What Is The Effect Of A Change In Price On Quantity Demanded
Need and Supply:
How Prices are adamant in a Marketplace Economy
How Prices are adamant in a Marketplace Economy
REVIEW: For review exercises click HERE
Introduction
Structural Adjustment Policies
In our introductory lecture on Structural Adjustment nosotros discussed various policies that countries are adopting all around the word to promote economic growth (increasing output rather than increasing their ability) and achieve productive and allocative efficiency. Information technology is hoped that as economies movement away from command economies (Chapter 23) toward mzrket economies or capitalism (chapter 4).
These policies are:
1. Privatization
two. Promotion of Competition
3. Express and Reoriented Role for Government
4. Price Reform: Removing Controls
5. Joining the World Economic system
6. Macroeconomic Stability
Even though the concepts of SUPPLY and DEMAND are microeconomic concepts, they are reviewed in this macroeconomics course considering not all students take taken micro (ECO 211) and they are primal principles that all economical student should primary. We will study supply and demand in this "Macroeconomics of the Gloabal Econaomy" course to better understand why there is a worldwide movement to remove price controls and let Supply and Demand make up one's mind prices.
In a capitalist economy, prices are very important. They have ii fundamental functions:
- they RATION goods and services, and
- the GUIDE resources to where they are wanted most
Past doing this they help the economy maintain allocative efficiency and productive efficiency.
In the 5Es lesson on allocative efficiency we discussed that it was skillful for the price of plywood to increase in Florida subsequently a hurricane. When the price increased two things happened: (1) plywood was rationed to its most of import 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 toll of plywood was kept too low the result was allocative inefficiency (a shortage).
Prices are likewise very of import in maintaining productive efficiency. In the 5Es lecture on Productive efficiency we divers information technology as producing at a minimum toll. In order to minimize costs, producers must know the prices of the resources. If these resources prices are determined past demand and supply then they will reflect the relative scarcity of the resources and their relative importance (more scarce and important resources will take a higher cost) and the economy can accomplish productive efficiency.
In a backer order prices are determined by the interaction of demand and supply. Since prices are so of import, nosotros demand to amend empathise how they are determined. why is the price of gasoline $ane.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 later on a hurricane?
Demand
If the price of a product increases what happens to need for that product? For example, If the toll of pizza increases, then the demand for pizza does what?
-
-
-
-
-
-
-
NOTHING! If the cost of pizza increases, the need for pizza does not change. This is because in economics we accept a more than precise definition of demand. Demand is Not the quantity that people buy.
DEFINITION: So 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 period, ceteris paribus. We should look more than closely at this definition.
Demand is a table of numbers. Look at the tabular array below. The whole tabular array might represent my demand for pizza.
Demand Schedule and Curve
As nosotros learned in a previous lesson, any point on a graph represents two numbers, so we can plot our demand table equally in the graph below.
If we assume that there are quantities and prices in-between those in the table (for instance if the price was $4.l how many pizzas would I buy?) we 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 price will be we need both demand and supply.
But we can meet what happens to need if the price of pizzas increases. If the price of pizza increases, say from $6 to $ix, nothing on the tabular array changes (demand does not change) because need already includes diverse prices and various quantities. Demand (the tabular array or the graph) does non change when the price changes because need INCLUDES diverse prices and diverse quantities. Need is NOT how much we purchase.
Note that our definition of demand includes the ceteris paribus assumption. When we develop a demand bend only the cost and quantity demanded change. Everything else is assumed to remain constant. I don't get a big increase in my income. I don't win the lottery. There isn't a new report out that states pizzas crusade cancer. All other factors remain the aforementioned - simply the price and quantity demanded change.
Law of Demand
As we tin can run into on the demand graph, there is an changed relationship between price and quantity demanded. Economists phone call this the Law of Demand. If the price goes up, the quantity demanded goes downward (only demand itself stays the same). If the cost decreases, quantity demanded increases. This is the Law of Demand. On a graph, an inverse relationship is represented by a downward sloping line from left to correct.
Why?
Why is the law of demand truthful? Why is the demand bend downward sloping from left to right? Why do people buy more than at lower prices and less at higher prices?
As social scientists, economists try to explain homo behavior. Information technology is common sense that people behave this way - but how can we explicate it? Economists have three 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 law of diminishing marginal utility. This economic principle besides explains why the need curve is downward sloping.
Utility is the reason nosotros consume a skilful or service. You might telephone call it satisfaction. I become satisfaction (utility) when I drive my boat. I get utility (satisfaction?) when I go to the dentist. "Marginal" means EXTRA or ADDITIONAL. Then, according to the police force of diminishing marginal utility, the Extra (non the full) utility diminishes for each additional unit consumed. If we are receiving less extra utility when we buy one more of a production, we won't be willing to pay the aforementioned price. Afterwards all, information technology is the marginal utility that we are paying for.
The first piece of pizza that I eat I really enjoy. It gives me a lot of utility. But later on a few pieces, I don't get as much additional satisfaction from one more piece equally I did from the offset slice. So, I will but buy a second piece if it has a lower price, since I am getting less additional utility from the second piece. this explains why we buy more when the cost goes downwards and why we purchase less when the price goes upward. It explains the law of demand.
Income Effects
Another explanation of why the police force of demand explains human being behavior is "income effects".
If the toll of price of pizza decreases what happens to your income?
(NOTE: the "
" means "causes".)
? Nada happens to your income when the toll of pizza decreases? (Exercise you become a enhance when Pizza Hut has a auction?), Just your REAL income (or the purchasing power of your income volition increase.
Then, when pizza prices subtract your real income increases. (This is like the cost of pizza staying the aforementioned simply 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 police force of need is true.
Exchange Effects
The 3rd explanation of the law of demand is "substitution effects".
? If the price of pizza decreases what happens to the price of Chinese food at the restaurant downwardly the street? Probably aught. (I know that the Chinese eating house where My wife and I eat does not change their prices when Pizza Hut has a auction.) 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 we see that Pizza Hut has a sale (
toll of pizza) we start to think that the Chinese food seems more expensive compared to the now cheaper pizza (
Market Demand
Definition:
Marketplace need is the horizontal summation of the individual demand curves. Or, instead of just my private need for a product what if there were two people, or more, in the marketplace. the consequence would be tat for each price, the quantities demanded would be greater since there are more people. The prices stay the same, but the quantities become larger, or the demand graph shifts horizontally (to the right).
Graphically:
Sample Problem:
Given the following individuals' demand schedules for product X, and bold these are the only three consumers of X, which set of prices and output levels below will be on the marketplace need bend for this product?
Reply
Determinants of Need
The price of the product
Economists stress the importance of price in determining how much people volition buy. That is why they put cost on the need graph, only in that location are other things that impact how much of a product we buy too the price. When we developed my demand curve for pizza nosotros employed the ceteris paribus supposition. I didn't become a large increase in my income. I didn't win the lottery. There wasn't a new study out that stated pizzas crusade cancer. All other factors remained the same - only the cost and quantity demanded changed.But there are other determinants of how much we demand (or buy) likewise the price. We call these the Non-Cost determinants of Demand.
The non-price determinants of demand
Let's non talk most pizzas anymore and employ a new production in our examples. - - - How about vodka? We know that when the price of vodka goes up nosotros buy less and when the price goes down we buy more than (this is the law of need). But what else might cause us to buy more vodka besides the price? In other words, IF THE Toll OF VODKA STAYED THE Same, what might cause us to buy more or less vodka?Economists classify the non-price determinants of demand into 5 groups:
- expected price (Pe)
- price of other goods (Pog)
- income (I or Y) (In Macroeconomics "I" usually stands for "investment" and "Y" stands for "income".)
- number of POTENTIAL consumers (Npot), and
- tastes and preferences (T).
Let'due south briefly wait at each one hither and in more than detail later.
Pe - If we hear that there will be a new $v tax on a bottle of vodka beginning next calendar week, what happens to the amount of vodka sold this week at the current price? Information technology probably increases since some people volition purchase more than now to avoid the higher future prices.
Pog - What happens to the amount of vodka sold if the toll of gin increases? Might not some people who were going to purchase gin buy vodka instead since the price of gin went upwards? Or what might happen to vodka sales if the price of lycopersicon esculentum juice goes down? perchance now with the cheaper lycopersicon esculentum juice prices some people might want to drink more encarmine marys (vodka mixed with tomato juice)? If and 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 downward I would probably buy less vodka. (And if I lost my job 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 actually means "everything else". There are hundreds of factors that touch the quantity of vodka sold. We don't want to memorize hundreds of different determinants for each product, so economists group everything else into "tastes and preferences". Annihilation that might make consumers desire 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. Correct earlier a holiday people may buy more than.
In gild to remember these determinants of demand, retrieve of somebody who has had too much vodka to drink and they come staggering into a liquor store demanding, "G-g-give grand-me an-n-n-nother p-p-p-pint of five-v-vodka".
Get information technology? "p-p-p-pint " or P, P, P, I, N, T or Px, Pe, Pog, I, Npot, T
In order to save me time in typing, I will type "P, P, I, Northward, T" instead of "the non-toll determinants of demand".
Two Kinds of Changes Involving Demand
If the price of a production increases what happens to need for that product? For example, If the price of pizza increases, so the demand for pizza does what? NOTHING, demand does not change when the price changes, simply the quantity demanded does change. This section will help us to improve understand the divergence betwixt a modify in quantity demanded ( 
Change in Quantity Demanded (
A modify in quantity demanded acquired ONLY by a change in the Toll of the product. On a graph information technology is represented past a motion ALONG a SINGLE demand curve.
And then if the price of pizza increase from $6 to $9 we will get an decrease in quantity demanded ( 
Alter in Demand (
When there is a change in demand itself nosotros get a new need schedule and curve. We accept to change the numbers in the demand schedule and this volition SHIFT the need curve.
If in that location is an increase in demand (
When we say that the demand curves shift to the right, it means that we accept to change the numbers on the need schedule. For the same prices, the quantities increment. This shifts the curve to the Correct.
A decrease in demand will then shift the demand bend to the LEFT. For each cost on the demand schedule, the quantities decrease.
Be sure to depict your arrows to the RIGHT and LEFT. Many students want to draw the arrows perpendicular to the demand curve. Don't practice this. Always draw your arrows horizontally considering this indicates the the prices are the same, and only the quantities change.
A alter in demand is caused by a Modify in the non-price determinants of need:
Pe, Pog, I, Npot, T If these modify we get a new demand schedule and curve. To empathize why prices are what they are, and why they change, we need to empathize very well how these determinants move the demand curve. This is where information technology all begins. In our definition of demand nosotros held these things constant (ceteris paribus), only in the real world these things exercise change, changing demand, and ultimately irresolute prices. So let's look at each determinant individually to sympathise how they each affect demand.
If you lot expect the price to get upwards in the hereafter demand today volition increment (shift to the correct). For example, if we read that there volition be a new taxation on vodka starting adjacent week, people will want to purchase more now earlier the price increases. Retailers empathize this. How often have yous heard "SALE ENDS Monday"? They want you to await the price to increase in the future so yous'll buy information technology today.
The opposite happens when yous wait the price to go downwards in the hereafter. In the past when my wife and I were shopping whenever I put something in the cart, she would take it out and put it back on the shelf! I'd ask, "why are you doing that?". She would say that she expected it to continue sale presently and we should wait until it does. If you await the price to get down in the futurity demand today decreases. (f ¯Pe in the future Þ ¯D today). But, whenever I put something in the cart, she would take information technology out proverb that she expects information technology to become on sale soon. After awhile I got a piffling upset, when I'd enquire her nigh the items she put in the cart and she'd say that they were on auction last week and nosotros missed it. Finally, I went to talk to the store manager and explained the situation to him. He saved our marriage past explaining that well-nigh chain store have a policy stating that if an item goes on auction after you accept purchased it, yous tin can bring in the receipt inside 30 days and get a refund. Retailers sympathise how toll expectations bear upon demand.
The effect of a modify in the toll of other goods on demand depends on what type of other appurtenances we are talking well-nigh. There are three types:1) substitute appurtenances
Substitute goods are goods where if you buy more 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.
Let'southward look at Coke and Pepsi. If the price of Coke increases information technology will increase the demand for Pepsi (the graph shifts to the correct).I f you are going to purchase a can of Coke, y'all may walk correct past the Pepsi machine, just when yous notice that the cost of Coke has increased, you'll probably turn around and buy the Pepsi. You weren't going to purchase Pepsi before, merely now, at the same cost, you are willing to purchase it. And then the need for Pepsi has increased. The need bend has shifted to the correct. At the same prices, the quantities demanded are greater.
If the toll of Coke increases, what happens to the need for Coke? - - - Zero. Price does not change demand (as nosotros have divers it) but it volition change the quantity demanded.
You've seen a good instance of this in your local grocery store. For case, I may want to buy some coffee. Then I go to the coffee alley and grab a tin of Folgers and keep downward the aisle. But at the end of the aisle I see a display of Maxwell House java on sale! What do 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 yous seen various brands mixed in with such displays? The demand for Folgers decreased (I no longer desire information technology at that price, so I accept it out of my cart) because the price of Maxwell Business firm decreased.
If:
2) complementary goods
Complementary goods are goods where if y'all purchase more of one you also buy more of the other one. they go together similar vodka and tomato juice, rum and Coke, film and film developing, hot dogs and hot dog buns.
Permit's say that yous desire to eat hot dogs tonight and you become to your local grocery shop and put a pocketbook of buns in your cart and head down the alley to the wieners. When you get to the wiener display you detect that their price has increased significantly so you decide not to eat hot dogs. What are you going to do with the buns? You should put them back, but if yous are like many people you lot'll put them in the wiener display and move on quickly. But the point is, you lot were going to buy the buns at their nowadays cost (they were already in your cart), but when you learned the price of hot dogs increased your need for buns decreased (the need curve shifted to the left - at the same prices the quantities demanded decreased).
Of course, if the price of one product decreases (cheaper film developing), the demand for its complement (motion picture) increases.
iii) contained goods
Contained goods are goods where if the price of one changes, it has no effect on the need for to other i. For example, what happens to the demand for newspaper clips if the price of surfboards increases? Nothing.
Summary (Pog):
i) normal goodsFor most goods, called normal goods, if consumer incomes increment, demand will increase and vice versa.
And then if incomes increase, the demand bend for restaurant meals, and cars, and boats, volition shift to the right. At the aforementioned prices people will buy more.
2) inferior goods
For some goods, called inferior goods, if consumer incomes increment demand will subtract, and vice versa. If simply you had more money, you would purchase less of that product
The term "junior proficient" does not mean they are of low quality. the definition of an inferior good is one where if your income increases, need decreases. There is an inverse human relationship between income and demand.
Examples of inferior goods might include used clothing, potatoes, rice, perchance generic foods. If you lose your chore (and then your income decreases) you may shop for wearing apparel at the Salvation Army Thrift Store (demand for used clothing increases).
What is a normal good for one consumer might be an inferior skilful for some other. For example, if the income of ane family increases they may buy a second pocket-sized automobile (a normal good), but for another family unit, an increase in income may hateful that they don't buy a small automobile (an inferior practiced) anymore and they purchase a mini van instead.
An increase 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 increment.
Oft 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 sale on Pepsi (price of Pepsi decreases) what happens to demand for Pepsi? -- Nothing (price does non change the demand schedule). But, if G-Mart has a sale on Pepsi (price of Pepsi decreases) what happens to the number of consumers ownership Pepsi? It volition increase. (The police force of need says that if price goes downwardly, quantity demanded goes up.) And so, if they take more customers because the toll went down, what happens to need? Nothing - (price does not alter the need schedule).
But, if the number of POTENTIAL customers changes, need will change.
4 circumstances tin change the number of potential consumers:
- population change
If a new housing development is built in the empty field backside a small shop, the number of potential consumers increases, and need volition increase.
- expanded marketing surface area
Coors beer used to sold just out West. President Ford used to take to accept it flown in to the While Business firm considering you couldn't buy it anyplace else. Then when Coors expanded to all states, demand increased considering now at that place are more potential consumers.
- new competitor (changes the demand curve facing and individual store, but Not market demand curve)
If a new liquor store moves in across the street from and existing shop, the demand for liquor of the existing shop will decrease since now at that place are fewer potential consumers since some of the consumers walking past the store will have already bought something at the new store.
- change in eligible consumers (i.due east. drinking age)
If they lower the drinking historic period there will exist more potential vodka drinkers and so need for vodka will increase.
There are hundreds of factors that touch the quantity of vodka sold. Nosotros don't want to memorize hundreds of different determinants for each product, then economists group everything else into "tastes and preferences". Tastes and preferences really refers to "everything else". Anything that increases a consumer's preference for a product will increase demand for that production. This will include advertising and fads.
Supply
Introduction
Supply is more difficult for students to understand than demand. We are all consumers (demanders), but few of us ain a business (suppliers). And then, remember to think of yourself as a concern owner when we discuss supply.
Definition
Supply is a schedule which shows the diverse quantities businesses are willing and able to offering for sale at diverse prices in a given time flow, ceteris paribus.
Supply is NOT the quantity available for sale. This is the way the term is often used in the popular printing. Supply is the whole schedule with many prices and many quantities.
Just similar with demand, there is a divergence between a modify in quantity supplied and a alter in supply itself. So, if the cost increases what happens to supply? The best WRONG answer would exist "supply increases", but it doesn't. Cost does not alter supply, information technology 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 we plot these points (remember any point on a graph merely represents two numbers) We get the graph beneath.
If we assume at that place are quantities and prices in-between those on the schedule we get a supply bend.
Law of Supply
The law of supply states that there is a direct human relationship between price and quantity supplied. In other words, when the price increases the quantity supplied besides increases. This is represented past an upward sloping line from left to correct.
Why?
Why is the constabulary of supply true? Why is the supply curve upward sloping? Why volition businesses supply more pizzas only 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, you accept to pay them more than, per pizza. But economists, as social science, desire to explain common sense. We know businesses behave this way, merely why?
There are two explanations for the constabulary of supply and both have to do with increasing costs. Businesses crave a college price per pizza to produce more than pizzas considering they accept higher costs per pizza. Why?
Commencement, in that location are increasing costs because of the constabulary of increasing costs. In a previous lecture we explained that the production possibilities curve is concave to the origin because of the law of increasing costs. the police of increasing costs is true considering non all resource are identical. Let'south say a pizza place is only opening. The owner figures that they volition need five employees. After putting an advert in the paper there are 20 applicants. Five have had experience working in a pizza place earlier. They came to the interview clean and on time. The other fifteen had no work experience. Many came late. A few were defenseless steeling pepperoni on the manner out. One spilled flour all over the floor. Which applicants will exist hired? Of class it volition be the five with experience and the other fifteen volition be rejected because they would be as well costly to hire. NOW, if the pizza identify wants to produce more than pizzas they will 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.). So, they will simply hire the more costly employees if they can get a college price to cover the higher costs. this is ane explanation why the supply bend is upward sloping.
2d, there are increasing costs because some resources are fixed. This should not make sense to you lot. Why would there be increasing costs if nosotros use the same quantity of some resources? 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. Now, if we want to produce more pizzas you will have to cram more than workers into the same size kitchen. Every bit they crash-land into each other and look for an oven to exist gratis they even so get paid, just the cost per pizza increases. Therefore they will not produce more than pizza unless they can get a higher price to encompass these college per unit costs. So the supply curve should be upward sloping.
Market Supply
Market supply is the horizontal summation of the individual supply curves. Instead of looking at how many pizzas ane pizza place is willing and able to produce at unlike prices (private supply), we keep the prices the aforementioned and add the quantities of boosted pizza places. Prices stay the aforementioned, but quantities increase because at that place are more pizza suppliers. Then the market supply of pizzas is farther to the right (horizontal) than the individual pizza place 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 price on the supply graph, but there are other things that touch how much of a production volition be produced as well the toll. When nosotros developed the supply bend for pizza nosotros employed the ceteris paribus assumption. we causeless all other things stayed constant. For case in that location were no new technological discoveries, the prices of resources stayed the same, or no change in taxes. All other factors remained the same - only the price and quantity supplied inverse.But there are other determinants of how much concern supply also the price. We call these the Non-Price determinants of Supply.
The non-cost determinants of Supply
Economists classify the non-toll determinants of supply into vi groups:a. Pe -- expected cost
b. Pog -- price of other goods Too PRODUCED Past THE Business firm
c. Pres -- price 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 change in Quantity supplied acquired ONLY by a change in the Toll of the product. It is represented past a movement Along a Unmarried supply curve.
Change in Supply (
A change in supply is a shifting the supply curve because at that place is a new supply schedule. The supply curve either moves left or right (horizontally) since the prices stay the same and only the quantities change and quantity is on the horizontal axis. Be certain to draw your arrows to the Right and LEFT. Many students want to draw the arrows perpendicular to the supply curve. Don't do this. Always draw your arrows horizontally because this indicates the the prices are the same, and simply the quantities change. Also, if you depict y'all arrows perpendicular to the supply curve and pointer pointing Upwardly will indicate a DECREASE in supply. That could get confusing!
A modify in supply is caused by a alter in the non-price determinants of supply. these are the factors that we assumed were constant when we used the ceteris paribus assumption to develop the supply curve.
Increase in Supply
If in that location is an increment in supply (
Decrease in Supply
If there is an decrease in supply (
Changes in supply are acquired by a CHANGE in the not-price determinants of supply
Allow's await at these determinants on at a time. We must know how they shift the supply bend if we are to use the supply and demand tool to understand how prices are adamant in a market place economy.
If a business expects that they can become a college price in the future, what will happen to supply today? They volition exist less willing to sell there products today because they will know that if they waited they could go a college price and so supply today would subtract, shift to the left. (Remember, supply is non the quantity available for sale.)Let's say that you desire to sell y'all car, somebody offers you $1500 today, and you accept it. You are willing to sell your car for $1500 today. And then, somebody says that they volition dive you $2000 for your motorcar if you lot could wait three days. Now yous expect that you can get a higher price ($2000) in the hereafter, so you will probably no longer want to sell your car for $1500 today.
First, think of a business that produces two products, similar farmers who can either grow corn or soybeans. Then the price of ane increases, what happens to the supply of the other one.So if the price of soybeans increases, what happens to the supply of corn?
If the price of soybeans increases the supply of corn will subtract. The supply curve of corn will shift to the left every bit farmers establish more than soybeans and less corn.
If the price of soybeans increases, what happens to the supply of soybeans?
-
-
-
Nada. Call up, price does not change supply, it changes the quantity supplied. and so if the price of soybeans increases, we would get an increase in the quantity supplied (aforementioned supply curve, higher quantity).
The cost of resources (
If the price 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 toll to comprehend the higher costs. This shifts the supply bend to the left (For Example: if the autoworkers unions receives a significant wage increase, this volition increase the costs of producing cars and subtract the supply of cars (
Does improved engineering increment or subtract the costs of producing a product?Improved technology DECREASES costs and therefore increases supply. If the technology did not decrease costs, then it wouldn't be used. If there is a high-tech expensive style to produce a product and a low-toll, low-tech, manner to produce the same product, companies that utilize the low-cost methods will be able to sell the production at a lower price and beat out the high-toll producers.
Improved applied science
What has improved technology done to the costs of medical intendance? Improved medical technology has INCREASED the cost of medical care Just information technology has also changed the outcome. For instance let's say that there is a affliction where with existing low-toll applied science, half the patients dice. Now, if they invent a new high-cost technology that will salvage all lives which technology will exist used? Of class the new loftier-price engineering will be used, Just THE PRODUCT HAS CHANGED. One product is when half the patients die, the other product is when all patients live. We tin can't put ii products on one supply bend.
Let'south use ane more medical instance. Why do doctors however use depression-tech stethoscopes? they were using similar stethoscopes a hundred years ago. Isn't hither a high-tech electronic stethoscope? Yes there is, so why don't doctors employ it? Because it is more expensive AND Information technology GIVES THE SAME RESULTS. Doctors will apply the cheaper technology as long as the results are the same. but obstetricians do use the more than expensive high-tech stethoscope because it gives them improve results. The depression-tech stethoscopes can't e'er option out the fetal middle beat. the newer high-tech and higher-cost electronic stethoscopes can. The product changes.
So, improved applied science will decrease costs and increase supply OR it will increase costs and alter the product which we cannot put on one graph.
Here we will hash out excise taxes. Excise taxes are a "per-unit" tax imposed on the production or auction of a product. Examples include the gasoline tax (so much per gallon), the cigarette revenue enhancement (so much per pack) and the liquor tax (so much per bottle).Let's discuss the gasoline tax. If the tax on gasoline increases will this impact the need for gasoline or the supply of gasoline? If you said demand - and so which non-price determinant of demand has changed? remember cost does not change need.
If the revenue enhancement on gasoline increases, this will raise the cost of SELLING gasoline, and DECREASE SUPPLY.
Who pays the gasoline tax? Who pays the wages of the gas station employees? Whether yous answer the consumer of the gas station possessor, you have to give the same reply for both questions. Both taxes and wages are costs to the producer or seller. College gasoline taxes exercise not shift the demand curve, only they may result in a higher price and therefore a decrease in quantity demanded.
Subsidies are the contrary of taxes. Instead of the business paying the authorities, the regime pays the business. There are fewer subsidies than taxes. But let's say the the government wants to encourage the utilise of solar energy then they put a subsidy (or increase ane) on solar free energy equipment. this will decrease the costs of producing or selling the equipment considering when they produce or sell one they get a refund (subsidy) from the government.
An increase in the number of producers of a production will increase supply of that product. If the number of figurer manufacturers increases, the supply of computers volition increment (shift to the right).
Market Equilibrium -- Equilibrium Cost and Quantity
At present we are gear up to talk over PRICES. At the top of this online lecture I said:
"In a capitalist lodge prices are determined by the interaction of need and supply. Since prices are and then of import, we need to better understand how they are determined. why is the price of gasoline $1.59 a gallon. Why does a candy bar cost $0.75? Why is the price of plywood normally $10 a sheet, but $30 a sail after a hurricane?"
Market Equilibrium
Equilibrium means that there is no further tendency to change. When something is at equilibrium, information technology is at remainder, not changing. Like a pendulum. when it is swinging, it is changing. We call this disequilibrium. Eventually, it will stop swinging and accomplish equilibrium.
Prices exercise something similar. They move toward an equilibrium where they come to rest and don't change. But just similar you can push a pendulum and cause it to swing and and then slow down and achieve equilibrium again, prices can be "pushed" and they will change to a new equilibrium. It is the non-price determinants of need and supply that "push" prices to a new equilibrium. We 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. Information technology is impossible for the whole demand curve to be the same as the whole supply curve (Not: D = South), only there is one price where the quantity demanded equals the quantity supplied.
Marketplace Disequilibrium
Why will the price of pizzas be $9? Well, let's take a look at what happens if the price is not at equilibrium.
If the price is $12, the quantity demanded is 2000 (Qd = 2000) and the quantity that businesses are willing to supply is 4000 (Qs = 4000). The outcome will be a surplus of 2000 pizzas (4000 - 2000 = 2000). If there is a surplus (more available than consumers are willing to purchase) the toll will change - decrease. Twelve dollars is not equilibrium - it volition change.
Encounter 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 result volition exist a shortage of 3000 pizzas (5000 - 2000 = 3000). If there is a shortage (consumers are willing to purchase more than is available) the price will change - increment. Vi dollars is non equilibrium - it will change.
See graph.
Changes in Demand AND Supply
At present that we tin find equilibrium AND we know what causes supply or demand to change, let's meet what happens to the equilibrium price and quantity if supply and/or demand changes. After nosotros do this, we will put it all together. It all begins with a change in ane of the xi not-price determinants:
Need:
SUPPLY:
so you must know how they impact the graphs. We discussed this higher up and volition review information technology once again soon. Here, permit'south just concentrate on what happens to price and quantity if demand and/or supply changes.
Case i: D changes and supply stays the same
If demand increases (shifts to the right) what outcome volition this have on Cost and QUANTITY. Be certain to DRAW THE GRAPHS. Yous tin can probably guess what volition happen to toll and quantity and go information technology correct quite oftentimes, but why estimate when yous tin can describe the graphs and go it right almost all the time? Exist SURE TO Depict THE GRAPHS!
So, if demand increases and supply stays the aforementioned you get (encounter graph):
| |
| Need increases:
|
If demand decreases (shifts to the left) and supply stays the same you become (see graph):
| |
| Demand decreases:
|
This is quite piece of cake, but the primal to understanding this are the non-cost determinants of supply and demand. We volition review them soon.
Case 2: S changes and demand stays the same
If supply increases (shifts to the correct) what effect will this accept on PRICE and QUANTITY. Be sure to Depict THE GRAPHS. You lot can probably gauge what will happen to cost and quantity and go information technology correct quite often, merely why guess when you can depict the graphs and get it right almost all the time? BE Certain TO DRAW THE GRAPHS!
And then, if supply increases and demand stays the same you lot go (see graph):
| |
| Supply increases:
|
If supply decreases (shifts to the left) and demand stays the same you go (see graph):
| |
| Supply decreases:
|
Case 3: D and S both modify
What if BOTH supply and demand change at the aforementioned fourth dimension? This means what happens to price and quantity if a non-toll determinant and supply AND a not-price determinant of demand modify shifting the graphs at the same fourth dimension?
1. S increases, D decreases
DON'T Await!!!Graph it right at present and determine what would happen to cost and quantity if supply increases and demand decreases.
In a contiguous class I would have my students do this themselves and tell me what happens to P and Q. And so permit's do it in this distance learning class.
-
-
-
-
What do you get? What happens to cost and quantity if supply increases (shifts to the right) and need decreases (shifts to the left)?
-
-
If supply increases and demand decreases:
- cost decreases
- quantity is INdeterminant
The price volition decrease, just we cannot tell what happens to quantity. Quantity could increment, it could subtract or information technology could stay the aforementioned. What happens to quantity depends on how much the supply and need curves shift and since we were not told this, nosotros cannot decide what happens to quantity. Quantity is indeterminant.
See the graph below where we can see that if demand decreases a little (D2) then the equilibrium quantity will increase, just if the demand curve decreases a lot (D4) the equilibrium quantity will subtract.
two. S decreases, D increases
What happens to price and quantity if supply decrease and demand increases?GRAPH Information technology!
-
-
-
-
If supply decreases and demand increases:
- cost increases
- quantity is indeterminant
The price will increment, but we cannot tell what happens to quantity. Quantity could increase, it could subtract 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 not told this, nosotros cannot make up one's mind what happens to quantity. Quantity is indeterminant. Endeavour graphing different shifts in D and Due south and come across what happens to quantity.
iii. S increases, D increases
What happens to cost and quantity if both supply and demand increase (shift to the right)?GRAPH IT before scrolling (or looking) lower on this page.
-
-
-
-
If supply increases and demand increases:
- quantity increases
- price is INdeterminant
The quantity will increment, but we cannot tell what happens to toll. The price could increment, it could decrease or information technology could stay the same. What happens to the 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. Toll is indeterminant.
Run across the graph beneath where we can see that if supply increases a little (S1) and so the equilibrium cost will increase, simply if the supply curve increases a lot (S3) the equilibrium price volition subtract.
four. S decreases, D decreases
What happens to cost and quantity if supply decrease and demand increases?GRAPH IT!
-
-
-
-
If supply decreases and need decreases:
- quantity decreases
- toll is indeterminant
The quantity will decrease, just we cannot tell what happens to price. price could increase, it could subtract, or information technology could stay the same. What happens to price depends on how much the supply and need curves shift and since nosotros were not told this, nosotros cannot determine what happens to price. Price is indeterminant. Try graphing different shifts in D and S and see what happens to price.
Using Supply and Demand
Now permit'south put information technology all together. We can use our supply and demand model to understand why prices change. It all begins with the not-price determinants of need (
We will utilize 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 lot estimate, answer the post-obit questions:
(1) Which determinant has inverse?
(two) Will information technology affect supply or demand?
(3) Will supply or demand increase or decrease?
(four) GRAPH Information technology! What happens to price and quantity?
EXAMPLE i
| |
Our goal is to understand what happens to PRICE and QUANTITY, but don't just approximate. If you practice simply recall about it and effort to figure it out in your head, you lot'll probably get it right a lot of the time. But wouldn't you lot rather get it correct nigh, or all, of the time? We now have a tool (supply and demand) that we can use to better understand changes in toll and quantity. So utilise the tool. Once you lot get used to it you lot'll see its benefits.
Reply the four questions and the graph (tool) volition give y'all the reply.
(1) Which determinant has changed?Sometimes this is obvious. In this example it is income.(two) Will it affect supply or need?
Income is a determinant of Demand. Merely at other times this is more than difficult. For instance Pe and Pog are determinants of BOTH demand and supply.(3) Will supply or demand increment or subtract?
This is the fundamental to using the tool correctly. We discussed in a higher place how the non-price determinants shift the curves. Computers are normal goods. This means that if incomes increase, demand for computers will increase.(4) Finally, GRAPH IT! the graph will tell you what happens to price and quantity. See graph below.
| | |
Respond: And then if consumer incomes increase, ceteris paribus, the price of computers volition increase and consumers will buy more than.
Case 2
| |
(1) Which determinant has changed?Engineering science(2) Volition it affect supply or need?
SUPPLY(3) Will supply or demand increment or subtract?
SUPPLY WILL INCREASE (shift to the right)(4) GRAPH IT! What happens to price and quantity?
| | |
Example 3
| |
If the graph above is for Nintendo 64 Video Game Systems, what will happen to the price and quantity if at that place is a subtract in the price of personal computers?
(1) Which determinant has changed?Pog - the product on the graph is Nintendo Video Game Systems and the price of another production, computers, has inverse(2) Will it touch supply or demand?
The not-price determinant, Pog, is a determinant for both supply and demand. With supply we said it refers to the price of other skilful PRODUCED BY THE SAME FIRM. Does Nintendo also produce computers? NO.With demand, Pog refers to the cost of substitute and the price of complements. Are video game systems and home computers substitutes or compliments? About people would say they are substitutes. If you buy a new home computer, you can play games on the computer and maybe you won't purchase a new video game organization.
So, if there is a decrease in the price of personal computers, DEMAND FOR VIDEO GAME SYSTEMS Will CHANGE.
(three) Will supply or demand increase or subtract?
if there is a subtract in the price of personal computers, Need FOR VIDEO GAME SYSTEMS Volition DECREASE (shift to the left).(4) GRAPH It! What happens to price and quantity?
| | |
More EXAMPLES:
For REVIEW exercises click HERE
"Real World" Examples
In the "real world" the determinants are not as like shooting fish in a barrel to option out. The tool still works, but it takes a niggling more practice.
If you read a newspaper or Cyberspace news article most a production whose price and/or quantity has changed, you tin use supply and demand to analyze WHY the price and/or quantity has inverse. We know that changes in the non-price determinants of need and supply cause prices and quantities to change. So, to understand why, we have to look for the non-cost determinants in the commodity.
Existent-Globe Case one
Below is a portion of an article from CNNFN.COM
Read the article looking for the crusade of the price change and then use our supply and demand graph to ILLUSTRATE what has happened. This volition exist like to the extra credit question that you lot will accept on exam 1.
Think to use our tool correctly:
(ane) Which determinants accept changed?
(2) Will they bear upon supply, demand, or both?
(three) Will supply or need increase or decrease?
(four) GRAPH IT! Then evidence what happens to price and quantity?
Peak PC makers cut prices
Compaq clears out sometime models; Dell passes on lower component costs
February 1, 2000: two:44 p.grand. ET
NEW YORK (CNNfn) - Two of the world's largest reckoner makers on Tuesday announced that they have cut prices on their commercial desktop PCs.
Compaq, the No. i PC maker, said it cut prices up to 13 percent on most of its Deskpro serial commercial PCs. The price cuts are beingness fabricated to articulate the way for nine new Deskpro models. . . . . . . . . . . . . . . .Dell ( DELL : Research , Estimates ), the world'southward 2d largest supplier of PCs, said it was cut prices because the cost of the components information technology uses to make them accept also dropped.
Effective Monday, a Dell Precision WorkStation 210 with a Pentium 3 processor running at 650 meg cycles per second volition sell for $ane,740, a 17.i percent reduction, the visitor said. Dell also said information technology cut prices on the mid-range models in its Precision WorkStation 410 line past up to 15.5 percent.
(i) Which determinants accept inverse?
The commodity says " Dell ( DELL : Inquiry , Estimates ), the world'south second largest supplier of PCs, said it was cutting prices considering the cost of the components it uses to brand them accept likewise dropped." This indicates the there has been a change in the price of resources ((2) Will they affect supply, need, or both?
SUPPLY(3) Will supply or need increase or decrease?
SUPPLY Will INCREASE (shift to the right)(4) GRAPH IT! Then bear witness what happens to price and quantity?
| | |
Existent-WORLD Example two
Beneath 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 so use our supply and need graph to ILLUSTRATE what has happened. This will exist like to the extra credit question that you will accept on exam 1.
Remember to use our tool correctly:
(1) Which determinants have inverse?
(2) Will they affect supply, demand, or both?
(3) Will supply or demand increase or subtract?
(4) GRAPH Information technology! So testify what happens to cost and quantity?
Air customers to pay for fuel
With demand for seats however potent, almost carriers announce fuel surcharges
By Staff Writer Chris Isidore
Jan 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 before: their passengers.
With oil prices hit a post-Gulf War high Friday, three more carriers - US Airways, America Due 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. seven Southwest Airlines ( LUV ), the Dallas-based discount carrier, property off at this time.
Demand for seats opens door
The surcharge is unique in its credence by the typically cutthroat airline manufacture, and is a sign that need for air travel remains stiff.
The Air Transport Association report that 71.3 percentage of its members' seats were filled last year, the all-time rate in the history of passenger jet travel.
With demand remaining potent despite the fasten, airlines are in a improve position to seek college fares.
"In the past, when we had the tremendous run up in fuel, nosotros also 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.". . . . . . . . .
Respond: I have highlighted in blood-red the important parts of this article. Let'south clarify each i.
"With oil prices striking a post-Gulf War high Friday, iii more carriers - U.s. Airways, America West and Trans World Airlines - announced surcharges, charging customers $twenty per round-trip ticket on virtually all domestic flights."
(1) Which determinant has changed?PRICE OF Resources. Oil (fuel) is a resources used by the airline industry(two) Will they bear on supply or demand?
SUPPLY(3) Will supply or demand increase or decrease?
SUPPLY WILL DECREASE (shift to the left)(4) GRAPH Information technology! And then show what happens to price and quantity?
| | |
The commodity also says:
" The surcharge is unique in its credence past the typically cutthroat airline manufacture, and is a sign that need for air travel remains strong. " AND "Now the economic system is moving ahead".
(1) Which determinant has changed?INCOME ("The economic system is moving ahead" ways incomes are rising.)(two) Will they affect supply or demand?
DEMAND(3) Will supply or demand increase or decrease?
DEMAND Volition INCREASE (assuming air travel is a normal good)(4) GRAPH It! And then show what happens to cost and quantity?
| | |
NOW Permit'South PUT BOTH CHANGES ON THE Same GRAPH. You must do this to show the overall effect of all changes. We accept a decrease in supply caused by higher resources prices and an increase in demand caused by college incomes,
The issue is college prices (meet graph) and the quantity stays about the same every bit the article states (therefore I shifted the curves the same corporeality).
Other manufactures that you tin analyze yourself:
- http://cnn.com/U.s./9907/27/gas.prices/
- http://cnnfn.com/2000/01/21/companies/airfuel/
- http://cnn.com/US/9908/09/rv.boom/
ANSWERS
Marketplace Supply: right respond "B" [RETURN]
Source: http://www2.harpercollege.edu/mhealy/eco212i/lectures/s&d/s&d.htm
Posted by: hoggardtwerfell.blogspot.com
0 Response to "What Is The Effect Of A Change In Price On Quantity Demanded"
Post a Comment