Supply of Single Family Residential Properties Is Most Affected by Quizlet
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 Aligning we discussed various policies that countries are adopting all effectually the discussion to promote economic growth (increasing output rather than increasing their ability) and achieve productive and allocative efficiency. It is hoped that as economies motion away from command economies (Chapter 23) toward mzrket economies or capitalism (chapter 4).
These policies are:
1. Privatization
2. Promotion of Competition
3. Express and Reoriented Function for Government
4. Price Reform: Removing Controls
5. Joining the Globe Economic system
6. Macroeconomic Stability
Even though the concepts of SUPPLY and Demand are microeconomic concepts, they are reviewed in this macroeconomics class because not all students have taken micro (ECO 211) and they are primal principles that all economic student should principal. We will study supply and demand in this "Macroeconomics of the Gloabal Econaomy" course to better sympathize why there is a worldwide motion to remove price controls and let Supply and Need determine prices.
In a capitalist economic system, prices are very important. They have ii fundamental functions:
- they RATION goods and services, and
- the GUIDE resources to where they are wanted near
Past doing this they help the economy maintain allocative efficiency and productive efficiency.
In the 5Es lesson on allocative efficiency we discussed that it was good for the price of plywood to increase in Florida after a hurricane. When the price increased two things happened: (ane) plywood was rationed to its most important uses (not doghouses or decks), and (two) the loftier prices were an incentive for more plywood to be guided to Florida so that they had more plywood. If the price of plywood was kept too low 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 information technology equally producing at a minimum cost. In club to minimize costs, producers must know the prices of the resources. If these resource prices are determined by need and supply then they will reflect 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 guild prices are determined by the interaction of demand and supply. Since prices are so of import, nosotros demand to better empathise how they are adamant. why is the cost of gasoline $ane.59 a gallon. Why does a candy bar cost $0.75? Why is the cost of plywood normally $ten a sheet, but $xxx a sail after a hurricane?
Demand
If the price of a product increases what happens to need for that product? For example, If the cost of pizza increases, so 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 economic science 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 buy at various prices in a given time catamenia, ceteris paribus. We should wait more than closely at this definition.
Demand is a table of numbers. Look at the table below. The whole table might represent my demand for pizza.
Demand Schedule and Curve
As we learned in a previous lesson, any point on a graph represents two numbers, and then nosotros can plot our demand table as in the graph beneath.
If we assume that there are quantities and prices in-between those in the table (for example if the price was $iv.50 how many pizzas would I buy?) nosotros tin can connect the points and we get the demand curve (graph).
This is my demand for pizza. This demand bend does NOT tell us what the price will be. To know what the cost will be we demand both demand and supply.
Only nosotros can see what happens to need if the price of pizzas increases. If the price of pizza increases, say from $6 to $9, nothing on the table changes (demand does not change) because demand already includes diverse prices and various quantities. Demand (the table or the graph) does not change when the price changes considering demand INCLUDES diverse prices and various quantities. Demand is Not how much nosotros buy.
Note that our definition of demand includes the ceteris paribus assumption. When we develop a need curve only the price and quantity demanded change. Everything else is assumed to remain constant. I don't become a large 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 - merely the cost and quantity demanded modify.
Law of Demand
As we can come across on the need graph, there is an changed relationship between price and quantity demanded. Economists call this the Police of Demand. If the cost goes up, the quantity demanded goes downwards (but demand itself stays the aforementioned). If the price decreases, quantity demanded increases. This is the Law of Need. On a graph, an changed relationship is represented by a downward sloping line from left to right.
Why?
Why is the police of demand true? Why is the demand curve downward sloping from left to right? Why practice people purchase more at lower prices and less at higher prices?
As social scientists, economists try to explain human beliefs. It is common sense that people comport this style - but how tin we explicate it? Economists have three explanations:
- diminishing marginal utility
- income effects
- substitution effects
Diminishing Marginal Utility
We learned in the 5Es lesson that disinterestedness helps reduce scarcity because of the law of diminishing marginal utility. This economic principle also explains why the need bend is downward sloping.
Utility is the reason we consume a expert or service. You might call it satisfaction. I get satisfaction (utility) when I drive my boat. I go utility (satisfaction?) when I go to the dentist. "Marginal" ways EXTRA or Additional. And so, according to the constabulary of diminishing marginal utility, the Extra (not the total) utility diminishes for each additional unit consumed. If we are receiving less extra utility when we buy i more of a product, we won't exist willing to pay the aforementioned price. After all, it is the marginal utility that we are paying for.
The first piece of pizza that I consume I actually enjoy. It gives me a lot of utility. But after a few pieces, I don't get equally much additional satisfaction from one more slice as I did from the first piece. So, I will only buy a second piece if information technology has a lower toll, since I am getting less boosted utility from the second piece. this explains why nosotros buy more when the price goes downward and why we buy less when the price goes up. It explains the law of demand.
Income Furnishings
Some other explanation of why the law of demand explains human behavior is "income effects".
If the price of cost of pizza decreases what happens to your income?
(Note: the "
" means "causes".)
? Nil happens to your income when the toll of pizza decreases? (Do you get a raise when Pizza Hut has a auction?), Only your Existent income (or the purchasing ability of your income volition increment.
So, when pizza prices subtract your real income increases. (This is like the price of pizza staying the same but yous 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 constabulary of need is truthful.
Substitution Furnishings
The third caption of the law of demand is "substitution furnishings".
? If the price of pizza decreases what happens to the price of Chinese food at the eating house down the street? Probably zippo. (I know that the Chinese restaurant where My wife and I consume does not alter their prices when Pizza Hut has a sale.) But the RELATIVE price of Chinese food does increase
At present, as my wife and I drive past Pizza Hut on our way to the Chinese restaurant and nosotros see that Pizza Hut has a sale (
cost of pizza) we kickoff to think that the Chinese food seems more expensive compared to the now cheaper pizza (
Market Demand
Definition:
Marketplace demand is the horizontal summation of the private demand curves. Or, instead of just my individual need for a product what if in that location were ii people, or more than, in the market. the consequence would be tat for each cost, the quantities demanded would exist greater since there are more people. The prices stay the same, but the quantities go larger, or the demand graph shifts horizontally (to the right).
Graphically:
Sample Problem:
Given the following individuals' need schedules for product X, and assuming these are the just 3 consumers of X, which set of prices and output levels beneath will be on the market need bend for this product?
Answer
Determinants of Demand
The price of the product
Economists stress the importance of toll in determining how much people will buy. That is why they put price on the demand graph, but there are other things that touch on how much of a production we buy likewise the price. When we developed my demand curve for pizza we employed the ceteris paribus supposition. 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 changed.Merely there are other determinants of how much we need (or buy) besides the price. We phone call these the Not-Price determinants of Need.
The non-price determinants of demand
Permit's not talk about pizzas anymore and utilise a new product in our examples. - - - How about vodka? We know that when the cost of vodka goes upwardly we purchase less and when the cost goes downwardly nosotros buy more (this is the constabulary of demand). But what else might cause us to buy more vodka likewise 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 not-price determinants of need into 5 groups:
- expected price (Pe)
- price of other goods (Pog)
- income (I or Y) (In Macroeconomics "I" commonly stands for "investment" and "Y" stands for "income".)
- number of POTENTIAL consumers (Npot), and
- tastes and preferences (T).
Allow'south briefly look at each one hither and in more detail subsequently.
Pe - If we hear that there volition be a new $5 tax on a bottle of vodka beginning adjacent week, what happens to the amount of vodka sold this week at the current cost? It probably increases since some people will purchase more than now to avoid the college hereafter prices.
Pog - What happens to the corporeality of vodka sold if the toll of gin increases? Might non some people who were going to buy gin buy vodka instead since the cost of gin went up? Or what might happen to vodka sales if the toll of tomato juice goes downward? maybe now with the cheaper tomato juice prices some people might want to drink more than encarmine marys (vodka mixed with tomato juice)? If so, vodka sales would go up.
Y (or I) - If I become a heighten and my income increases I might purchase more than vodka - or if my income goes down I would probably buy less vodka. (And if I lost my chore 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 vodka.
Finally T - Tastes and preferences really means "everything else". At that place are hundreds of factors that impact the quantity of vodka sold. We don't want to memorize hundreds of different determinants for each product, then economists group everything else into "tastes and preferences". Anything that might brand consumers desire more or less vodka will change the quantity sold. For example, if a new written report says that drinking vodka causes blindness - people will buy less. Right before a vacation people may purchase more.
In guild 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-chiliad-requite m-me an-due north-n-nother p-p-p-pint of five-v-vodka".
Get it? "p-p-p-pint " or P, P, P, I, Due north, T or Px, Pe, Pog, I, Npot, T
In order to save me time in typing, I will type "P, P, I, N, T" instead of "the non-price determinants of demand".
Ii Kinds of Changes Involving Need
If the price of a product increases what happens to demand for that product? For example, If the toll of pizza increases, and then the demand for pizza does what? Zilch, demand does non modify when the toll changes, merely the quantity demanded does alter. This department will help us to meliorate understand the deviation betwixt a change in quantity demanded ( 
Change in Quantity Demanded (
A change in quantity demanded caused ONLY by a change in the PRICE of the product. On a graph it is represented by a motility ALONG a SINGLE demand curve.
So if the price of pizza increase from $6 to $9 we will get an decrease in quantity demanded ( 
Change in Demand (
When there is a modify in need itself we get a new demand schedule and bend. Nosotros have to change the numbers in the demand schedule and this will SHIFT the demand curve.
If at that place is an increase in need (
When we say that the demand curves shift to the correct, it means that nosotros have to change the numbers on the need schedule. For the aforementioned prices, the quantities increment. This shifts the curve to the RIGHT.
A decrease in need will then shift the demand bend 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. Always draw your arrows horizontally considering this indicates the the prices are the same, and just the quantities change.
A change in demand is caused by a Modify in the non-price determinants of demand:
Pe, Pog, I, Npot, T If these change we get a new need schedule and bend. To understand why prices are what they are, and why they change, we need to understand very well how these determinants move the demand bend. This is where it all begins. In our definition of need we held these things constant (ceteris paribus), but in the real world these things exercise change, changing demand, and ultimately irresolute prices. So allow'south look at each determinant individually to understand how they each bear upon demand.
If you expect the price to go up in the future demand today will increase (shift to the right). For example, if we read that there will exist a new tax on vodka starting side by side week, people will want to buy more at present before the price increases. Retailers understand this. How oftentimes have you lot heard "SALE ENDS MONDAY"? They desire yous to expect the price to increase in the future so you'll buy it today.
The opposite happens when yous expect the price to go down in the future. In the by when my wife and I were shopping whenever I put something in the cart, she would have information technology out and put it back on the shelf! I'd ask, "why are you doing that?". She would say that she expected it to go on sale soon and nosotros should look until it does. If you expect the toll to go downwards in the future need today decreases. (f ¯Pe in the future Þ ¯D today). Just, whenever I put something in the cart, she would accept it out proverb that she expects it to keep auction before long. Later awhile I got a fiddling upset, when I'd ask her about the items she put in the cart and she'd say that they were on sale final week and we missed information technology. Finally, I went to talk to the shop director and explained the situation to him. He saved our marriage by explaining that most chain store have a policy stating that if an item goes on sale after y'all take purchased it, you can bring in the receipt within thirty days and get a refund. Retailers understand how price expectations affect demand.
The event of a change in the price of other goods on demand depends on what type of other goods nosotros are talking about. There are three types:1) substitute goods
Substitute goods are goods where if you buy more than of one, you buy less of the other one. Examples of substitutes include vodka and gin, hot dogs and hamburgers, chicken and beef, Coca-Cola and Pepsi.
Allow's wait at Coke and Pepsi. If the price of Coke increases it will increase the demand for Pepsi (the graph shifts to the right).I f you are going to buy a can of Coke, yous may walk right past the Pepsi machine, but when you notice that the toll of Coke has increased, you'll probably turn around and buy the Pepsi. You weren't going to purchase Pepsi before, but now, at the same cost, you are willing to buy it. So the demand for Pepsi has increased. The demand curve has shifted to the right. At the same prices, the quantities demanded are greater.
If the toll of Coke increases, what happens to the demand for Coke? - - - NOTHING. Price does not change demand (equally we take defined it) but information technology will alter the quantity demanded.
You've seen a skilful instance of this in your local grocery store. For example, I may want to buy some coffee. So I go to the coffee alley and catch a can 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 practise I practice with the Folgers in my shopping cart? - - - - - No, I don't put it dorsum. I accept information technology out of my cart and put it on the Maxwell House display. Haven't y'all seen various brands mixed in with such displays? The demand for Folgers decreased (I no longer want information technology at that price, so I accept it out of my cart) because the toll of Maxwell House decreased.
If:
two) complementary appurtenances
Complementary appurtenances are appurtenances where if you buy more of ane you also buy more of the other one. they get together like vodka and tomato plant juice, rum and Coke, motion picture and film developing, hot dogs and hot dog buns.
Let's say that you want to consume hot dogs tonight and you go to your local grocery shop and put a bag of buns in your cart and head down the aisle to the wieners. When yous get to the wiener brandish you lot discover that their cost has increased significantly and so you decide not to eat hot dogs. What are you going to do with the buns? You should put them dorsum, simply if yous are like many people you'll put them in the wiener display and move on chop-chop. Just the point is, y'all were going to buy the buns at their present cost (they were already in your cart), but when y'all learned the price of hot dogs increased your need for buns decreased (the demand bend shifted to the left - at the same prices the quantities demanded decreased).
Of form, if the cost of one product decreases (cheaper film developing), the demand for its complement (film) increases.
3) independent goods
Independent goods are appurtenances where if the price of one changes, it has no event on the demand for to other i. For instance, what happens to the need for paper clips if the price of surfboards increases? Zilch.
Summary (Pog):
1) normal goodsFor most goods, called normal goods, if consumer incomes increase, need volition increment and vice versa.
So if incomes increase, the demand curve for restaurant meals, and cars, and boats, volition shift to the right. At the aforementioned prices people will buy more than.
two) junior goods
For some goods, chosen junior goods, if consumer incomes increase need will decrease, and vice versa. If merely yous had more coin, y'all would purchase less of that product
The term "inferior good" does not mean they are of depression quality. the definition of an inferior expert is one where if your income increases, demand decreases. At that place is an inverse relationship between income and demand.
Examples of junior goods might include used clothing, potatoes, rice, maybe generic foods. If yous lose your chore (so your income decreases) you may shop for clothes at the Salvation Army Austerity Store (need for used wearable increases).
What is a normal good for one consumer might be an inferior good for another. For instance, if the income of 1 family increases they may buy a second small car (a normal good), but for another family, an increase in income may mean that they don't buy a small car (an inferior good) anymore and they buy a mini van instead.
An increase in the number of potential consumers will increment need and vice versa.
Earlier we say that if they lowered the drinking age, the demand for vodka would increase.
Often economists say that an increase in the "number of consumers" will increase demand. I prefer to use the terminology "number of POTENTIAL consumers" because if K-Mart has a auction on Pepsi (price of Pepsi decreases) what happens to demand for Pepsi? -- Nothing (toll does not change the need schedule). But, if K-Mart has a sale on Pepsi (price of Pepsi decreases) what happens to the number of consumers buying Pepsi? It will increase. (The law of demand says that if toll goes downwardly, quantity demanded goes upwardly.) Then, if they have more customers because the cost went downward, what happens to need? Nothing - (price does not change the demand schedule).
But, if the number of POTENTIAL customers changes, demand will alter.
Iv circumstances can change the number of potential consumers:
- population change
If a new housing development is congenital in the empty field behind a small shop, the number of potential consumers increases, and demand will increase.
- expanded marketing area
Coors beer used to sold only out West. President Ford used to have to have information technology flown in to the While Business firm because you couldn't buy it anyplace else. So when Coors expanded to all states, demand increased because now there are more potential consumers.
- new competitor (changes the demand curve facing and individual store, but NOT market need curve)
If a new liquor store moves in beyond the street from and existing store, the need for liquor of the existing shop will decrease since now in that location are fewer potential consumers since some of the consumers walking past the store will take already bought something at the new store.
- change in eligible consumers (i.due east. drinking historic period)
If they lower the drinking age in that location will exist more potential vodka drinkers and then demand for vodka will increase.
At that place are hundreds of factors that touch on 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". Annihilation that increases a consumer's preference for a production will increase demand for that production. This volition include advertizement and fads.
Supply
Introduction
Supply is more hard for students to understand than demand. We are all consumers (demanders), merely few of u.s. own a business (suppliers). So, call back to remember of yourself equally a business owner when we discuss supply.
Definition
Supply is a schedule which shows the diverse quantities businesses are willing and able to offer for sale at various prices in a given fourth dimension menstruation, ceteris paribus.
Supply is NOT the quantity available for sale. This is the way the term is often used in the pop press. Supply is the whole schedule with many prices and many quantities.
Merely similar with demand, at that place is a departure between a change in quantity supplied and a change in supply itself. And then, if the price increases what happens to supply? The best Incorrect reply would be "supply increases", but information technology doesn't. Cost does non change supply, information technology changes quantity supplied, considering supply means the whole schedule with various prices and diverse quantities.
Supply Schedule and Bend
Below is a hypothetical supply schedule for pizza.
If we plot these points (remember any point on a graph but represents 2 numbers) We get the graph beneath.
If we assume there are quantities and prices in-between those on the schedule nosotros get a supply bend.
Law of Supply
The police of supply states that in that location is a direct relationship between price and quantity supplied. In other words, when the price increases the quantity supplied also increases. This is represented past an up sloping line from left to correct.
Why?
Why is the law of supply true? Why is the supply curve upward sloping? Why volition businesses supply more than pizzas simply id the toll is higher? I think it is only common sense. If you want the pizza places to work harder and longer and produce more pizzas, y'all have to pay them more than, per pizza. But economists, every bit social science, want to explicate common sense. We know businesses behave this way, but why?
There are 2 explanations for the law of supply and both have to do with increasing costs. Businesses require a higher toll per pizza to produce more pizzas because they have higher costs per pizza. Why?
Start, there are increasing costs because of the law 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 truthful because not all resources are identical. Permit's say a pizza place is just opening. The owner figures that they will need five employees. After putting an ad in the paper at that place are twenty applicants. Five have had experience working in a pizza place before. They came to the interview clean and on time. The other xv had no work experience. Many came late. A few were defenseless steeling pepperoni on the way out. I spilled flour all over the floor. Which applicants volition be hired? Of course it volition be the five with experience and the other xv volition be rejected because they would be too costly to hire. NOW, if the pizza identify wants to produce more pizzas they volition need more than workers. This ways they will have to hire some of those who were rejected because they were more than costly (less experienced, etc.). Then, they will only hire the more plush employees if they can become a higher cost to encompass the higher costs. this is i explanation why the supply bend is upwards sloping.
Second, there are increasing costs because some resources are fixed. This should not make sense to yous. Why would at that place exist increasing costs if we use the same quantity of some resource? Well, let's say that the size of the kitchen and the number of ovens (capital resources) are stock-still. This means that they don't change. At present, if we want to produce more pizzas you 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, but the cost per pizza increases. Therefore they will non produce more pizza unless they can get a higher price to encompass these higher per unit of measurement costs. Then the supply curve should be upward sloping.
Market Supply
Market supply is the horizontal summation of the private supply curves. Instead of looking at how many pizzas one pizza place is willing and able to produce at dissimilar 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 farther to the right (horizontal) than the individual pizza place supply curves.
determinants of Supply
The price of the production (
Economists stress the importance of price in determining how much will be produced. That is why they put toll on the supply graph, but there are other things that affect how much of a product volition be produced besides the price. When nosotros developed the supply curve 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 modify in taxes. All other factors remained the same - only the price and quantity supplied inverse.Just in that location are other determinants of how much business supply as well the price. We call these the Non-Toll determinants of Supply.
The not-cost determinants of Supply
Economists classify the non-price determinants of supply into 6 groups:a. Pe -- expected price
b. Pog -- price of other goods Also PRODUCED BY THE Business firm
c. Pres -- cost of resources
d. T --technology
e. T --taxes and subsidies
f. N -- number of producers/sellers
2 Kinds of Changes Involving Supply
Change in Quantity Supplied (
A modify in Quantity supplied acquired Just by a change in the PRICE of the product. It is represented by a movement Along a Single supply curve.
Alter in Supply (
A change in supply is a shifting the supply bend because at that place is a new supply schedule. The supply bend either moves left or right (horizontally) since the prices stay the aforementioned and only the quantities change and quantity is on the horizontal centrality. Be certain to describe your arrows to the Right and LEFT. Many students want to describe the arrows perpendicular to the supply curve. Don't do this. E'er draw your arrows horizontally considering this indicates the the prices are the same, and but the quantities change. Also, if you draw you lot arrows perpendicular to the supply curve and arrow pointing UP will indicate a Decrease in supply. That could become disruptive!
A alter in supply is caused by a change in the non-price determinants of supply. these are the factors that we assumed were constant when nosotros used the ceteris paribus supposition to develop the supply curve.
Increase in Supply
If there is an increase in supply (
Decrease in Supply
If at that place is an subtract in supply (
Changes in supply are caused by a CHANGE in the non-cost determinants of supply
Allow's 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 understand how prices are determined in a market economy.
If a concern expects that they can become a college price in the futurity, what will happen to supply today? They will exist less willing to sell there products today because they will know that if they waited they could get a higher price so supply today would decrease, shift to the left. (Recollect, supply is non the quantity available for auction.)Let's say that you want to sell you car, somebody offers yous $1500 today, and y'all take it. You are willing to sell your car for $1500 today. Then, somebody says that they will dive you $2000 for your motorcar if you could wait three days. Now y'all wait that yous can get a higher toll ($2000) in the future, so y'all will probably no longer want to sell your car for $1500 today.
First, remember of a business that produces two products, like farmers who can either grow corn or soybeans. Then the price of i increases, what happens to the supply of the other i.So if the price of soybeans increases, what happens to the supply of corn?
If the price of soybeans increases the supply of corn volition subtract. The supply curve of corn volition shift to the left as farmers plant more soybeans and less corn.
If the price of soybeans increases, what happens to the supply of soybeans?
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Cypher. Remember, toll does not change supply, it changes the quantity supplied. then if the price of soybeans increases, nosotros would get an increase in the quantity supplied (same supply curve, higher quantity).
The price of resources (
If the toll of a resource used to produce the product increases, this will increment the costs of production and the producer will no longer be willing to offer the aforementioned quantity at the aforementioned price. They will want a higher price to encompass the higher costs. This shifts the supply curve to the left (For Example: if the autoworkers unions receives a significant wage increment, this will increase the costs of producing cars and decrease the supply of cars (
Does improved applied science increase or decrease the costs of producing a production?Improved technology DECREASES costs and therefore increases supply. If the technology did non decrease costs, then it wouldn't be used. If in that location is a high-tech expensive way to produce a product and a low-toll, low-tech, way to produce the same product, companies that use the low-cost methods will be able to sell the product at a lower price and beat out the loftier-cost producers.
Improved technology
What has improved technology done to the costs of medical care? Improved medical technology has INCREASED the cost of medical care BUT it has also changed the outcome. For example let'southward say that there is a affliction where with existing low-cost technology, half the patients dice. Now, if they invent a new high-cost technology that volition relieve all lives which engineering will be used? Of class the new loftier-toll engineering science will be used, BUT THE Product HAS Inverse. One product is when half the patients die, the other product is when all patients alive. Nosotros tin can't put 2 products on i supply curve.
Let's use i more medical example. Why practice doctors all the same use depression-tech stethoscopes? they were using similar stethoscopes a hundred years ago. Isn't here a high-tech electronic stethoscope? Yes there is, and so why don't doctors use it? Because information technology is more expensive AND It GIVES THE Same RESULTS. Doctors will utilise the cheaper technology equally long as the results are the same. just obstetricians do utilise the more expensive high-tech stethoscope because it gives them better results. The low-tech stethoscopes can't always selection out the fetal centre beat. the newer high-tech and higher-cost electronic stethoscopes can. The product changes.
So, improved applied science volition decrease costs and increase supply OR it will increase costs and change the product which we cannot put on one graph.
Here we will hash out excise taxes. Excise taxes are a "per-unit of measurement" tax imposed on the production or sale of a product. Examples include the gasoline tax (so much per gallon), the cigarette tax (so much per pack) and the liquor taxation (and so much per bottle).Let'south discuss the gasoline revenue enhancement. If the taxation on gasoline increases will this bear on the demand for gasoline or the supply of gasoline? If yous said demand - then which not-price determinant of demand has changed? remember price does non modify demand.
If the revenue enhancement on gasoline increases, this will heighten the cost of SELLING gasoline, and Decrease SUPPLY.
Who pays the gasoline revenue enhancement? Who pays the wages of the gas station employees? Whether you lot answer the consumer of the gas station owner, y'all take to requite the aforementioned respond for both questions. Both taxes and wages are costs to the producer or seller. Higher gasoline taxes practise not shift the demand curve, simply they may upshot in a higher cost and therefore a decrease in quantity demanded.
Subsidies are the opposite of taxes. Instead of the concern paying the government, the regime pays the business organisation. There are fewer subsidies than taxes. But let's say the the government wants to encourage the apply of solar energy and so they put a subsidy (or increase 1) on solar energy equipment. this volition decrease the costs of producing or selling the equipment because when they produce or sell 1 they go a refund (subsidy) from the authorities.
An increase in the number of producers of a product will increment supply of that production. If the number of computer manufacturers increases, the supply of computers will increase (shift to the right).
Market Equilibrium -- Equilibrium Price and Quantity
At present we are ready to hash out PRICES. At the top of this online lecture I said:
"In a capitalist social club prices are adamant by the interaction of demand and supply. Since prices are so important, we need to ameliorate empathize how they are determined. why is the cost of gasoline $one.59 a gallon. Why does a processed bar cost $0.75? Why is the price of plywood ordinarily $x a canvass, merely $xxx a sheet after a hurricane?"
Market place Equilibrium
Equilibrium ways that there is no further tendency to change. When something is at equilibrium, it is at rest, not irresolute. Like a pendulum. when it is swinging, it is changing. Nosotros call this disequilibrium. Eventually, it will end swinging and attain equilibrium.
Prices do something similar. They move toward an equilibrium where they come to balance and don't change. But just like you tin push a pendulum and cause it to swing and then slow down and attain equilibrium over again, prices can be "pushed" and they will modify to a new equilibrium. Information technology is the non-price determinants of need and supply that "push" prices to a new equilibrium. Nosotros 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 demand equals supply. It is impossible for the whole demand curve to exist the aforementioned as the whole supply bend (NOT: D = Due south), but there is 1 price where the quantity demanded equals the quantity supplied.
Market Disequilibrium
Why will the price of pizzas exist $9? Well, allow'south have a look 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 volition exist a surplus of 2000 pizzas (4000 - 2000 = 2000). If there is a surplus (more available than consumers are willing to buy) the toll will change - subtract. Twelve dollars is non equilibrium - information technology volition change.
See graph.
If the price is $half dozen, the quantity demanded is 5000 (Qd = 5000) and the quantity that businesses are willing to supply is 2000 (Qs = 2000). The consequence will be a shortage of 3000 pizzas (5000 - 2000 = 3000). If in that location is a shortage (consumers are willing to buy more than is available) the price volition change - increase. Six dollars is not equilibrium - it will change.
See graph.
Changes in Need AND Supply
At present that nosotros tin detect equilibrium AND nosotros know what causes supply or demand to change, let's meet what happens to the equilibrium price and quantity if supply and/or need changes. After nosotros do this, we will put it all together. It all begins with a modify in one of the eleven non-price determinants:
DEMAND:
SUPPLY:
so yous must know how they touch the graphs. We discussed this higher up and will review it over again soon. Here, let's just concentrate on what happens to price and quantity if need and/or supply changes.
Case i: D changes and supply stays the same
If demand increases (shifts to the right) what effect volition this take on PRICE and QUANTITY. Be sure to DRAW THE GRAPHS. You tin can probably gauge what will happen to price and quantity and become it correct quite frequently, but why judge when you tin can depict the graphs and get it right almost all the time? Be SURE TO Draw THE GRAPHS!
So, if need increases and supply stays the aforementioned y'all get (run into graph):
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| Need increases:
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If demand decreases (shifts to the left) and supply stays the same you get (run across graph):
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| Demand decreases:
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This is quite like shooting fish in a barrel, only the key to agreement this are the non-price determinants of supply and demand. Nosotros will review them soon.
Case 2: S changes and need stays the same
If supply increases (shifts to the correct) what effect will this have on PRICE and QUANTITY. Be sure to Draw THE GRAPHS. You can probably judge what will happen to price and quantity and get it right quite often, but why guess when you tin draw the graphs and get it correct almost all the fourth dimension? BE Sure TO Describe THE GRAPHS!
So, if supply increases and need stays the aforementioned 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 same you get (see graph):
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| Supply decreases:
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Case 3: D and S both change
What if BOTH supply and demand change at the same time? This means what happens to cost and quantity if a non-price determinant and supply AND a non-cost determinant of demand change shifting the graphs at the same time?
1. S increases, D decreases
DON'T Look!!!Graph it correct now and determine what would happen to price and quantity if supply increases and demand decreases.
In a contiguous class I would take my students do this themselves and tell me what happens to P and Q. So let's do it in this distance learning course.
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What do you lot go? What happens to price and quantity if supply increases (shifts to the right) and demand decreases (shifts to the left)?
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If supply increases and demand decreases:
- price decreases
- quantity is INdeterminant
The cost volition decrease, only we 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.
See the graph beneath where we can see that if demand decreases a picayune (D2) then the equilibrium quantity will increase, but if the need curve decreases a lot (D4) the equilibrium quantity will decrease.
two. South decreases, D increases
What happens to cost and quantity if supply subtract and demand increases?GRAPH It!
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If supply decreases and need increases:
- price increases
- quantity is indeterminant
The cost will increase, only nosotros 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 we were non told this, we cannot determine what happens to quantity. Quantity is indeterminant. Try graphing different shifts in D and Southward and come across what happens to quantity.
3. S increases, D increases
What happens to toll 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 will increase, merely we cannot tell what happens to price. The toll could increase, information technology could decrease or information technology could stay the same. What happens to the price depends on how much the supply and need curves shift and since we were not told this, we cannot determine what happens to price. Price is indeterminant.
See the graph below where we can see that if supply increases a lilliputian (S1) then the equilibrium cost will increase, but if the supply curve increases a lot (S3) the equilibrium price will decrease.
4. South decreases, D decreases
What happens to price and quantity if supply subtract and need increases?GRAPH Information technology!
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If supply decreases and need decreases:
- quantity decreases
- price is indeterminant
The quantity will subtract, only we cannot tell what happens to price. price could increase, information technology could decrease, or information technology could stay the aforementioned. What happens to price depends on how much the supply and demand curves shift and since we were not told this, nosotros cannot determine what happens to cost. Price is indeterminant. Effort graphing unlike shifts in D and S and see what happens to price.
Using Supply and Need
Now let's put it all together. We can utilize our supply and demand model to understand why prices change. Information technology all begins with the non-price determinants of demand (
We will use supply and demand curves to illustrate how changes in these non-price determinants volition affect the price and quantity of a product, ceteris paribus. Before you approximate, respond the following questions:
(1) Which determinant has changed?
(2) Will information technology touch on supply or demand?
(3) Will supply or demand increase or decrease?
(iv) GRAPH Information technology! What happens to price and quantity?
Instance one
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Our goal is to empathise what happens to Price and QUANTITY, only don't merely gauge. If you do just retrieve almost it and try to figure information technology out in your head, yous'll probably get it correct a lot of the time. But wouldn't you rather become it correct virtually, or all, of the time? We now accept a tool (supply and demand) that we can use to amend understand changes in toll and quantity. And then use the tool. Once you become used to it you'll come across its benefits.
Reply the four questions and the graph (tool) volition give you the reply.
(1) Which determinant has changed?Sometimes this is obvious. In this example information technology is income.(2) Will it affect supply or need?
Income is a determinant of Demand. Simply 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 central to using the tool correctly. We discussed above how the non-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 volition tell you what happens to price and quantity. Meet graph beneath.
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Answer: So if consumer incomes increase, ceteris paribus, the price of computers will increment and consumers will buy more than.
Instance 2
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(1) Which determinant has changed?TECHNOLOGY(2) Will it affect supply or demand?
SUPPLY(3) Volition supply or demand increment or subtract?
SUPPLY Will INCREASE (shift to the right)(4) GRAPH It! What happens to price and quantity?
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Case iii
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If the graph in a higher place 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?
(ane) Which determinant has changed?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 as well produce computers? NO.With need, 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 purchase a new habitation computer, you can play games on the computer and mayhap you won't buy a new video game system.
So, if there is a decrease in the price of personal computers, DEMAND FOR VIDEO GAME SYSTEMS WILL Alter.
(3) Will supply or demand increase or subtract?
if in that location is a decrease in the price of personal computers, DEMAND FOR VIDEO GAME SYSTEMS WILL Decrease (shift to the left).(4) GRAPH IT! What happens to toll and quantity?
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More than EXAMPLES:
For REVIEW exercises click HERE
"Real World" Examples
In the "existent world" the determinants are not equally easy to pick out. The tool withal works, but information technology takes a niggling more practice.
If you read a newspaper or Net news commodity about a production whose price and/or quantity has inverse, y'all can use supply and demand to clarify WHY the price and/or quantity has changed. We know that changes in the non-toll determinants of demand and supply cause prices and quantities to change. So, to empathise why, we have to look for the non-price determinants in the article.
REAL-WORLD EXAMPLE i
Below is a portion of an commodity from CNNFN.COM
Read the commodity looking for the cause of the cost modify and then use our supply and demand graph to ILLUSTRATE what has happened. This volition be similar to the extra credit question that you will accept on exam 1.
Remember to utilize our tool correctly:
(one) Which determinants have changed?
(2) Will they bear upon supply, demand, or both?
(3) Will supply or demand increment or decrease?
(4) GRAPH Information technology! So show what happens to price and quantity?
Tiptop PC makers cut prices
Compaq clears out former models; Dell passes on lower component costs
Feb 1, 2000: 2:44 p.m. ET
NEW YORK (CNNfn) - Two of the world's largest estimator makers on Tuesday announced that they accept cut prices on their commercial desktop PCs.
Compaq, the No. ane PC maker, said it cut prices upwards to thirteen percent on most of its Deskpro series commercial PCs. The price cuts are being made to clear the way for ix new Deskpro models. . . . . . . . . . . . . . . .Dell ( DELL : Research , Estimates ), the world's 2d largest supplier of PCs, said information technology was cutting prices considering the cost of the components it uses to brand them have too dropped.
Effective Monday, a Dell Precision WorkStation 210 with a Pentium III processor running at 650 million cycles per 2d volition sell for $one,740, a 17.one percentage reduction, the company said. Dell as well said it cut prices on the mid-range models in its Precision WorkStation 410 line past up to fifteen.five percentage.
(1) Which determinants have changed?
The article says " Dell ( DELL : Enquiry , Estimates ), the globe's second largest supplier of PCs, said information technology was cutting prices because the cost of the components it uses to make them take also dropped." This indicates the there has been a change in the toll of resource ((2) Volition they bear upon supply, need, or both?
SUPPLY(3) Will supply or demand increase or decrease?
SUPPLY WILL Increment (shift to the right)(4) GRAPH IT! Then bear witness what happens to price and quantity?
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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 price alter and and so use our supply and demand graph to ILLUSTRATE what has happened. This will exist similar to the actress credit question that you will have on exam 1.
Recall to use our tool correctly:
(1) Which determinants take changed?
(2) Volition they bear on supply, demand, or both?
(three) Will supply or demand increment or subtract?
(4) GRAPH IT! Then prove what happens to toll and quantity?
Air customers to pay for fuel
With need for seats still strong, near carriers announce fuel surcharges
By 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 hitting a mail-Gulf War high Friday, three more carriers - Us Airways, America West and Trans World Airlines - announced surcharges, charging customers $twenty per round-trip ticket on virtually all domestic flights.
That meant that eight of the nine 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 time.
Demand for seats opens door
The surcharge is unique in its acceptance by the typically cutthroat airline industry, and is a sign that demand for air travel remains potent.
The Air Send Association written report that 71.3 percentage of its members' seats were filled last year, the best rate in the history of passenger jet travel.
With demand remaining strong despite the spike, airlines are in a better position to seek higher fares.
"In the past, when nosotros had the tremendous stitch in fuel, nosotros besides had a recession," said David Swierenga, the ATA's chief economist. "Those ii things together clobbered the manufacture. Now the economy is moving ahead , and carriers will have a little more flexibility on the pricing side.". . . . . . . . .
Answer: I have highlighted in cerise the important parts of this article. Let's analyze each one.
"With oil prices hitting a post-Gulf War high Friday, three more than carriers - US Airways, America W and Trans World Airlines - announced surcharges, charging customers $20 per round-trip ticket on well-nigh all domestic flights."
(1) Which determinant has changed?Toll OF Resource. Oil (fuel) is a resources used by the airline industry(ii) Will they affect supply or demand?
SUPPLY(3) Will supply or demand increment or decrease?
SUPPLY WILL DECREASE (shift to the left)(four) GRAPH IT! Then show what happens to cost and quantity?
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The article as well says:
" The surcharge is unique in its acceptance past the typically cutthroat airline industry, and is a sign that demand for air travel remains potent. " AND "Now the economic system is moving ahead".
(ane) Which determinant has inverse?INCOME ("The economy is moving alee" means incomes are rising.)(two) Volition they touch on supply or demand?
DEMAND(3) Volition supply or demand increment or decrease?
Need Volition Increase (bold air travel is a normal good)(iv) GRAPH Information technology! Then bear witness what happens to price and quantity?
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At present LET'South PUT BOTH CHANGES ON THE SAME GRAPH. You lot must do this to prove the overall outcome of all changes. We take a subtract in supply caused by higher resources prices and an increment in need caused by higher incomes,
The result is higher prices (encounter graph) and the quantity stays about the same as the article states (therefore I shifted the curves the aforementioned amount).
Other articles that you can clarify yourself:
- http://cnn.com/Usa/9907/27/gas.prices/
- http://cnnfn.com/2000/01/21/companies/airfuel/
- http://cnn.com/US/9908/09/rv.blast/
ANSWERS
Market Supply: correct respond "B" [Render]
Source: http://www2.harpercollege.edu/mhealy/eco212i/lectures/s&d/s&d.htm
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