a decrease in the price of personal computers, Need FOR VIDEO GAME SYSTEMS WILL CHANGE.
(three) Volition supply or need increase or decrease?
if there is a subtract in the price of personal computers, DEMAND FOR VIDEO GAME SYSTEMS WILL Subtract (shift to the left).(4) GRAPH Information technology! What happens to price and quantity?
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More than EXAMPLES:
For REVIEW exercises click HERE
"Existent World" Examples
In the "real world" the determinants are non as like shooting fish in a barrel to pick out. The tool still works, but it takes a fiddling more than practice.
If you lot read a newspaper or Internet news article about a product whose cost and/or quantity has inverse, you can utilize supply and need to analyze WHY the toll and/or quantity has changed. Nosotros know that changes in the non-price determinants of demand and supply crusade prices and quantities to change. So, to understand why, we have to look for the non-price determinants in the commodity.
REAL-World Case i
Below is a portion of an commodity from CNNFN.COM
Read the article looking for the crusade of the price change and so use our supply and demand graph to ILLUSTRATE what has happened. This volition be similar to the extra credit question that you will have on exam ane.
Call back to use our tool correctly:
(1) Which determinants accept changed?
(2) Will they impact supply, demand, or both?
(3) Volition supply or demand increment or decrease?
(4) GRAPH IT! And so show what happens to price and quantity?
Pinnacle PC makers cutting prices
Compaq clears out old models; Dell passes on lower component costs
Feb 1, 2000: ii:44 p.m. ET
NEW YORK (CNNfn) - Two of the globe's largest computer makers on Tuesday announced that they take cutting prices on their commercial desktop PCs.
Compaq, the No. 1 PC maker, said information technology cutting prices upwards to xiii per centum on most of its Deskpro serial commercial PCs. The price cuts are being made to articulate the manner for ix new Deskpro models. . . . . . . . . . . . . . . .Dell ( DELL : Enquiry , Estimates ), the world's second largest supplier of PCs, said it was cutting prices because the cost of the components it uses to make them have likewise dropped.
Effective Monday, a Dell Precision WorkStation 210 with a Pentium 3 processor running at 650 million cycles per second volition sell for $1,740, a 17.one percent reduction, the visitor said. Dell as well said information technology cut prices on the mid-range models in its Precision WorkStation 410 line past up to 15.5 pct.
(1) Which determinants accept inverse?
The article says " Dell ( DELL : Research , Estimates ), the world'due south 2nd largest supplier of PCs, said it was cut prices because the cost of the components information technology uses to brand them have likewise dropped." This indicates the there has been a alter in the price of resources ((2) Volition they affect supply, demand, or both?
SUPPLY(3) Will supply or demand increase or decrease?
SUPPLY Volition INCREASE (shift to the right)(4) GRAPH It! Then evidence what happens to toll and quantity?
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Existent-WORLD EXAMPLE 2
Below is a portion of an article from CNNFN.COM
http://cgi.cnnfn.com/output/pfv/2000/02/01/companies/pcs_prices/
Read the article looking for the cause of the toll change then utilise our supply and demand graph to ILLUSTRATE what has happened. This will be similar to the extra credit question that you volition have on exam i.
Remember to use our tool correctly:
(1) Which determinants accept changed?
(2) Will they affect supply, demand, or both?
(3) Volition supply or demand increase or subtract?
(4) GRAPH IT! Then show what happens to toll and quantity?
Air customers to pay for fuel
With demand for seats nevertheless strong, almost carriers denote fuel surcharges
Past Staff Writer Chris Isidore
January 21, 2000: 3:54 p.m. ET
NEW YORK (CNNfn) - Airlines are finding a source of relief for oil price shocks they've rarely tapped earlier: their passengers.
With oil prices hit a post-Gulf War high Fri, three more carriers - US Airways, America West and Trans Earth Airlines - announced surcharges, charging customers $20 per round-trip ticket on nearly all domestic flights.
That meant that eight of the 9 largest carriers in the country now had the charges, with just No. 7 Southwest Airlines ( LUV ), the Dallas-based disbelieve carrier, belongings off at this fourth dimension.
Demand for seats opens door
The surcharge is unique in its acceptance by the typically cutthroat airline industry, and is a sign that need for air travel remains strong.
The Air Transport Association report that 71.3 percent of its members' seats were filled last year, the best rate in the history of rider jet travel.
With demand remaining strong despite the spike, airlines are in a better position to seek college fares.
"In the past, when we had the tremendous run upwardly in fuel, we likewise had a recession," said David Swierenga, the ATA's chief economist. "Those 2 things together clobbered the industry. Now the economy is moving ahead , and carriers volition have a picayune more flexibility on the pricing side.". . . . . . . . .
Respond: I have highlighted in cherry the important parts of this article. Let'south analyze each one.
"With oil prices hitting a post-Gulf War high Friday, three more than carriers - US Airways, America West and Trans World Airlines - announced surcharges, charging customers $twenty per circular-trip ticket on virtually all domestic flights."
(1) Which determinant has changed?Price OF Resource. Oil (fuel) is a resource used by the airline industry(2) Will they affect supply or need?
SUPPLY(iii) Will supply or demand increase or subtract?
SUPPLY Volition Decrease (shift to the left)(4) GRAPH IT! Then prove what happens to price and quantity?
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The article also says:
" The surcharge is unique in its acceptance by the typically cutthroat airline industry, and is a sign that demand for air travel remains strong. " AND "Now the economy is moving ahead".
(1) Which determinant has changed?INCOME ("The economic system is moving ahead" means incomes are ascension.)(ii) Volition they touch on supply or need?
Demand(three) Will supply or need increase or decrease?
Demand WILL INCREASE (bold air travel is a normal good)(4) GRAPH Information technology! And so prove what happens to price and quantity?
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At present Let'Due south PUT BOTH CHANGES ON THE SAME GRAPH. You must do this to bear witness the overall consequence of all changes. We have a decrease in supply caused past higher resource prices and an increase in demand caused by higher incomes,
The upshot is higher prices (see graph) and the quantity stays about the aforementioned as the article states (therefore I shifted the curves the same amount).
Other manufactures that you can clarify yourself:
- http://cnn.com/US/9907/27/gas.prices/
- http://cnnfn.com/2000/01/21/companies/airfuel/
- http://cnn.com/US/9908/09/rv.boom/
ANSWERS
Marketplace Supply: correct answer "B" [Return]
Source: http://www2.harpercollege.edu/mhealy/eco212i/lectures/s&d/s&d.htm
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