Monday, May 19, 2008

An Increase in Supply & a Decrease in Demand

Both curves shift in this case.

An increase in supply is illustrated by a shift of the supply curve to the right.

An increase in supply can be caused by:
  • an increase in the number of producers.
  • a decrease in the costs of production (such as lower prices for oil, labor, or other factors of production).
  • weather (e.g., ideal conditions might increase agricultural production)
  • technology (Technological innovations typically increase supply.)
  • expectations (e.g., producers might increase current production if they anticipate less favorable market conditions in the future.)
A decrease in demand is illustrated by a shift of the demand curve to the left.

A decrease in demand can be caused by:
  • a decrease in the number of consumers.
  • an decrease in income (for normal products) or an increase in income (for inferior products, such as Ramen noodles).
  • a decrease in the price of a substitute product.
  • an increase in the price of a complementary product.
  • a change in tastes and preferences (e.g., if the product has become less popular or fashionable)
  • expectations (e.g., consumers might decrease current demand if they anticipate more favorable market conditions, such as lower prices, in the future.)

When there is an increase is supply and a decrease in demand, the new equilibrium occurs at a lower market price. The new equilibrium quantity may be larger, smaller, or unchanged depending on the magnitudes of the shifts.

When supply increases and demand decreases, ceteris paribus, in the new equilibrium:

Supply has increased. (The supply curve shifted to the right.)
Demand has decreased. (The demand curve shifted to the left.)
The quantity supplied (at the new equilibrium quantity) may increase, decrease, or be unchanged depending on the magnitude of the shifts of supply and demand.
The quantity demanded (at the new equilibrium quantity) may increase, decrease, or be unchanged depending on the magnitude of the shifts of supply and demand.
The equilibrium price has decreased.

An increase in supply typically causes a decrease in the equilibrium price and an increase in the equilibrium quantity.
An decrease in demand typically causes a decrease in the equilibrium price and a decrease in the equilibrium quantity.
Thus, the increase in supply and decrease in demand are both contributing to the decrease in the equilibrium price. The increase in supply is putting upward pressure on the equilibrium quantity. The decrease in demand is putting downward pressure on the equilibrium quantity. Since the supply shift and demand shift are trying to push the equilibrium quantity in opposite directions, the overall effect on the equilibrium quantity will depend on which effect is larger. The new equilibrium quantity could stay the same, increase or decrease:
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AN INCREASE IN SUPPLY & A DECREASE IN DEMAND WHERE QUANTITY IS UNCHANGED.

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AN INCREASE IN SUPPLY & A DECREASE IN DEMAND WHERE QUANTITY INCREASES.

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AN INCREASE IN SUPPLY & A DECREASE IN DEMAND WHERE QUANTITY DECREASES.

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10 comments:

  1. in what instances will this case have no effect on equilibrium quantity

    ReplyDelete
    Replies
    1. We have the same query..

      Delete
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  4. i ruby am feeling alone in this world

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  5. hey boys and girls it Ruby again!!11!1! i hope everyone is doing well and are healthy! i wish i was african boys ok.kthxbye xoxoxoxo

    ReplyDelete
  6. What factor / determinant could possibly affect only the equilibrium price and the equilibrium quantity will not change?

    Please share some..

    ReplyDelete
  7. does a drop in taxes increase or decrease supply?
    does new technology increase or decrease supply?
    does a lack of competition increase or decrease supply?

    ReplyDelete