What Will Your Preference Diagram Look Like For A Triangular Cake? Volume
Demand and Supply:
How Prices are adamant in a Market place Economy
How Prices are adamant in a Market place Economy
REVIEW: For review exercises click HERE
Introduction
Structural Adjustment Policies
In our introductory lecture on Structural Aligning we discussed various policies that countries are adopting all around the give-and-take to promote economical growth (increasing output rather than increasing their ability) and accomplish productive and allocative efficiency. It is hoped that as economies motility away from command economies (Chapter 23) toward mzrket economies or commercialism (chapter 4).
These policies are:
1. Privatization
2. Promotion of Competition
3. Limited and Reoriented Function for Authorities
4. Price Reform: Removing Controls
5. Joining the World Economy
six. Macroeconomic Stability
Even though the concepts of SUPPLY and DEMAND are microeconomic concepts, they are reviewed in this macroeconomics course because non all students have taken micro (ECO 211) and they are fundamental principles that all economic student should main. We volition study supply and demand in this "Macroeconomics of the Gloabal Econaomy" course to better understand why there is a worldwide motility to remove price controls and let Supply and Need determine prices.
In a capitalist economy, prices are very important. They have two fundamental functions:
- they RATION goods and services, and
- the GUIDE resource to where they are wanted nigh
By doing this they help the economic system maintain allocative efficiency and productive efficiency.
In the 5Es lesson on allocative efficiency we discussed that it was adept for the price of plywood to increase in Florida after a hurricane. When the cost increased two things happened: (one) plywood was rationed to its most important uses (not doghouses or decks), and (two) the high prices were an incentive for more than plywood to be guided to Florida so that they had more than plywood. If the toll of plywood was kept too low the consequence 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 as producing at a minimum price. In order to minimize costs, producers must know the prices of the resources. If these resource prices are determined past demand and supply so they volition reflect the relative scarcity of the resources and their relative importance (more scarce and important resources will have a higher price) and the economic system can reach productive efficiency.
In a backer society prices are determined past the interaction of demand and supply. Since prices are then important, we need to meliorate empathize how they are determined. why is the price of gasoline $i.59 a gallon. Why does a candy bar cost $0.75? Why is the price of plywood normally $10 a sheet, but $30 a sheet after a hurricane?
Demand
If the toll of a product increases what happens to demand for that product? For example, If the price of pizza increases, then the demand for pizza does what?
-
-
-
-
-
-
-
NOTHING! If the toll of pizza increases, the demand for pizza does not modify. This is because in economics we have a more precise definition of demand. Demand is NOT the quantity that people purchase.
DEFINITION: And then what is demand?
Demand is a schedule that shows the various quantities that consumers are willing and able to purchase at various prices in a given time period, ceteris paribus. We should look more closely at this definition.
Demand is a table of numbers. Expect at the table below. The whole table might represent my demand for pizza.
Demand Schedule and Curve
Every bit we learned in a previous lesson, any point on a graph represents ii numbers, and then nosotros tin can plot our demand table equally in the graph below.
If we assume that there are quantities and prices in-betwixt those in the table (for instance if the price was $iv.l how many pizzas would I buy?) nosotros tin can connect the points and we get the need curve (graph).
This is my demand for pizza. This demand curve does NOT tell us what the toll will exist. To know what the price will be we need both demand and supply.
But we tin can encounter what happens to demand if the price of pizzas increases. If the price of pizza increases, say from $6 to $9, nothing on the tabular array changes (demand does not change) because demand already includes various prices and various quantities. Demand (the table or the graph) does not alter when the price changes because demand INCLUDES various prices and various quantities. Demand is NOT how much we buy.
Note that our definition of demand includes the ceteris paribus assumption. When we develop a demand bend merely the price and quantity demanded change. Everything else is assumed to remain constant. I don't become a big increase in my income. I don't win the lottery. In that location isn't a new study out that states pizzas cause cancer. All other factors remain the same - but the toll and quantity demanded alter.
Constabulary of Need
As we can encounter on the demand graph, at that place is an inverse relationship between price and quantity demanded. Economists call this the Law of Demand. If the price goes up, the quantity demanded goes down (but need itself stays the same). If the price decreases, quantity demanded increases. This is the Law of Demand. On a graph, an inverse relationship is represented by a down sloping line from left to right.
Why?
Why is the law of demand truthful? Why is the need curve downward sloping from left to right? Why exercise people buy more than at lower prices and less at higher prices?
As social scientists, economists try to explain human behavior. It is common sense that people behave this way - only how can we explain it? Economists accept 3 explanations:
- diminishing marginal utility
- income effects
- substitution effects
Diminishing Marginal Utility
We learned in the 5Es lesson that equity helps reduce scarcity considering of the police of diminishing marginal utility. This economical principle besides explains why the need bend is downwards sloping.
Utility is the reason we consume a good or service. You might call it 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, according to the law of diminishing marginal utility, the Actress (non the full) utility diminishes for each additional unit consumed. If we are receiving less actress utility when we buy one more of a production, we won't be willing to pay the same price. Later all, it is the marginal utility that we are paying for.
The first piece of pizza that I consume I really savour. It gives me a lot of utility. Simply after a few pieces, I don't become as much additional satisfaction from one more than piece equally I did from the first piece. So, I will only buy a second piece if it has a lower price, since I am getting less additional utility from the 2d piece. this explains why we purchase more when the price goes down and why we buy less when the price goes up. It explains the police force of need.
Income Furnishings
Another explanation of why the law of need explains human behavior is "income effects".
If the price of price of pizza decreases what happens to your income?
(NOTE: the "
" means "causes".)
? Naught happens to your income when the price of pizza decreases? (Do you get a raise when Pizza Hut has a sale?), BUT your Real income (or the purchasing power of your income will increase.
And so, when pizza prices decrease your existent income increases. (This is like the price of pizza staying the same only you get a raise.) The result is that we buy more pizza (The quantity of pizza demanded increases when the price decreases.) this explains why the law of need is true.
Substitution Effects
The third explanation of the law of demand is "substitution effects".
? If the price of pizza decreases what happens to the toll of Chinese nutrient at the restaurant downward the street? Probably nix. (I know that the Chinese restaurant where My wife and I eat does not change their prices when Pizza Hut has a sale.) But the RELATIVE price of Chinese food does increment
Now, as my wife and I drive by Pizza Hut on our way to the Chinese restaurant and we see that Pizza Hut has a sale (
price of pizza) nosotros start to think that the Chinese nutrient 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 simply my individual demand for a product what if there were two people, or more, in the market. the result would be tat for each cost, the quantities demanded would exist greater since there are more people. The prices stay the same, merely the quantities get larger, or the need graph shifts horizontally (to the right).
Graphically:
Sample Problem:
Given the following individuals' demand schedules for product 10, and assuming these are the only three consumers of X, which ready of prices and output levels below volition be on the market demand curve for this production?
ANSWER
Determinants of Need
The price of the product
Economists stress the importance of price in determining how much people will buy. That is why they put price on the demand graph, but in that location are other things that affect how much of a product we purchase besides the price. When we developed my demand curve for pizza we employed the ceteris paribus assumption. I didn't get a large increase in my income. I didn't win the lottery. In that location wasn't a new written report out that stated pizzas cause cancer. All other factors remained the same - only the price and quantity demanded inverse.Simply in that location are other determinants of how much we demand (or buy) besides the price. We phone call these the Not-Toll determinants of Demand.
The not-price determinants of demand
Permit's non talk nearly pizzas anymore and use a new production in our examples. - - - How about vodka? We know that when the cost of vodka goes upwards we buy less and when the price goes down we buy more (this is the law of need). But what else might cause us to buy more than vodka besides the price? In other words, IF THE Toll OF VODKA STAYED THE Aforementioned, what might cause us to buy more than or less vodka?Economists classify the non-price determinants of demand into 5 groups:
- expected price (Pe)
- toll of other goods (Pog)
- income (I or Y) (In Macroeconomics "I" unremarkably stands for "investment" and "Y" stands for "income".)
- number of POTENTIAL consumers (Npot), and
- tastes and preferences (T).
Allow's briefly look at each one here and in more detail later.
Pe - If we hear that in that location will be a new $5 tax on a bottle of vodka beginning side by side calendar week, what happens to the amount of vodka sold this calendar week at the current price? It probably increases since some people will buy more than now to avoid the higher future prices.
Pog - What happens to the amount of vodka sold if the price of gin increases? Might non some people who were going to buy gin buy vodka instead since the cost of gin went upward? Or what might happen to vodka sales if the price of tomato plant juice goes down? maybe now with the cheaper lycopersicon esculentum juice prices some people might want to drink more bloody marys (vodka mixed with tomato plant juice)? If so, vodka sales would go up.
Y (or I) - If I get a raise and my income increases I might buy more vodka - or if my income goes down I would probably buy less vodka. (And if I lost my task I might buy 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 than vodka.
Finally T - Tastes and preferences really ways "everything else". In that location are hundreds of factors that affect the quantity of vodka sold. We don't desire to memorize hundreds of different determinants for each product, then economists group everything else into "tastes and preferences". Anything that might brand consumers want more or less vodka will change the quantity sold. For example, if a new study says that drinking vodka causes blindness - people will buy less. Right before a vacation people may buy more.
In order to remember these determinants of demand, think of somebody who has had too much vodka to drink and they come staggering into a liquor store demanding, "G-grand-requite m-me an-due north-n-nother p-p-p-pint of v-five-vodka".
Become it? "p-p-p-pint " or P, P, P, I, N, T or Px, Pe, Pog, I, Npot, T
In social club to save me time in typing, I will type "P, P, I, N, T" instead of "the non-cost determinants of demand".
Two Kinds of Changes Involving Demand
If the toll of a product increases what happens to demand for that product? For instance, If the cost of pizza increases, then the demand for pizza does what? Nothing, need does not change when the toll changes, only the quantity demanded does modify. This section will help us to ameliorate understand the difference between a modify in quantity demanded ( 
Change in Quantity Demanded (
A alter in quantity demanded caused ONLY by a change in the PRICE of the production. On a graph information technology is represented by a movement Forth a Single need curve.
So if the price of pizza increase from $6 to $nine we volition go an subtract in quantity demanded ( 
Change in Demand (
When there is a alter in need itself we go a new demand schedule and curve. We have to change the numbers in the demand schedule and this volition SHIFT the demand curve.
If there 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 subtract in demand will then shift the demand curve to the LEFT. For each toll on the demand schedule, the quantities decrease.
Exist sure to draw your arrows to the RIGHT and LEFT. Many students want to draw the arrows perpendicular to the need curve. Don't practice this. Always depict your arrows horizontally because this indicates the the prices are the same, and only the quantities change.
A modify in need is caused by a CHANGE in the not-cost determinants of need:
Pe, Pog, I, Npot, T If these change nosotros go a new demand schedule and curve. To understand why prices are what they are, and why they change, we need to sympathise very well how these determinants move the demand curve. This is where it all begins. In our definition of demand we held these things abiding (ceteris paribus), merely in the real world these things do change, changing demand, and ultimately changing prices. And so allow's wait at each determinant individually to sympathize how they each touch on demand.
If yous expect the price to go up in the futurity demand today will increase (shift to the correct). For case, if nosotros read that there volition exist a new tax on vodka starting next week, people will desire to buy more than now before the price increases. Retailers understand this. How often have you heard "Auction ENDS MONDAY"? They want you to expect the cost to increase in the futurity and so you'll purchase it today.
The opposite happens when you await the cost to go down in the future. In the past when my married woman and I were shopping whenever I put something in the cart, she would have it out and put it dorsum on the shelf! I'd inquire, "why are y'all doing that?". She would say that she expected it to proceed auction shortly and we should look until it does. If you lot expect the cost to go down in the future demand today decreases. (f ¯Pe in the future Þ ¯D today). Just, whenever I put something in the cart, she would have information technology out saying that she expects it to become on sale before long. Later on awhile I got a little upset, when I'd enquire her about the items she put in the cart and she'd say that they were on sale last week and nosotros missed it. Finally, I went to talk to the store director and explained the situation to him. He saved our marriage by explaining that most chain store have a policy stating that if an particular goes on sale after y'all have purchased it, you can bring in the receipt within 30 days and get a refund. Retailers sympathize how toll expectations affect demand.
The effect of a change in the price of other appurtenances on demand depends on what type of other goods we are talking nigh. At that place are three types:1) substitute goods
Substitute goods are goods where if you buy more of 1, you lot buy less of the other ane. Examples of substitutes include vodka and gin, hot dogs and hamburgers, chicken and beef, Coca-Cola and Pepsi.
Permit'due south await at Coke and Pepsi. If the cost of Coke increases it will increment the demand 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 machine, but when yous observe that the price of Coke has increased, you'll probably plough around and buy the Pepsi. Y'all weren't going to buy Pepsi before, only at present, at the same toll, you lot are willing to buy information technology. So the need for Pepsi has increased. The demand curve 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? - - - Zip. Price does not change demand (as nosotros have defined it) but it will change the quantity demanded.
You've seen a good example of this in your local grocery store. For example, I may desire to buy some java. Then I go to the coffee aisle and grab a tin of Folgers and continue downward the aisle. But at the end of the aisle I see a display of Maxwell House java on sale! What practice I do with the Folgers in my shopping cart? - - - - - No, I don't put it back. I take it out of my cart and put it on the Maxwell House display. Haven't you seen various brands mixed in with such displays? The need for Folgers decreased (I no longer desire it at that price, and then I accept it out of my cart) because the price of Maxwell Firm decreased.
If:
2) complementary goods
Complementary goods are appurtenances where if yous purchase more of one you also purchase more of the other one. they go together like vodka and love apple juice, rum and Coke, film and picture show developing, hot dogs and hot dog buns.
Allow's say that you want to swallow hot dogs tonight and you go to your local grocery store and put a pocketbook of buns in your cart and head down the alley to the wieners. When you get to the wiener brandish you detect that their price has increased significantly so yous decide not to eat hot dogs. What are you going to do with the buns? Y'all should put them dorsum, but if y'all are like many people you'll put them in the wiener brandish and move on quickly. But the point is, you were going to purchase the buns at their present price (they were already in your cart), but when y'all learned the price 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 class, if the price of one product decreases (cheaper film developing), the demand for its complement (film) increases.
iii) independent goods
Independent goods are appurtenances where if the price of i changes, it has no effect on the demand for to other one. For example, what happens to the demand for paper clips if the price of surfboards increases? Zilch.
Summary (Pog):
1) normal goodsFor most goods, called normal goods, if consumer incomes increase, demand will increase and vice versa.
Then if incomes increase, the need curve for restaurant meals, and cars, and boats, will shift to the right. At the same prices people will purchase more.
2) inferior goods
For some appurtenances, chosen inferior goods, if consumer incomes increase demand will subtract, and vice versa. If only yous had more than money, y'all would buy less of that production
The term "inferior good" does not mean they are of depression quality. the definition of an junior skillful is one where if your income increases, demand decreases. There is an inverse human relationship between income and need.
Examples of junior goods might include used article of clothing, potatoes, rice, peradventure generic foods. If you lose your job (and then your income decreases) you lot may shop for dress at the Salvation Ground forces Austerity Store (demand for used clothing increases).
What is a normal good for one consumer might be an inferior proficient for another. For example, if the income of ane family increases they may purchase a second modest car (a normal good), simply for another family, an increase in income may mean that they don't buy a small car (an junior proficient) anymore and they buy a mini van instead.
An increment in the number of potential consumers will increase demand and vice versa.
Earlier we say that if they lowered the drinking historic period, the need for vodka would increase.
Often economists say that an increment in the "number of consumers" will increase need. I prefer to utilize the terminology "number of POTENTIAL consumers" because if K-Mart has a sale on Pepsi (price of Pepsi decreases) what happens to need for Pepsi? -- Nothing (price does not change the demand schedule). But, if 1000-Mart has a sale on Pepsi (price of Pepsi decreases) what happens to the number of consumers buying Pepsi? It volition increase. (The law of demand says that if toll goes down, quantity demanded goes upwards.) So, if they have more customers because the price went down, what happens to need? Nothing - (price does non change the demand schedule).
But, if the number of POTENTIAL customers changes, demand will alter.
Four circumstances can change the number of potential consumers:
- population change
If a new housing development is built in the empty field behind a small store, the number of potential consumers increases, and demand volition increase.
- expanded marketing area
Coors beer used to sold merely out West. President Ford used to have to accept it flown in to the While House because you lot couldn't buy information technology anyplace else. And then when Coors expanded to all states, demand increased because now there are more potential consumers.
- new competitor (changes the demand curve facing and individual shop, but NOT market demand curve)
If a new liquor store moves in across the street from and existing store, the demand for liquor of the existing store volition decrease since now there are fewer potential consumers since some of the consumers walking past the store volition have already bought something at the new shop.
- change in eligible consumers (i.eastward. drinking historic period)
If they lower the drinking historic period in that location will be more potential vodka drinkers then demand for vodka will increment.
In that location are hundreds of factors that affect the quantity of vodka sold. We don't want to memorize hundreds of different determinants for each production, so economists group everything else into "tastes and preferences". Tastes and preferences really refers to "everything else". Anything that increases a consumer'due south preference for a production will increase demand for that product. This will include advertizing and fads.
Supply
Introduction
Supply is more than difficult for students to empathise than demand. We are all consumers (demanders), but few of u.s.a. own a business (suppliers). Then, call up to call up of yourself as a business owner when we discuss supply.
Definition
Supply is a schedule which shows the various quantities businesses are willing and able to offer for auction at various prices in a given time menstruum, ceteris paribus.
Supply is Not the quantity available for sale. This is the fashion the term is oft used in the popular printing. Supply is the whole schedule with many prices and many quantities.
But like with demand, there is a difference between a change in quantity supplied and a change in supply itself. And so, if the price increases what happens to supply? The best WRONG respond would be "supply increases", but information technology doesn't. Price does not alter 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 (retrieve whatever signal on a graph simply represents two numbers) Nosotros get the graph below.
If nosotros assume at that place are quantities and prices in-betwixt those on the schedule we go a supply curve.
Law of Supply
The police of supply states that there is a direct human relationship between toll and quantity supplied. In other words, when the price increases the quantity supplied as well increases. This is represented by an upward sloping line from left to right.
Why?
Why is the constabulary of supply truthful? Why is the supply curve upward sloping? Why will businesses supply more than pizzas only id the price is college? I think information technology is just common sense. If you want the pizza places to work harder and longer and produce more than pizzas, y'all accept to pay them more than, per pizza. But economists, as social science, want to explain common sense. We know businesses carry this way, but why?
In that location are two explanations for the law of supply and both have to do with increasing costs. Businesses crave a higher toll per pizza to produce more pizzas because they have higher costs per pizza. Why?
First, there are increasing costs considering of the law of increasing costs. In a previous lecture we explained that the production possibilities bend is concave to the origin considering 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 just opening. The owner figures that they will demand five employees. After putting an advertisement in the paper there are twenty applicants. Five accept had experience working in a pizza identify earlier. They came to the interview make clean and on time. The other fifteen had no work experience. Many came late. A few were caught steeling pepperoni on the fashion out. I spilled flour all over the flooring. Which applicants will be hired? Of course it will be the five with feel and the other 15 volition be rejected because they would be besides costly to hire. NOW, if the pizza identify wants to produce more pizzas they will need more than workers. This ways they will have to hire some of those who were rejected considering they were more than costly (less experienced, etc.). Then, they will only hire the more costly employees if they can get a higher price to embrace the higher costs. this is one explanation why the supply bend is upward sloping.
Second, in that location are increasing costs because some resource are fixed. This should not brand sense to yous. Why would there be increasing costs if we use the aforementioned quantity of some resource? Well, let'south say that the size of the kitchen and the number of ovens (uppercase resource) are fixed. This ways that they don't change. At present, if we want to produce more pizzas y'all will have to cram more workers into the same size kitchen. As they bump into each other and wait for an oven to be free they still get paid, merely the toll per pizza increases. Therefore they will non produce more pizza unless they can get a college toll to cover these higher per unit costs. And then the supply curve should exist upwardly sloping.
Market Supply
Market 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 different prices (individual supply), we keep the prices the same and add together the quantities of additional pizza places. Prices stay the same, merely quantities increase considering there are more pizza suppliers. So the market supply of pizzas is further to the correct (horizontal) than the private pizza identify supply curves.
determinants of Supply
The toll of the product (
Economists stress the importance of toll in determining how much will be produced. That is why they put cost on the supply graph, merely there are other things that affect how much of a production will exist produced likewise the toll. When nosotros developed the supply curve for pizza we employed the ceteris paribus supposition. we assumed all other things stayed constant. For example in that location were no new technological discoveries, the prices of resources stayed the same, or no modify in taxes. All other factors remained the same - only the price and quantity supplied inverse.But at that place are other determinants of how much business organisation supply besides the price. We call these the Non-Price determinants of Supply.
The non-price determinants of Supply
Economists classify the not-toll determinants of supply into 6 groups:a. Pe -- expected price
b. Pog -- price of other goods Too PRODUCED BY THE FIRM
c. Pres -- price of resources
d. T --engineering
e. T --taxes and subsidies
f. N -- number of producers/sellers
Ii Kinds of Changes Involving Supply
Change in Quantity Supplied (
A modify in Quantity supplied caused ONLY by a alter in the Price of the product. It is represented by a motion Along a SINGLE supply curve.
Change in Supply (
A change in supply is a shifting the supply bend because there is a new supply schedule. The supply bend either moves left or right (horizontally) since the prices stay the same and but the quantities alter and quantity is on the horizontal axis. Be sure to draw your arrows to the RIGHT and LEFT. Many students want to draw the arrows perpendicular to the supply bend. Don't do this. Ever describe your arrows horizontally because this indicates the the prices are the same, and only the quantities change. Also, if you depict y'all arrows perpendicular to the supply curve and arrow pointing Upward volition indicate a DECREASE in supply. That could get disruptive!
A change in supply is caused by a change in the non-price determinants of supply. these are the factors that nosotros assumed were constant when we used the ceteris paribus supposition to develop the supply curve.
Increase in Supply
If there is an increase in supply (
Subtract in Supply
If there is an decrease in supply (
Changes in supply are caused by a Change in the non-price determinants of supply
Allow's expect at these determinants on at a time. We must know how they shift the supply bend if we are to utilize the supply and demand tool to understand how prices are determined in a market economy.
If a business organization expects that they tin get a higher price in the futurity, what will happen to supply today? They will be less willing to sell there products today because they will know that if they waited they could become a college toll so supply today would decrease, shift to the left. (Remember, supply is not the quantity available for sale.)Permit'due south say that y'all want to sell you car, somebody offers you lot $1500 today, and you lot accept it. Y'all are willing to sell your car for $1500 today. And so, somebody says that they will swoop y'all $2000 for your machine if you could wait three days. Now yous expect that y'all tin go a college price ($2000) in the hereafter, and then you will probably no longer want to sell your car for $1500 today.
First, think of a business that produces 2 products, like farmers who can either abound corn or soybeans. Then the price of one increases, what happens to the supply of the other one.Then 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 volition shift to the left every bit farmers plant more soybeans and less corn.
If the cost of soybeans increases, what happens to the supply of soybeans?
-
-
-
Nothing. Recall, price does not change supply, it changes the quantity supplied. so if the price of soybeans increases, we would get an increase in the quantity supplied (aforementioned supply curve, higher quantity).
The price of resources (
If the cost of a resource used to produce the product increases, this will increase the costs of production and the producer will no longer be willing to offer the same quantity at the same price. They will want a higher price to cover the higher costs. This shifts the supply bend to the left (For Example: if the autoworkers unions receives a significant wage increase, this will increase the costs of producing cars and decrease the supply of cars (
Does improved engineering science increase or decrease the costs of producing a product?Improved engineering science DECREASES costs and therefore increases supply. If the engineering science did not decrease costs, then it wouldn't be used. If there is a high-tech expensive way to produce a production and a low-cost, depression-tech, way to produce the aforementioned production, companies that use the depression-cost methods will be able to sell the product at a lower toll and beat out the high-cost producers.
Improved technology
What has improved technology done to the costs of medical care? Improved medical engineering has INCREASED the price of medical care Merely it has also inverse the outcome. For example allow'south say that at that place is a disease where with existing low-cost technology, half the patients die. Now, if they invent a new high-cost technology that will save all lives which applied science volition be used? Of course the new loftier-cost technology will be used, Just THE PRODUCT HAS Inverse. I product is when half the patients die, the other product is when all patients live. We can't put two products on i supply bend.
Let's use 1 more than medical example. Why practice doctors withal use low-tech stethoscopes? they were using similar stethoscopes a hundred years agone. Isn't hither a high-tech electronic stethoscope? Yes there is, and so why don't doctors use information technology? Considering information technology is more expensive AND IT GIVES THE SAME RESULTS. Doctors will employ the cheaper technology every bit long equally the results are the same. only obstetricians practice utilise the more expensive loftier-tech stethoscope because it gives them better results. The low-tech stethoscopes can't e'er pick out the fetal heart shell. the newer high-tech and college-cost electronic stethoscopes can. The product changes.
And then, improved engineering science will decrease costs and increase supply OR information technology will increase costs and change the product which we cannot put on one graph.
Here nosotros volition discuss excise taxes. Excise taxes are a "per-unit" tax imposed on the production or sale of a product. Examples include the gasoline revenue enhancement (so much per gallon), the cigarette taxation (so much per pack) and the liquor tax (and so much per bottle).Allow'due south talk over the gasoline tax. If the revenue enhancement on gasoline increases will this impact the demand for gasoline or the supply of gasoline? If yous said demand - then which non-price determinant of demand has changed? retrieve toll does not change demand.
If the revenue enhancement on gasoline increases, this volition raise the toll 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 owner, yous have to give the same answer for both questions. Both taxes and wages are costs to the producer or seller. College gasoline taxes do not shift the demand bend, but they may result in a higher price and therefore a decrease in quantity demanded.
Subsidies are the reverse of taxes. Instead of the business paying the authorities, the government pays the business. There are fewer subsidies than taxes. But let's say the the regime wants to encourage the use of solar free energy then they put a subsidy (or increment one) on solar energy equipment. this will decrease the costs of producing or selling the equipment because when they produce or sell one they get a refund (subsidy) from the government.
An increase in the number of producers of a product 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 Price and Quantity
Now nosotros are gear up to discuss PRICES. At the height of this online lecture I said:
"In a capitalist society prices are determined by the interaction of need and supply. Since prices are so important, we demand to amend empathise how they are determined. why is the price of gasoline $1.59 a gallon. Why does a processed bar price $0.75? Why is the price of plywood commonly $10 a sheet, but $30 a sheet after a hurricane?"
Market Equilibrium
Equilibrium means that there is no further trend to change. When something is at equilibrium, it is at rest, non irresolute. Like a pendulum. when it is swinging, it is changing. Nosotros call this disequilibrium. Eventually, it will stop swinging and achieve equilibrium.
Prices do something similar. They move toward an equilibrium where they come to rest and don't alter. But merely like yous tin button a pendulum and cause it to swing so slow down and accomplish equilibrium again, prices tin can be "pushed" and they volition alter to a new equilibrium. Information technology is the non-price determinants of demand and supply that "push" prices to a new equilibrium. We telephone call this "market equilibrium".
The equilibrium price is the price where the quantity demanded equals the quantity supplied.
Sometimes I hear people say that equilibrium is where need equals supply. It is impossible for the whole demand curve to exist the same as the whole supply curve (NOT: D = S), just there is one cost where the quantity demanded equals the quantity supplied.
Market Disequilibrium
Why will the cost of pizzas be $9? Well, allow'due south take a wait at what happens if the cost 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 exist a surplus of 2000 pizzas (4000 - 2000 = 2000). If there is a surplus (more than bachelor than consumers are willing to purchase) the toll volition modify - decrease. Twelve dollars is non equilibrium - it will alter.
See 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 result volition be a shortage of 3000 pizzas (5000 - 2000 = 3000). If at that place is a shortage (consumers are willing to purchase more than is available) the cost volition change - increase. Six dollars is not equilibrium - information technology will modify.
Encounter graph.
Changes in Need AND Supply
Now that we tin can detect equilibrium AND we know what causes supply or demand to alter, let'southward encounter what happens to the equilibrium price and quantity if supply and/or demand changes. Later on we exercise this, nosotros volition put it all together. Information technology all begins with a change in ane of the xi not-price determinants:
Need:
SUPPLY:
so yous must know how they affect the graphs. We discussed this in a higher place and will review it again presently. Here, let'due south just concentrate on what happens to toll and quantity if demand and/or supply changes.
Instance 1: D changes and supply stays the same
If need increases (shifts to the right) what result will this take on Price and QUANTITY. Be certain 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 draw the graphs and get information technology right almost all the time? Be SURE TO Depict THE GRAPHS!
So, if demand increases and supply stays the same you lot become (see graph):
| |
| Need increases:
|
If need decreases (shifts to the left) and supply stays the same you become (see graph):
| |
| Demand decreases:
|
This is quite easy, but the key to understanding this are the not-price determinants of supply and demand. We volition review them shortly.
Case 2: Southward changes and demand stays the same
If supply increases (shifts to the correct) what effect volition this have on Cost and QUANTITY. Be sure to DRAW THE GRAPHS. You can probably guess what will happen to toll and quantity and get information technology right quite ofttimes, but why guess when you tin describe the graphs and go information technology correct virtually all the time? BE Sure TO Describe THE GRAPHS!
And then, if supply increases and demand stays the same you get (come across graph):
| |
| Supply increases:
|
If supply decreases (shifts to the left) and demand stays the same you lot get (encounter graph):
| |
| Supply decreases:
|
Case 3: D and S both change
What if BOTH supply and demand modify at the aforementioned time? This ways what happens to price and quantity if a not-toll determinant and supply AND a non-price determinant of need change shifting the graphs at the same fourth dimension?
1. S increases, D decreases
DON'T Look!!!Graph it right at present and make up one's mind what would happen to price and quantity if supply increases and demand decreases.
In a face up-to-face grade I would have my students practise this themselves and tell me what happens to P and Q. And then let'south do it in this distance learning course.
-
-
-
-
What practise y'all get? What happens to price and quantity if supply increases (shifts to the right) and demand decreases (shifts to the left)?
-
-
If supply increases and demand decreases:
- price decreases
- quantity is INdeterminant
The price will decrease, but we cannot tell what happens to quantity. Quantity could increase, it could decrease or information technology could stay the same. What happens to quantity depends on how much the supply and demand curves shift and since nosotros were non told this, nosotros cannot decide what happens to quantity. Quantity is indeterminant.
See the graph below where nosotros tin see that if demand decreases a trivial (D2) then the equilibrium quantity volition increase, merely if the demand curve decreases a lot (D4) the equilibrium quantity will decrease.
2. Due south decreases, D increases
What happens to price and quantity if supply decrease and need increases?GRAPH It!
-
-
-
-
If supply decreases and need increases:
- price increases
- quantity is indeterminant
The price will increase, but nosotros cannot tell what happens to quantity. Quantity could increase, information technology 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 decide what happens to quantity. Quantity is indeterminant. Try graphing different shifts in D and South and run into what happens to quantity.
3. S increases, D increases
What happens to price and quantity if both supply and need increase (shift to the correct)?GRAPH IT before scrolling (or looking) lower on this folio.
-
-
-
-
If supply increases and demand increases:
- quantity increases
- price is INdeterminant
The quantity will increment, simply we cannot tell what happens to price. The price could increment, it could decrease or it 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. Price is indeterminant.
See the graph below where we can run across that if supply increases a lilliputian (S1) so the equilibrium price will increment, merely if the supply curve increases a lot (S3) the equilibrium price will decrease.
4. Southward decreases, D decreases
What happens to price and quantity if supply subtract and demand increases?GRAPH It!
-
-
-
-
If supply decreases and demand decreases:
- quantity decreases
- price is indeterminant
The quantity will decrease, but we cannot tell what happens to cost. cost could increase, it could subtract, or information technology could stay the same. What happens to price depends on how much the supply and demand curves shift and since we were not told this, we cannot make up one's mind what happens to price. Price is indeterminant. Endeavour graphing different shifts in D and S and see what happens to price.
Using Supply and Demand
At present let'south put information technology all together. Nosotros tin use our supply and demand model to understand why prices change. Information technology all begins with the non-price determinants of demand (
We volition use supply and demand curves to illustrate how changes in these non-price determinants will affect the toll and quantity of a product, ceteris paribus. Before you guess, respond the post-obit questions:
(i) Which determinant has changed?
(2) Volition it touch on supply or demand?
(3) Will supply or need increase or subtract?
(4) GRAPH IT! What happens to price and quantity?
Case 1
| |
Our goal is to sympathize what happens to PRICE and QUANTITY, but don't just judge. If you practise just think nigh it and try to figure it out in your head, you'll probably get information technology right a lot of the time. But wouldn't yous rather get it right most, or all, of the time? Nosotros now have a tool (supply and demand) that we tin use to improve understand changes in cost and quantity. So utilise the tool. One time you get used to information technology you'll see its benefits.
Respond the four questions and the graph (tool) will give you lot the answer.
(ane) Which determinant has changed?Sometimes this is obvious. In this example information technology is income.(two) Will it affect supply or demand?
Income is a determinant of DEMAND. But at other times this is more than difficult. For example Pe and Pog are determinants of BOTH demand and supply.(3) Will supply or need increment or decrease?
This is the key to using the tool correctly. We discussed above how the non-price determinants shift the curves. Computers are normal goods. This means that if incomes increment, demand for computers will increase.(four) Finally, GRAPH IT! the graph volition tell you what happens to toll and quantity. Meet graph below.
| | |
Answer: So if consumer incomes increase, ceteris paribus, the price of computers will increase and consumers will buy more.
Case two
| |
(i) Which determinant has changed?TECHNOLOGY(ii) Will it affect supply or need?
SUPPLY(3) Will supply or need increase or subtract?
SUPPLY Will Increment (shift to the right)(4) GRAPH Information technology! What happens to price and quantity?
| | |
EXAMPLE three
| |
If the graph above is for Nintendo 64 Video Game Systems, what will happen to the price and quantity if there is a decrease in the price of personal computers?
(one) Which determinant has inverse?Pog - the production on the graph is Nintendo Video Game Systems and the toll of some other product, computers, has inverse(ii) Will it affect supply or need?
The not-toll determinant, Pog, is a determinant for both supply and demand. With supply nosotros said it refers to the price of other good PRODUCED BY THE SAME FIRM. Does Nintendo also produce computers? NO.With demand, Pog refers to the price of substitute and the price of complements. Are video game systems and home computers substitutes or compliments? Well-nigh people would say they are substitutes. If you buy a new dwelling house computer, you can play games on the computer and maybe you won't buy a new video game organisation.
So, if at that place is a decrease in the price of personal computers, DEMAND FOR VIDEO GAME SYSTEMS Volition CHANGE.
(iii) Will supply or demand increase or decrease?
if there is a subtract in the cost of personal computers, DEMAND FOR VIDEO GAME SYSTEMS WILL DECREASE (shift to the left).(4) GRAPH Information technology! What happens to cost and quantity?
| | |
MORE EXAMPLES:
For REVIEW exercises click Here
"Real World" Examples
In the "real world" the determinants are not as piece of cake to pick out. The tool notwithstanding works, but information technology takes a fiddling more practice.
If you read a paper or Cyberspace news article about a production whose price and/or quantity has changed, you tin use supply and need to clarify WHY the price and/or quantity has changed. We know that changes in the not-price determinants of demand and supply crusade prices and quantities to change. So, to understand why, we take to look for the non-cost determinants in the article.
Real-Earth Example one
Below is a portion of an commodity from CNNFN.COM
Read the article looking for the cause of the price change and so utilize our supply and demand graph to ILLUSTRATE what has happened. This will exist similar to the extra credit question that you volition have on test 1.
Remember to use our tool correctly:
(1) Which determinants have changed?
(2) Will they affect supply, demand, or both?
(3) Will supply or need increase or decrease?
(4) GRAPH Information technology! Then show what happens to price and quantity?
Elevation PC makers cut prices
Compaq clears out old models; Dell passes on lower component costs
February one, 2000: two:44 p.1000. ET
NEW YORK (CNNfn) - Two of the globe'due south largest computer makers on Tuesday appear that they take cut prices on their commercial desktop PCs.
Compaq, the No. one PC maker, said it cutting prices up to xiii pct on most of its Deskpro series commercial PCs. The toll cuts are being made to clear the way for nine new Deskpro models. . . . . . . . . . . . . . . .Dell ( DELL : Research , Estimates ), the world's 2nd largest supplier of PCs, said information technology was cutting prices considering the price of the components information technology uses to make them have too dropped.
Effective Monday, a Dell Precision WorkStation 210 with a Pentium III processor running at 650 million cycles per second will sell for $ane,740, a 17.1 percentage reduction, the company said. Dell likewise said it cut prices on the mid-range models in its Precision WorkStation 410 line by upwardly to xv.5 percent.
(ane) Which determinants have changed?
The article says " Dell ( DELL : Enquiry , Estimates ), the world's second largest supplier of PCs, said information technology was cutting prices because the cost of the components information technology uses to brand them have also dropped." This indicates the in that location has been a change in the toll of resource ((two) Will they bear upon supply, demand, or both?
SUPPLY(3) Will supply or demand increase or decrease?
SUPPLY Will Increment (shift to the right)(4) GRAPH IT! And then bear witness what happens to price and quantity?
| | |
Real-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 so use our supply and need graph to ILLUSTRATE what has happened. This will be similar to the actress credit question that you will have on exam i.
Remember to use our tool correctly:
(1) Which determinants have changed?
(2) Will they affect supply, need, or both?
(3) Volition supply or demand increase or decrease?
(4) GRAPH IT! So show what happens to price and quantity?
Air customers to pay for fuel
With demand for seats nevertheless strong, near carriers announce fuel surcharges
By Staff Writer Chris Isidore
January 21, 2000: iii:54 p.thou. ET
NEW YORK (CNNfn) - Airlines are finding a source of relief for oil toll shocks they've rarely tapped before: their passengers.
With oil prices hit a post-Gulf War high Friday, iii more carriers - United states Airways, America W and Trans World Airlines - announced surcharges, charging customers $20 per round-trip ticket on virtually all domestic flights.
That meant that eight of the ix largest carriers in the country now had the charges, with only No. 7 Southwest Airlines ( LUV ), the Dallas-based discount carrier, holding off at this fourth dimension.
Demand for seats opens door
The surcharge is unique in its acceptance by the typically cutthroat airline manufacture, and is a sign that demand for air travel remains strong.
The Air Transport Association report that 71.3 percentage of its members' seats were filled terminal 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 higher fares.
"In the past, when we had the tremendous run up in fuel, we as well had a recession," said David Swierenga, the ATA's main economist. "Those 2 things together clobbered the industry. Now the economy is moving ahead , and carriers will have a little more than flexibility on the pricing side.". . . . . . . . .
Respond: I have highlighted in red the important parts of this article. Let'due south analyze each one.
"With oil prices striking a post-Gulf War high Friday, iii more carriers - US Airways, America West and Trans World Airlines - announced surcharges, charging customers $20 per round-trip ticket on virtually all domestic flights."
(ane) Which determinant has changed?PRICE OF RESOURCES. Oil (fuel) is a resources used by the airline industry(2) Will they affect supply or demand?
SUPPLY(iii) Volition supply or demand increase or decrease?
SUPPLY Will Subtract (shift to the left)(4) GRAPH IT! And so show what happens to cost and quantity?
| | |
The article also says:
" The surcharge is unique in its credence by the typically cutthroat airline manufacture, and is a sign that demand for air travel remains stiff. " AND "Now the economy is moving ahead".
(ane) Which determinant has changed?INCOME ("The economy is moving ahead" ways incomes are ascension.)(2) Will they impact supply or need?
Demand(3) Volition supply or demand increase or decrease?
Demand WILL INCREASE (assuming air travel is a normal skillful)(4) GRAPH IT! Then show what happens to toll and quantity?
| | |
Now Let'Southward PUT BOTH CHANGES ON THE SAME GRAPH. You must practise this to testify the overall effect of all changes. We have a decrease in supply acquired past higher resource prices and an increase in demand caused by higher incomes,
The result is college prices (see graph) and the quantity stays about the same equally the article states (therefore I shifted the curves the aforementioned amount).
Other manufactures that you tin analyze yourself:
- http://cnn.com/United states/9907/27/gas.prices/
- http://cnnfn.com/2000/01/21/companies/airfuel/
- http://cnn.com/US/9908/09/rv.boom/
ANSWERS
Market place Supply: correct answer "B" [Return]
Source: http://www2.harpercollege.edu/mhealy/eco212i/lectures/s&d/s&d.htm
Posted by: pearcerainglady.blogspot.com
0 Response to "What Will Your Preference Diagram Look Like For A Triangular Cake? Volume"
Post a Comment