"Ceteris paribus" is a Latin phrase that is generally translated as "all other things being equal" or "with all other factors or things remaining the same." This is a common (frequently unstated) assumption of economic analysis used to isolate the effect of a particular event or phenomenon.
If an economist asks "What is the likely effect on the oil market of the discovery of new oil reserves in the Gulf of Mexico?" the ceteris paribus assumption ignores other events occurring at the same time that may also affect the market. For example, the emergence of a larger middle class in China is increasing car ownership and the demand for fuel. The market for oil may be affected by many forces of supply and demand at the same time. The ceteris paribus assumption allows analysts to isolate individual market forces from what are otherwise extremely complex interactions. To do a complete analysis of a market, however, one should consider all factors.
Thursday, May 29, 2008
Wednesday, May 28, 2008
Supply & Demand - Questions for Further Study
1. Using supply & demand. Use supply and demand analysis to illustrate the likely effects of a hurricane in Florida on the equilibrium price and quantity in each of the following markets.
a. the market for orange juice. (Hint: The oranges grown in Florida are primarily used to make orange juice.)
b. the market for plywood. (Hint: Plywood is used to protect windows from the high winds associated with hurricanes.)
c. the market for batteries. (Hint: Hurricanes frequently know down power line, causing many people to be without electricity for days or weeks.)
d. the market for admission tickets to theme parks in Orlando. (Hint: Assume the hurricane causes heavy rain and wind throughout the Orlando area. Most of the attractions at these parks are outdoors.)
e. tickets for airline travel from Florida during the few days before the hurricane makes landfall. (Hint: Voluntary and mandatory evacuations are common when hurricanes threaten coastal areas.)
2. When supply and demand curves shift, there is a change in the equilibrium price and quantity. What is the relationship between the slope of the curves and the size of the changes in price and quantity?
3. Economists define the price elasticity of demand as the percentage change in the quantity demanded divided by the percentage change in the price of the product. How is elasticity useful in supply and demand analysis?
4. What happens to the equilibrium price and quantity when there is an increase in supply and demand? Does the answer depend on the magnitudes of the shifts?
5. What happens to the equilibrium price and quantity when there is a decrease in supply and demand? Does the answer depend on the magnitudes of the shifts?
6. What happens to the equilibrium price and quantity when there is an increase in supply and a decrease in demand? Does the answer depend on the magnitudes of the shifts?
7. What happens to the equilibrium price and quantity when there is a decrease in supply and an increase in demand? Does the answer depend on the magnitudes of the shifts?
8. Another example of a price control is a law that sets a minimum price that may be legally charged for an agricultural product, such as milk. Is this farm price control a price ceiling or a price floor? Draw a supply and demand diagram to illustrate the market price, equilibrium price, quantity supplied, quantity demanded, and the surplus or shortage when there is a binding farm price support. What is the social objective of a farm price support? What other methods could be used to achieve this objective? Would they be better than farm price supports?
a. the market for orange juice. (Hint: The oranges grown in Florida are primarily used to make orange juice.)
b. the market for plywood. (Hint: Plywood is used to protect windows from the high winds associated with hurricanes.)
c. the market for batteries. (Hint: Hurricanes frequently know down power line, causing many people to be without electricity for days or weeks.)
d. the market for admission tickets to theme parks in Orlando. (Hint: Assume the hurricane causes heavy rain and wind throughout the Orlando area. Most of the attractions at these parks are outdoors.)
e. tickets for airline travel from Florida during the few days before the hurricane makes landfall. (Hint: Voluntary and mandatory evacuations are common when hurricanes threaten coastal areas.)
2. When supply and demand curves shift, there is a change in the equilibrium price and quantity. What is the relationship between the slope of the curves and the size of the changes in price and quantity?
3. Economists define the price elasticity of demand as the percentage change in the quantity demanded divided by the percentage change in the price of the product. How is elasticity useful in supply and demand analysis?
4. What happens to the equilibrium price and quantity when there is an increase in supply and demand? Does the answer depend on the magnitudes of the shifts?
5. What happens to the equilibrium price and quantity when there is a decrease in supply and demand? Does the answer depend on the magnitudes of the shifts?
6. What happens to the equilibrium price and quantity when there is an increase in supply and a decrease in demand? Does the answer depend on the magnitudes of the shifts?
7. What happens to the equilibrium price and quantity when there is a decrease in supply and an increase in demand? Does the answer depend on the magnitudes of the shifts?
8. Another example of a price control is a law that sets a minimum price that may be legally charged for an agricultural product, such as milk. Is this farm price control a price ceiling or a price floor? Draw a supply and demand diagram to illustrate the market price, equilibrium price, quantity supplied, quantity demanded, and the surplus or shortage when there is a binding farm price support. What is the social objective of a farm price support? What other methods could be used to achieve this objective? Would they be better than farm price supports?
Monday, May 26, 2008
Rent Controls
INSERT DIAGRAM HERE.
Rent Controls
Many cities in the United States and the rest of the world have rent controls. The primary motive for rent controls is to provide affordable housing for low-income people. Most economists argue that rent controls are a lousy way to achieve that objective.
In their strictest sense, rent controls prevent the owners of housing (typically apartments) from increasing the rent they charge. Rent controls are examples of the type of price controls known as price ceilings. The law does not allow the price to rise above the ceiling.
The rent-controlled price is necessarily below the market equilibrium price. (Otherwise, there would be no need for rent controls.) What does supply and demand analysis suggest about the effect of imposing rent controls?
Suppose that in the absence of price controls a particular type of apartment in New York City would rent for $2,000 per month. Suppose New York has price controls that do not permit the landlord to charge more than $1,500 per month. In equilibrium, the number of apartments supplied at $2,000 per month equals the number of apartments demanded at that price.
At the rent-controlled price, however, the number of apartments supplied is smaller than in equilibrium. (For example, some apartment building owners may decide to convert their buildings into condominiums or office space if they are not allowed to charge the market rent for apartments.) The number of apartments demanded at the rent-controlled price exceeds the number of apartments supplied. The rent controls cause a shortage of apartments.
How well do rent controls achieve the objective of providing affordable housing for low-income people? If someone is lucky enough to have a rent-controlled apartment, they benefit from the policy. In practice, however, many of the people with rent-controlled apartments have middle or high incomes. (The rents are controlled, but the apartments may be available to anyone.)
Interfering with markets by controlling prices can lead to strange results. For example, tenants who want to move might continue to lease the apartment and sublet it at the higher market rate. (Thus the landlord is not receiving full compensation for providing the apartment, and the one who sublets the apartment receives substantial income just for keeping the lease.) Landlords also respond to rent controls by foregoing normal maintenance on the buildings. Landlords also might charge tenants extra fees to try to skirt the price controls and receive something closer to the market rent. Because of the shortage of apartments, many people who want an apartment at the rent controlled price are unable to find one. FEWER apartments are available to be rented with rent controls than without rent controls. Is this what we had in mind when choosing to implement rent controls?
Alternatives to rent controls which might achieve the objective of providing affordable housing for low income people:
• Provide low-income people with more income.
• Provide vouchers that can be used to pay for housing.
• Provide subsidized housing for low-income people.
Sunday, May 25, 2008
Price Ceilings
A price ceiling sets a maximum price that can be legally charged in a market. It is binding if the price ceiling is below the equilibrium price in the market. Rent controls are an example of a price ceiling.
See "Price as a Rationer."
Saturday, May 24, 2008
Minimum Wage Laws
INSERT DIAGRAM HERE
The Minimum Wage
Should we have a minimum wage in the United States?
Most people who support minimum wage laws feel they are necessary to ensure that unskilled workers have enough income to provide for themselves and their families. This is a reasonable societal goal. However, most economists argue that minimum wage laws are a lousy way to achieve that goal. We can use supply and demand analysis to explain why.
Minimum wage laws are applicable in the market for unskilled workers. (Highly skilled workers, such as doctors and lawyers, do not work for minimum wage.) The forces of supply & demand exist in the market for unskilled workers. The price of unskilled workers is the hourly wage that they are paid. At the equilibrium wage, the number of unskilled workers desiring a job equals the number of jobs offered by employers. The concern in this market is that this equilibrium wage does not provide sufficient income for these workers. Minimum wage laws attempt to increase the income of unskilled workers by requiring employers to pay these workers a higher wage than they would in the absence of the law.
What does supply & demand analysis suggest will be the outcome of this policy?
A minimum wage is a type of price control referred to as a price floor. The law does not allow the price to drop beneath the floor. The minimum wage is necessarily above the equilibrium wage. (If it were not, there would be no need for the minimum wage law.) At prices above equilibrium, however, the quantity of unskilled labor supplied (i.e., the number of people willing to work at that wage) exceeds the quantity of unskilled labor demanded (i.e., the number of unskilled jobs offered by employers). Thus, at prices above equilibrium, there is a surplus of unskilled labor. Some of the workers are unemployed (i.e., not working) or underemployed (i.e., not working as much as they would like).
Has the minimum wage accomplished our objective of providing unskilled workers with more income? The answer is "yes" and "no." The unskilled workers who have jobs are better off because they are earning a higher wage. Yet, some of the workers who would have been employed in the absence of the minimum wage law are unemployed with the minimum wage laws. Have we helped these unskilled workers by instituting a policy that provides incentives for employers to reduce the number of unskilled jobs?
Most economists oppose minimum wage laws. They oppose them because they are inefficient at achieving the stated objective. If you support the idea of providing unskilled workers with more income, there are alternatives to the minimum wage that probably are more efficient.
Alternatives to the Minimum Wage
• Give unskilled workers more income. (After all, the problem is that unskilled workers do not have enough income, right?)
• Give unskilled workers in-kind transfers (i.e., provide them with food, clothing, housing, medical care, etc.)
• Provide unskilled workers with education & training (so they can obtain skills). Economists generally like this option. The workers who obtain skills are more productive and consequently earn more income. Education & training also reduces the supply of unskilled workers. (They become skilled workers.) The supply curve for unskilled workers shifts left. Other things equal, the new equilibrium in the market for unskilled workers occurs at a higher wage. Education & training programs benefit the workers who receive the training (because they become more productive) and those workers who do not receive the training (because the supply of unskilled workers decreases). Wages for all of these workers increase. (Remember our goal is to increase the income of these workers.)
Friday, May 23, 2008
Thursday, May 22, 2008
Price Controls
INSERT DIAGRAM HERE
Economists use supply and demand analysis to examine most issues that affect the economy. For example, the supply & demand framework is used to examine minimum wage laws and rent controls.
Price controls are legal restrictions on the prices charged in the market for a product or resource.
A price floor is the minimum price that can be legally charged in a market. The minimum wage is an example of a price floor.
A price ceiling is the maximum price that can be legally charged in a market. Rent controls for apartments are an example of a price ceiling.
Economists use supply and demand analysis to examine most issues that affect the economy. For example, the supply & demand framework is used to examine minimum wage laws and rent controls.
Price controls are legal restrictions on the prices charged in the market for a product or resource.
A price floor is the minimum price that can be legally charged in a market. The minimum wage is an example of a price floor.
A price ceiling is the maximum price that can be legally charged in a market. Rent controls for apartments are an example of a price ceiling.
Wednesday, May 21, 2008
A Decrease in Supply & Demand
When supply and demand both decrease, the equilibrium quantity will decrease, but the equilibrium price may be unchanged, increase or decrease.
An decrease in supply is represented by a shift of the supply curve to the left.
An decrease in demand is represented by a shift of the demand curve to the left.
Ceteris paribus, in the new equilibrium:
Supply has decreased. (The supply curve shifted to the left.)
Demand has decreased. (The demand curve shifted to the left.)
The quantity supplied decreased to the new equilibrium quantity.
The quantity demanded decreased to the new equilibrium quantity.
The equilibrium price may increase, decrease, or stay the same depending on the magnitude of the shifts of supply and demand.
A decrease in supply typically causes an increase in the equilibrium price and a decrease in the equilibrium quantity.
A decrease in demand typically causes a decrease in the equilibrium price and a decrease in the equilibrium quantity.
Thus, the decreases in supply and demand are both contributing to the decrease in the equilibrium quantity. The decrease in supply is putting upward pressure on the equilibrium price. The decrease in demand is putting downward pressure on the equilibrium price. Since the supply shift and demand shift are trying to push the equilibrium price in opposite directions, the overall effect on the equilibrium price will depend on which effect is larger. The new equilibrium price could stay the same, increase or decrease:
_______________________________________________
INSERT DIAGRAM HERE.
An decrease in supply is represented by a shift of the supply curve to the left.
An decrease in demand is represented by a shift of the demand curve to the left.
Ceteris paribus, in the new equilibrium:
Supply has decreased. (The supply curve shifted to the left.)
Demand has decreased. (The demand curve shifted to the left.)
The quantity supplied decreased to the new equilibrium quantity.
The quantity demanded decreased to the new equilibrium quantity.
The equilibrium price may increase, decrease, or stay the same depending on the magnitude of the shifts of supply and demand.
A decrease in supply typically causes an increase in the equilibrium price and a decrease in the equilibrium quantity.
A decrease in demand typically causes a decrease in the equilibrium price and a decrease in the equilibrium quantity.
Thus, the decreases in supply and demand are both contributing to the decrease in the equilibrium quantity. The decrease in supply is putting upward pressure on the equilibrium price. The decrease in demand is putting downward pressure on the equilibrium price. Since the supply shift and demand shift are trying to push the equilibrium price in opposite directions, the overall effect on the equilibrium price will depend on which effect is larger. The new equilibrium price could stay the same, increase or decrease:
_______________________________________________
INSERT DIAGRAM HERE.
Tuesday, May 20, 2008
A Decrease in Supply & an Increase in Demand
Click on the illustration to enlarge it.
A decrease in supply is illustrated by a shift of the supply curve to the left.
A decrease in supply can be caused by:
- a decrease in the number of producers.
- an increase in the costs of production (such as higher prices for oil, labor, or other factors of production).
- weather (e.g., droughts, floods, or freezing temperatures decrease agricultural production)
- loss of technology (Technological innovations typically increase supply. If technology were to be lost, there could be a decrease in supply.)
- expectations (e.g., producers might decrease current production if they anticipate more favorable market conditions in the future.)
An increase in demand is illustrated by a shift of the demand curve to the right.
An increase in demand can be caused by:
- an increase in the number of consumers.
- an increase in income (for normal products) or a decrease in income (for inferior products, such as Ramen noodles).
- an increase in the price of a substitute product.
- a decrease in the price of a complementary product.
- a change in tastes and preferences (e.g., if the product has become more popular or fashionable)
- expectations (e.g., consumers might increase current demand if they anticipate less favorable market conditions, such as shortages or higher prices, in the future.)
When there is a decrease is supply and an increase in demand, the new equilibrium occurs at a higher market price. The new equilibrium quantity may be larger, smaller, or unchanged depending on the magnitudes of the shifts.
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.
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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Sunday, May 18, 2008
An Increase in Supply & 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 higher prices for oil, labor, or other factors of production).
- weather (e.g., ideal weather may 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.)
An increase in demand is illustrated by a shift of the demand curve to the right.
An increase in demand can be caused by:
- an increase in the number of consumers.
- an increase in income (for normal products) or a decrease in income (for inferior products, such as Ramen noodles).
- an increase in the price of a substitute product.
- a decrease in the price of a complementary product.
- a change in tastes and preferences (e.g., if the product has become more popular or fashionable)
- expectations (e.g., consumers might increase current demand if they anticipate less favorable market conditions, such as shortages or higher prices, in the future.)
When there is an increase in supply and an increase in demand, the new equilibrium quantity increases. The new equilibrium price may be higher, lower, or unchanged depending on the magnitudes of the shifts.
Supply has increased. (The supply curve shifted to the right.)
Demand has increased. (The demand curve shifted to the right.)
The quantity supplied increased to the new equilibrium quantity.
The quantity demanded increased to the new equilibrium quantity.
The equilibrium price may increase, decrease, or stay the same depending on the magnitude of the shifts of supply and demand.
An increase in supply typically causes a decrease in the equilibrium price and an increase in the equilibrium quantity.
An increase in demand typically causes an increase in the equilibrium price and an increase in the equilibrium quantity.
Thus, the increases and supply and demand are both contributing to the increase in the equilibrium quantity. The increase in supply is putting downward pressure on the equilibrium price. The increase in demand is putting upward pressure on the equilibrium price. Since the supply shift and demand shift are trying to push the equilibrium price in opposite directions, the overall effect on the equilibrium price will depend on which effect is larger. The new equilibrium price could stay the same, increase or decrease:
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AN INCREASE IN SUPPLY & DEMAND WHERE PRICE IS UNCHANGED.
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AN INCREASE IN SUPPLY & DEMAND WHERE PRICE INCREASES
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AN INCREASE IN SUPPLY & DEMAND WHERE PRICE DECREASES
Saturday, May 17, 2008
Friday, May 16, 2008
A Decrease in Supply
Click on the diagram above to enlarge it.An decrease in supply is represented by a shift of the supply curve to the left.
Ceteris paribus, in the new equilibrium:
Supply has decreased. (The supply curve shifted to the left.)
Demand is unchanged. (The demand curve did not move.)
The quantity supplied decreased to the new equilibrium quantity.
The quantity demanded decreased to the new equilibrium quantity.
The equilibrium price increased.
An Increase in Supply
An increase in supply is represented by a shift of the supply curve to the right.Ceteris paribus, in the new equilibrium:
Supply has increased. (The supply curve shifted to the right.)
Demand is unchanged. (The demand curve did not move.)
The quantity supplied increased to the new equilibrium quantity.
The quantity demanded increased to the new equilibrium quantity.
The equilibrium price decreased.
Shifts in Supply
INSERT DIAGRAM HERE.
How Shifts in SUPPLY Affect the Market Equilibrium
The following example illustrates how a change in supply changes the equilibrium price.
Orange Juice Market Example
Most of the oranges grown in Florida are used to make orange juice. Suppose a hurricane hits Florida and destroys a large portion of the orange groves. What affect will this have on equilibrium in the orange juice market? Because orange groves have been destroyed, the supply of orange juice decreases. The SUPPLY CURVE shifts left. At every possible price, less orange juice is produced than before the orange groves were destroyed.
Since the demand curve has not shifted, the new equilibrium occurs at a higher market price and a smaller quantity of orange juice.
How Shifts in SUPPLY Affect the Market Equilibrium
The following example illustrates how a change in supply changes the equilibrium price.
Orange Juice Market Example
Most of the oranges grown in Florida are used to make orange juice. Suppose a hurricane hits Florida and destroys a large portion of the orange groves. What affect will this have on equilibrium in the orange juice market? Because orange groves have been destroyed, the supply of orange juice decreases. The SUPPLY CURVE shifts left. At every possible price, less orange juice is produced than before the orange groves were destroyed.
Since the demand curve has not shifted, the new equilibrium occurs at a higher market price and a smaller quantity of orange juice.
Thursday, May 15, 2008
A Decrease in Demand
A decrease in demand is represented by a shift of the demand curve to the left.Ceteris paribus, in the new equilibrium:
Supply is unchanged. (The supply curve did not move.)
Demand has decreased. (The demand curve shifted to the left.)
The quantity supplied decreased to the new equilibrium quantity.
The quantity demanded decreased to the new equilibrium quantity.
The equilibrium price decreased.
Total revenues (price multiplied by the quantity sold) are unambiguously smaller in the new equilibrium.
An Increase in Demand
An increase in demand is represented by a shift of the demand curve to the right.Ceteris paribus, in the new equilibrium:
Supply is unchanged. (The supply curve did not move.)
Demand has increased. (The demand curve shifted to the right.)
The quantity supplied increased to the new equilibrium quantity.
The quantity demanded increased to the new equilibrium quantity.
The equilibrium price increased.
Shifts in Demand
INSERT DIAGRAM HERE.
Market prices move up and down because of changes in the supply and demand for the particular product. The following example illustrates how a change in demand changes the equilibrium price.
Beef Market Example
Suppose a report on national television suggests that eating beef is bad for your health.
Would this affect the market price for beef? The report suggesting beef may be harmful causes the demand for beef to decrease. This means the DEMAND CURVE shifts left. No matter what the price of beef is, people want less of it. If nothing else changes, what has happened to the equilibrium price of beef?
Since the supply curve has not shifted and the demand curve has shifted left, the new intersection occurs at a lower price and smaller quantity than the initial equilibrium point. The published report caused the equilibrium price and quantity of beef to fall. (This was the basis of a lawsuit filed by representatives of the beef industry against talk show host Oprah Winfrey in 1997.)
Market prices move up and down because of changes in the supply and demand for the particular product. The following example illustrates how a change in demand changes the equilibrium price.
Beef Market Example
Suppose a report on national television suggests that eating beef is bad for your health.
Would this affect the market price for beef? The report suggesting beef may be harmful causes the demand for beef to decrease. This means the DEMAND CURVE shifts left. No matter what the price of beef is, people want less of it. If nothing else changes, what has happened to the equilibrium price of beef?
Since the supply curve has not shifted and the demand curve has shifted left, the new intersection occurs at a lower price and smaller quantity than the initial equilibrium point. The published report caused the equilibrium price and quantity of beef to fall. (This was the basis of a lawsuit filed by representatives of the beef industry against talk show host Oprah Winfrey in 1997.)
Wednesday, May 14, 2008
Prices Below Equilibrium
Prices Below Equilibrium
INSERT DIAGRAM HERE.
At any market price below the equilibrium, the quantity demanded by consumers (represented by the horizontal distance between the vertical axis and the demand curve) is greater than the quantity supplied by producers (represented by the horizontal distance between the vertical axis and the supply curve at that price).
At prices below the equilibrium, there is a shortage of the product. The quantity demanded exceeds the quantity supplied. This situation will not be maintained very long. Since some buyers are unable to find a seller of the product at the current market price, the price of the product will tend to rise and a larger quantity of the product will be produced. (This represents a movement up the supply curve.)
As the price rises in this market, there is an increase in the quantity of this product that is supplied. (This represents a movement up the supply curve.) There also is a decrease in the quantity demanded. (This represents a movement up the demand curve.)
At any price below equilibrium, there is pressure for the market price to rise (because the quantity demanded exceeds the quantity supplied). This pressure continues until the market price reaches equilibrium.
Figure 11. An illustration of how prices below equilibrium create a shortage.
In equilibrium,
• there is no pressure for the price to change.
• the quantity supplied equals the quantity demanded.
If a market is not in equilibrium, market forces are pushing it toward equilibrium.
INSERT DIAGRAM HERE.
At any market price below the equilibrium, the quantity demanded by consumers (represented by the horizontal distance between the vertical axis and the demand curve) is greater than the quantity supplied by producers (represented by the horizontal distance between the vertical axis and the supply curve at that price).
At prices below the equilibrium, there is a shortage of the product. The quantity demanded exceeds the quantity supplied. This situation will not be maintained very long. Since some buyers are unable to find a seller of the product at the current market price, the price of the product will tend to rise and a larger quantity of the product will be produced. (This represents a movement up the supply curve.)
As the price rises in this market, there is an increase in the quantity of this product that is supplied. (This represents a movement up the supply curve.) There also is a decrease in the quantity demanded. (This represents a movement up the demand curve.)
At any price below equilibrium, there is pressure for the market price to rise (because the quantity demanded exceeds the quantity supplied). This pressure continues until the market price reaches equilibrium.
Figure 11. An illustration of how prices below equilibrium create a shortage.
In equilibrium,
• there is no pressure for the price to change.
• the quantity supplied equals the quantity demanded.
If a market is not in equilibrium, market forces are pushing it toward equilibrium.
Tuesday, May 13, 2008
Prices Above Equilibrium
Prices Above Equilibrium
INSERT DIAGRAM HERE.
At any market price above the equilibrium price, the quantity supplied by producers (represented by the horizontal distance between the vertical axis and the supply curve at that price) is larger than the quantity demanded by consumers (represented by the horizontal distance between the vertical axis and the demand curve).
When the market price is above the equilibrium price, there is a surplus of the product. The quantity supplied exceeds the quantity demanded. This situation will not be maintained very long. Since some sellers are unable to find buyers for all of their products at the current market price, the price of the product will tend to fall and a smaller quantity of the product will be produced. (This represents a move down the supply curve toward the origin.)
When stores at the mall have things that do not sell as quickly as expected, they put them on sale, don't they?
As the price falls in this market, there is an increase in the quantity of this product that is demanded. (This represents a movement down the demand curve.)
At any price above equilibrium, there is pressure for the market price to fall (because the quantity supplied exceeds the quantity demanded). This pressure continues until the market price reaches equilibrium.
Figure 10. An illustration of how prices above equilibrium create a surplus.
INSERT DIAGRAM HERE.
At any market price above the equilibrium price, the quantity supplied by producers (represented by the horizontal distance between the vertical axis and the supply curve at that price) is larger than the quantity demanded by consumers (represented by the horizontal distance between the vertical axis and the demand curve).
When the market price is above the equilibrium price, there is a surplus of the product. The quantity supplied exceeds the quantity demanded. This situation will not be maintained very long. Since some sellers are unable to find buyers for all of their products at the current market price, the price of the product will tend to fall and a smaller quantity of the product will be produced. (This represents a move down the supply curve toward the origin.)
When stores at the mall have things that do not sell as quickly as expected, they put them on sale, don't they?
As the price falls in this market, there is an increase in the quantity of this product that is demanded. (This represents a movement down the demand curve.)
At any price above equilibrium, there is pressure for the market price to fall (because the quantity supplied exceeds the quantity demanded). This pressure continues until the market price reaches equilibrium.
Figure 10. An illustration of how prices above equilibrium create a surplus.
Monday, May 12, 2008
Equilibrium
INSERT DIAGRAM HERE.
In common usage, equilibrium refers to a point of equality or balance. In economics, equilibrium occurs at the price at which the quantity supplied equals the quantity demanded. It is illustrated by the point where the supply and demand curves intersect.
The equilibrium quantity is the quantity supplied and demanded at the equilibrium price. It is represented graphically by the horizontal distance between the vertical axis and the supply and demand curves at the equilibrium price.
The equilibrium price is the price at which the quantity supplied equals the quantity demanded.
The market price is the price actually charged in the marketplace. It may or may not be the same as the equilibrium price.
A surplus is the amount by which the quantity supplied exceeds the quantity demanded. A surplus occurs when the market price is above the equilibrium price. A surplus is also called excess supply.
A shortage is the amount by which the quantity demanded exceeds the quantity supplied. A shortage occurs when the market price is below the equilibrium price. A shortage is also called excess demand.
Price of a hamburger Quantity of hamburgers supplied Quantity of hamburgers demanded
$5 5 1 Surplus
$4 4 2 Surplus
$3 3 3 Equilibrium
$2 2 4 Shortage
$1 1 5 Shortage
Table 4. An example of a using supply and demand schedules to determine whether a market is in equilibrium or has a shortage or surplus.
Figure 9. An illustration of equilibrium.
In common usage, equilibrium refers to a point of equality or balance. In economics, equilibrium occurs at the price at which the quantity supplied equals the quantity demanded. It is illustrated by the point where the supply and demand curves intersect.
The equilibrium quantity is the quantity supplied and demanded at the equilibrium price. It is represented graphically by the horizontal distance between the vertical axis and the supply and demand curves at the equilibrium price.
The equilibrium price is the price at which the quantity supplied equals the quantity demanded.
The market price is the price actually charged in the marketplace. It may or may not be the same as the equilibrium price.
A surplus is the amount by which the quantity supplied exceeds the quantity demanded. A surplus occurs when the market price is above the equilibrium price. A surplus is also called excess supply.
A shortage is the amount by which the quantity demanded exceeds the quantity supplied. A shortage occurs when the market price is below the equilibrium price. A shortage is also called excess demand.
Price of a hamburger Quantity of hamburgers supplied Quantity of hamburgers demanded
$5 5 1 Surplus
$4 4 2 Surplus
$3 3 3 Equilibrium
$2 2 4 Shortage
$1 1 5 Shortage
Table 4. An example of a using supply and demand schedules to determine whether a market is in equilibrium or has a shortage or surplus.
Figure 9. An illustration of equilibrium.
Sunday, May 11, 2008
Supply vs. Quantity Supplied
INSERT DIAGRAM HERE.
It is extremely important to understand the difference between supply and quantity supplied.
Supply
• refers to the entire relationship between prices and the quantity of this product supplied at each of these prices.
• should be thought of as "the supply curve."
Quantity Supplied
• refers to one particular point on the supply curve (not the entire curve).
• refers to how much of the product is supplied at one particular price.
• is the horizontal distance between the vertical axis and the supply curve.
An increase in supply versus an increase in quantity supplied
With an increase in supply:
• the supply curve shifts to the right.
• at every possible price, a greater quantity is supplied.
An increase in supply might be caused by:
• an increase in the number of sellers.
• a reduction in the cost of inputs (such as labor or electricity).
• a technological innovation that increases output (such as the development of disease resistant crops).
• unusually good weather (for an agricultural product).
• expectations (e.g., that the price will be lower in the future).
With an increase in quantity supplied:
• the price of the product increases.
• there has been a movement from one point on the supply curve to another point (further to the right) on the same demand curve.
An increase in quantity supplied is caused by:
• an increase in the price of the product
A supply curve illustrates how much the quantity supplied changes when the price changes.
A change in quantity supplied is represented as a movement along a supply curve.
In the diagram below, there is an increase in the quantity supplied from two to four when the
price of a hamburger rises from $2 to $4. This is illustrated by the movement along the supply curve from point B’ to point D’.
Figure 8. An illustration of an increase in quantity supplied. There is a movement along the supply curve, but the supply curve does not shift. In this graph, there is a change is the quantity supplied, but supply does not change.
It is extremely important to understand the difference between supply and quantity supplied.
Supply
• refers to the entire relationship between prices and the quantity of this product supplied at each of these prices.
• should be thought of as "the supply curve."
Quantity Supplied
• refers to one particular point on the supply curve (not the entire curve).
• refers to how much of the product is supplied at one particular price.
• is the horizontal distance between the vertical axis and the supply curve.
An increase in supply versus an increase in quantity supplied
With an increase in supply:
• the supply curve shifts to the right.
• at every possible price, a greater quantity is supplied.
An increase in supply might be caused by:
• an increase in the number of sellers.
• a reduction in the cost of inputs (such as labor or electricity).
• a technological innovation that increases output (such as the development of disease resistant crops).
• unusually good weather (for an agricultural product).
• expectations (e.g., that the price will be lower in the future).
With an increase in quantity supplied:
• the price of the product increases.
• there has been a movement from one point on the supply curve to another point (further to the right) on the same demand curve.
An increase in quantity supplied is caused by:
• an increase in the price of the product
A supply curve illustrates how much the quantity supplied changes when the price changes.
A change in quantity supplied is represented as a movement along a supply curve.
In the diagram below, there is an increase in the quantity supplied from two to four when the
price of a hamburger rises from $2 to $4. This is illustrated by the movement along the supply curve from point B’ to point D’.
Figure 8. An illustration of an increase in quantity supplied. There is a movement along the supply curve, but the supply curve does not shift. In this graph, there is a change is the quantity supplied, but supply does not change.
Saturday, May 10, 2008
Shifts in Supply
INSERT DIAGRAM HERE.
Shifts in supply occur to the right for increases and left for decreases. At every possible price, there is a different quantity supplied.
Figure 6. An increase in supply is illustrated by a shift of the supply curve to the right.
Figure 7. A decrease in supply is illustrated by a shift of the supply curve to the left.
Things that shift supply
The supply of a product may shift because of changes in
1. the number of producers. A larger number of producers increases the supply. A smaller number of producers decreases the supply.
2. The cost of inputs. Higher input costs decrease supply. Lower input costs increase supply.
3. Technology. Technological innovations tend to increase supply.
4. weather. For agricultural products, goods weather increases supply. Bad weather, such as droughts or floods, decreases supply.
5. expectations. Expectations can either increase or decrease supply.
Shifts in supply occur to the right for increases and left for decreases. At every possible price, there is a different quantity supplied.
Figure 6. An increase in supply is illustrated by a shift of the supply curve to the right.
Figure 7. A decrease in supply is illustrated by a shift of the supply curve to the left.
Things that shift supply
The supply of a product may shift because of changes in
1. the number of producers. A larger number of producers increases the supply. A smaller number of producers decreases the supply.
2. The cost of inputs. Higher input costs decrease supply. Lower input costs increase supply.
3. Technology. Technological innovations tend to increase supply.
4. weather. For agricultural products, goods weather increases supply. Bad weather, such as droughts or floods, decreases supply.
5. expectations. Expectations can either increase or decrease supply.
INSERT DIAGRAM HERE
A decrease in supply is illustrated by a shift of the supply curve to the left.
A decrease in supply can be caused by:
- a decrease in the number of producers.
- an increase in the costs of production (such as higher prices for oil, labor, or other factors of production).
- weather (e.g., droughts, floods, or freezing temperatures decrease agricultural production)
- loss of technology (Technological innovations typically increase supply. If technology were to be lost, there could be a decrease in supply.)
- expectations (e.g., producers might decrease current production if they anticipate more favorable market conditions in the future.)
When there is a decrease is supply with no change in demand, the new equilibrium occurs at a higher market price and smaller quantity.
Friday, May 9, 2008
Why do sUPply curves slope UPward?
Why do sUPply curves slope UPward?
INSERT DIAGRAM HERE.
A: As the price of a product increases, more producers are able to cover their costs of production. Thus the quantity supplied of a product increases as the price of the product increases.
There is usually a direct relationship between the price of a product and the quantity supplied of it.
• When a product becomes more expensive, producers tend to supply more of it.
• When a product becomes cheaper, producers tend to supply less of it.
Cold Soda Example
Suppose people are willing to pay $2 for a cold soda on Saturday afternoons in a local park. An entrepreneur might buy sodas from a store, refrigerate them, and set up a stand near the park. If the price people were willing to pay for a soda rose to $5, however, more people might find it worth their time and effort to start up a soda stand. If this happened, the quantity of sodas supplied near the park would increase.
Labor Supply Example
Suppose Jacksonville University decides to hire students to rake leaves on an autumn Saturday. As the wage offered increases, more students would be willing to spend their Saturday raking leaves. For example, the supply might resemble the table below.
Price of Labor
(wage paid per hour of labor) Quantity of Labor Supplied
(number of people who are willing to rake leaves on Saturday)
$50 100
$25 10
$10 2
$5 1
$1 0
Table 3. An example of a supply schedule in the market for labor.
INSERT DIAGRAM HERE.
A: As the price of a product increases, more producers are able to cover their costs of production. Thus the quantity supplied of a product increases as the price of the product increases.
There is usually a direct relationship between the price of a product and the quantity supplied of it.
• When a product becomes more expensive, producers tend to supply more of it.
• When a product becomes cheaper, producers tend to supply less of it.
Cold Soda Example
Suppose people are willing to pay $2 for a cold soda on Saturday afternoons in a local park. An entrepreneur might buy sodas from a store, refrigerate them, and set up a stand near the park. If the price people were willing to pay for a soda rose to $5, however, more people might find it worth their time and effort to start up a soda stand. If this happened, the quantity of sodas supplied near the park would increase.
Labor Supply Example
Suppose Jacksonville University decides to hire students to rake leaves on an autumn Saturday. As the wage offered increases, more students would be willing to spend their Saturday raking leaves. For example, the supply might resemble the table below.
Price of Labor
(wage paid per hour of labor) Quantity of Labor Supplied
(number of people who are willing to rake leaves on Saturday)
$50 100
$25 10
$10 2
$5 1
$1 0
Table 3. An example of a supply schedule in the market for labor.
Supply
Supply is the relationship between various prices of a product and the corresponding quantity that producers are willing and able to sell at each of those prices.
The quantity supplied is the amount that producers are willing and able to sell at a particular price.
The law of supply states that, other things equal, the quantity supplied of a product increases when the price of the product increases.
A supply schedule is a tabular representation of supply.
Price of a Hamburger Quantity of Hamburgers Supplied
$5 5
$4 4
$3 3
$2 2
$1 1
Table 2. An Example of a Supply Schedule
A supply curve is a graphical representation of supply. A supply curve can be a straight or curved line.) It is traditional in economics to place price on the vertical axis and quantity on the horizontal axis. On the graph of a supply curve, the quantity supplied at a particular price is the horizontal distance between the vertical axis and the supply curve.
Figure 5. An upward sloping supply curve.
Thursday, May 8, 2008
Demand vs. Quantity Demanded
INSERT DIAGRAM HERE.
It is extremely important to understand the difference between demand and quantity demanded.
Demand
• refers to the entire relationship between prices and the quantity of this product or service that people want at each of these prices.
• should be thought of as "the demand curve."
Quantity demanded
• refers to one particular point on the demand curve (not the entire curve).
• refers to how much of the product is demanded at one particular price.
• is the horizontal distance between the vertical axis and the demand curve.
An increase in demand versus an increase in quantity demanded
With an increase in demand:
• the demand curve shifts to the right.
• at every possible price, a greater quantity is demanded.
An increase in demand might be caused by:
• an increase in the number of consumers.
• an increase in consumers' income (for a normal good) or a decrease in consumers’ income (for an inferior good).
• an increase in the price of a substitute good.
• a decrease in the price of a complementary good.
• an increase in preference for the product (i.e., the product becomes more popular).
• expectations (e.g., that the price will be higher in the future).
With an increase in quantity demanded:
• the price of the product decreases.
• there has been a movement from one point on the demand curve to another point (further to the right) on the same demand curve.
An increase in quantity demanded is caused by:
• a decrease in the price of the product.
A demand curve illustrates how much the quantity demanded changes when the price changes.
A change in quantity demanded is represented as a movement along a demand curve.
In the diagram below, there is an increase in the quantity demanded from two to four when the price of a hamburger falls from $4 to $2. This is illustrated by the movement along the demand curve from point B to point D.
Figure 4. An illustration of an increase in quantity demanded. There is a movement along the demand curve, but the demand curve does not shift. In this graph, there is a change is the quantity demanded, but demand does not change.
It is extremely important to understand the difference between demand and quantity demanded.
Demand
• refers to the entire relationship between prices and the quantity of this product or service that people want at each of these prices.
• should be thought of as "the demand curve."
Quantity demanded
• refers to one particular point on the demand curve (not the entire curve).
• refers to how much of the product is demanded at one particular price.
• is the horizontal distance between the vertical axis and the demand curve.
An increase in demand versus an increase in quantity demanded
With an increase in demand:
• the demand curve shifts to the right.
• at every possible price, a greater quantity is demanded.
An increase in demand might be caused by:
• an increase in the number of consumers.
• an increase in consumers' income (for a normal good) or a decrease in consumers’ income (for an inferior good).
• an increase in the price of a substitute good.
• a decrease in the price of a complementary good.
• an increase in preference for the product (i.e., the product becomes more popular).
• expectations (e.g., that the price will be higher in the future).
With an increase in quantity demanded:
• the price of the product decreases.
• there has been a movement from one point on the demand curve to another point (further to the right) on the same demand curve.
An increase in quantity demanded is caused by:
• a decrease in the price of the product.
A demand curve illustrates how much the quantity demanded changes when the price changes.
A change in quantity demanded is represented as a movement along a demand curve.
In the diagram below, there is an increase in the quantity demanded from two to four when the price of a hamburger falls from $4 to $2. This is illustrated by the movement along the demand curve from point B to point D.
Figure 4. An illustration of an increase in quantity demanded. There is a movement along the demand curve, but the demand curve does not shift. In this graph, there is a change is the quantity demanded, but demand does not change.
Wednesday, May 7, 2008
Shifts in Demand
INSERT DIAGRAM HERE.
Shifts in demand occur to the right for increases and left for decreases. At every possible price, there is a different quantity demanded.
Figure 2. An increase in demand is illustrated by a shift of the demand curve to the right. Figure 3. A decrease in demand is illustrated by a shift of the demand curve to the left.
Things That Shift Demand
The demand for a product may shift because of changes in:
1. the number of consumers. Demand increases as the number of consumers increases.
2. income. A normal good is a product for which an increase in income increases demand. An inferior good is a product for which an increase in income decreases demand.
3. the price of a substitute good. Substitute goods are products that people use interchangeably. Most people treat different brands of gasoline as substitutes, for example. If the price of a substitute good increases, then demand increases and vice versa. Some people treat Pepsi and Coke as substitutes. If the price of Pepsi increases, then the demand for Coke increases.
4. the price of a complementary good. The demand for a product increases if the price of a complementary good decreases and vice versa. Complementary goods are products that are usually consumed together, such as DVD players and DVDs. If DVD players become significantly cheaper, then the demand for DVDs probably increases.
5. tastes and preferences. Changes in tastes, preferences, fashions and fads can either increase or decrease the demand for a product. For example, the demand for a product usually increases when a celebrity endorses it.
6. expectations. Expectations about the future can increase or decrease demand. For example, if people expect to receive a pay raise or bonus next month, they might increase their demand for something now. Or if people expect the price of a product to fall next week, they might decrease their demand for it now.
Shifts in demand occur to the right for increases and left for decreases. At every possible price, there is a different quantity demanded.
Figure 2. An increase in demand is illustrated by a shift of the demand curve to the right. Figure 3. A decrease in demand is illustrated by a shift of the demand curve to the left.
Things That Shift Demand
The demand for a product may shift because of changes in:
1. the number of consumers. Demand increases as the number of consumers increases.
2. income. A normal good is a product for which an increase in income increases demand. An inferior good is a product for which an increase in income decreases demand.
3. the price of a substitute good. Substitute goods are products that people use interchangeably. Most people treat different brands of gasoline as substitutes, for example. If the price of a substitute good increases, then demand increases and vice versa. Some people treat Pepsi and Coke as substitutes. If the price of Pepsi increases, then the demand for Coke increases.
4. the price of a complementary good. The demand for a product increases if the price of a complementary good decreases and vice versa. Complementary goods are products that are usually consumed together, such as DVD players and DVDs. If DVD players become significantly cheaper, then the demand for DVDs probably increases.
5. tastes and preferences. Changes in tastes, preferences, fashions and fads can either increase or decrease the demand for a product. For example, the demand for a product usually increases when a celebrity endorses it.
6. expectations. Expectations about the future can increase or decrease demand. For example, if people expect to receive a pay raise or bonus next month, they might increase their demand for something now. Or if people expect the price of a product to fall next week, they might decrease their demand for it now.
Tuesday, May 6, 2008
The Substitution Effect
INSERT DIAGRAM HERE.
The substitution effect refers to the increase in the consumption of a product as its price decreases because some consumers will buy this product as a substitute for something else.
Hamburger Example of the Substitution Effect
Suppose you go to McDonald's for lunch. On the way there, you are thinking you might enjoy their chicken sandwich today.
When you arrive at the restaurant, you are pleasantly surprised to find that Big Macs are on sale for $1. The chicken sandwich is not on sale and costs $3.50.
Thus, when the price of Big Macs decreases, one of the reasons the quantity demanded increases is that some consumers will substitute away from other products (e.g., chicken sandwiches) and buy the cheaper Big Macs.
The substitution effect refers to the increase in the consumption of a product as its price decreases because some consumers will buy this product as a substitute for something else.
Hamburger Example of the Substitution Effect
Suppose you go to McDonald's for lunch. On the way there, you are thinking you might enjoy their chicken sandwich today.
When you arrive at the restaurant, you are pleasantly surprised to find that Big Macs are on sale for $1. The chicken sandwich is not on sale and costs $3.50.
Thus, when the price of Big Macs decreases, one of the reasons the quantity demanded increases is that some consumers will substitute away from other products (e.g., chicken sandwiches) and buy the cheaper Big Macs.
Monday, May 5, 2008
The Income Effect
INSERT DIAGRAM HERE.
The income effect refers to the increase in a consumer’s purchasing power when the price of a product decreases. Even though a consumer’s actual income does not change, a reduction in the price of a product leaves consumers with more money after the purchase of the product compared to the amount of money left when the product was more expensive. One of the things consumers might do with their increased purchasing power is buy more of this product.
Hamburger Example of the Income Effect
Suppose you have $5 in your pocket. If you go to McDonald's and Big Macs cost $3, then if you buy one Big Mac for lunch, you would have $2 left.
With that same $5 in your pocket, suppose you go to McDonald's and find Big Macs on sale for $1. If you buy one Big Mac for lunch, you now have $4 left. One of the things you might do with the “extra” money is buy another Big Mac.
In both of these cases, your monetary income is the same ($5). You have more purchasing power in the second case, however.
The income effect refers to the increase in a consumer’s purchasing power when the price of a product decreases. Even though a consumer’s actual income does not change, a reduction in the price of a product leaves consumers with more money after the purchase of the product compared to the amount of money left when the product was more expensive. One of the things consumers might do with their increased purchasing power is buy more of this product.
Hamburger Example of the Income Effect
Suppose you have $5 in your pocket. If you go to McDonald's and Big Macs cost $3, then if you buy one Big Mac for lunch, you would have $2 left.
With that same $5 in your pocket, suppose you go to McDonald's and find Big Macs on sale for $1. If you buy one Big Mac for lunch, you now have $4 left. One of the things you might do with the “extra” money is buy another Big Mac.
In both of these cases, your monetary income is the same ($5). You have more purchasing power in the second case, however.
Sunday, May 4, 2008
Demand
Demand is the relationship between various prices of a product and the corresponding quantity that consumers are willing and able to buy at each of those prices.
The quantity demanded is the amount that consumers are willing and able to buy at a particular price.
The law of demand states that, other things equal, the quantity demanded of a product decreases when the price of the product increases.
A demand schedule is a tabular representation of demand.
Price of a Hamburger Quantity of Hamburgers Demanded
$5 1
$4 2
$3 3
$2 4
$1 5
Table 1. An Example of a Demand Schedule
A demand curve is a graphical representation of demand. A demand curve can be a straight or curved line. It is traditional in economics to place price on the vertical axis and quantity on the horizontal axis. On the graph of a demand curve, the quantity demanded at a particular price is the horizontal distance between the vertical axis and the demand curve.
Figure 1. An illustration of a downward sloping demand curve. Demand curves slope downward because there is an inverse relationship between price and quantity demanded due to income and substitution effects.
There is usually an inverse relationship between the price of a product and the quantity demanded of it.
• When a product becomes more expensive, consumers tend to buy less of it. Price increases are typically associated with a decrease in the quantity demanded.
• When a product becomes cheaper, consumers tend to buy more of it. Price decreases are typically associated with an increase in the quantity demanded.
The quantity demanded is the amount that consumers are willing and able to buy at a particular price.
The law of demand states that, other things equal, the quantity demanded of a product decreases when the price of the product increases.
A demand schedule is a tabular representation of demand.
Price of a Hamburger Quantity of Hamburgers Demanded
$5 1
$4 2
$3 3
$2 4
$1 5
Table 1. An Example of a Demand Schedule
A demand curve is a graphical representation of demand. A demand curve can be a straight or curved line. It is traditional in economics to place price on the vertical axis and quantity on the horizontal axis. On the graph of a demand curve, the quantity demanded at a particular price is the horizontal distance between the vertical axis and the demand curve.
Figure 1. An illustration of a downward sloping demand curve. Demand curves slope downward because there is an inverse relationship between price and quantity demanded due to income and substitution effects.
There is usually an inverse relationship between the price of a product and the quantity demanded of it.
• When a product becomes more expensive, consumers tend to buy less of it. Price increases are typically associated with a decrease in the quantity demanded.
• When a product becomes cheaper, consumers tend to buy more of it. Price decreases are typically associated with an increase in the quantity demanded.
Saturday, May 3, 2008
The Fundamentals of Supply & Demand Analysis
The basic framework economists use to study markets is supply and demand analysis. Supply and demand analysis examines how the price system allocates resources in a market-based economy. Supply and demand are relationships between the price of something and the quantity of the same thing. (For example, we could talk about the relationship between the price of hamburgers and the quantity of hamburgers.)
Friday, May 2, 2008
Supply & Demand Analysis - Learning Objectives
After studying this module, you should be able to:
• define supply and demand analysis and explain its function.
• explain how supply and demand are relationships between the price of a product and the quantity of the same product.
• define and explain the difference between demand and quantity demanded.
• define and explain the law of demand.
• define and explain the difference between a demand schedule and a demand curve.
• draw and explain how a demand curve illustrates the law of demand.
• show how the quantity demanded at a particular price is illustrated by the horizontal distance between the vertical axis and the demand curve.
• define and explain income and substitution effects.
• illustrate and explain how shifts in supply and demand occur to the right for increases and to the left for decreases.
• list and explain things that cause a demand curve to shift to the right.
• list and explain things that cause a demand curve to shift to the left.
• illustrate and explain how an increase in the number of consumers increases the demand for a product.
• define and explain the difference between normal goods and inferior goods.
• provide examples of products that are generally considered to be inferior goods.
• provide examples of products that are generally considered to be normal goods.
• illustrate and explain how an increase in income increases the demand for a normal good.
• illustrate and explain how an increase in income decreases the demand for an inferior good.
• define and explain the difference between substitutes and complementary goods.
• illustrate and explain how the demand for a product increases when the price of a substitute good increases.
• illustrate and explain how the demand for a product increases when the price of a complementary good decreases.
• illustrate and explain how a change in tastes and preferences can increase the demand for a product.
• illustrate and explain how a change in tastes and preferences can decrease the demand for a product.
• illustrate and explain how a change in expectations can increase the demand for a product.
• illustrate and explain how a change in expectations can decrease the demand for a product.
• define and explain the difference between supply and quantity supplied.
• define and explain the law of supply.
• define and explain the difference between a supply schedule and a supply curve.
• draw and explain how a supply curve illustrates the law of supply.
• show how the quantity supplied at a particular price is illustrated by the horizontal distance between the vertical axis and the supply curve.
• list and explain things that cause a supply curve to shift to the right.
• list and explain things that cause a supply curve to shift to the left.
• illustrate and explain how an increase in the number of producers increases the supply of a product.
• illustrate and explain how an increase in inputs costs (i.e., the costs of production) decreases the supply of a product.
• illustrate and explain how a technological innovation increases the supply of a product.
• illustrate and explain how a change in weather can decrease the supply of a product.
• illustrate and explain how a change in weather can increase the supply of a product.
• illustrate and explain how a change in expectations can increase the supply of a product.
• illustrate and explain how a change in expectations can decrease the supply of a product.
• explain the meaning of the Latin phrase “ceteris paribus.”
• define and explain the difference between an equilibrium price and a market price.
• determine the equilibrium price and quantity from a table of prices and the related quantity supplied and quantity demanded.
• determine the equilibrium price and quantity from a graph of a supply curve and a demand curve.
• define and explain the difference between a surplus and a shortage.
• explain why a surplus occurs when the market price is above the equilibrium price.
• explain why a shortage occurs when the market price is below the equilibrium price.
• determine whether there is a surplus or shortage in a market from a table of prices and the related quantity supplied and quantity demanded.
• determine whether there is a surplus or shortage in a market from a graph of a supply curve and a demand curve.
• determine the size of a surplus or shortage in a market from a table of prices and the related quantity supplied and quantity demanded.
• determine the size of a surplus or shortage in a market from a graph of a supply curve and a demand curve.
• explain why a surplus at the current market price has a tendency to cause the market price to go down.
• explain why a shortage at the current market price has a tendency to cause the market price to go up.
• define price controls and explain their purpose.
• define a price floor and explain its purpose.
• define a price ceiling and explain its purpose.
• define minimum wage laws and explain their objective.
• explain how minimum wage laws are examples of a price floor.
• explain the criticisms of minimum wage laws.
• discuss alternative policies that could be used instead of minimum wages and explain why they would be better or worse than the minimum wage.
• define rent controls and explain their objective.
• explain how rent controls are examples of a price ceiling.
• explain the criticisms of rent controls.
• discuss alternative policies that could be used instead of rent controls and explain why they would be better or worse than rent controls.
• define farm price supports and explain their objective.
• explain how farm price supports are examples of a price floor.
• explain the criticisms of farm price supports.
• discuss alternative policies that could be used instead of farm price supports and explain why they would be better or worse than farm price supports.
• use supply and demand analysis to illustrate and explain price changes reported in the news.
• define supply and demand analysis and explain its function.
• explain how supply and demand are relationships between the price of a product and the quantity of the same product.
• define and explain the difference between demand and quantity demanded.
• define and explain the law of demand.
• define and explain the difference between a demand schedule and a demand curve.
• draw and explain how a demand curve illustrates the law of demand.
• show how the quantity demanded at a particular price is illustrated by the horizontal distance between the vertical axis and the demand curve.
• define and explain income and substitution effects.
• illustrate and explain how shifts in supply and demand occur to the right for increases and to the left for decreases.
• list and explain things that cause a demand curve to shift to the right.
• list and explain things that cause a demand curve to shift to the left.
• illustrate and explain how an increase in the number of consumers increases the demand for a product.
• define and explain the difference between normal goods and inferior goods.
• provide examples of products that are generally considered to be inferior goods.
• provide examples of products that are generally considered to be normal goods.
• illustrate and explain how an increase in income increases the demand for a normal good.
• illustrate and explain how an increase in income decreases the demand for an inferior good.
• define and explain the difference between substitutes and complementary goods.
• illustrate and explain how the demand for a product increases when the price of a substitute good increases.
• illustrate and explain how the demand for a product increases when the price of a complementary good decreases.
• illustrate and explain how a change in tastes and preferences can increase the demand for a product.
• illustrate and explain how a change in tastes and preferences can decrease the demand for a product.
• illustrate and explain how a change in expectations can increase the demand for a product.
• illustrate and explain how a change in expectations can decrease the demand for a product.
• define and explain the difference between supply and quantity supplied.
• define and explain the law of supply.
• define and explain the difference between a supply schedule and a supply curve.
• draw and explain how a supply curve illustrates the law of supply.
• show how the quantity supplied at a particular price is illustrated by the horizontal distance between the vertical axis and the supply curve.
• list and explain things that cause a supply curve to shift to the right.
• list and explain things that cause a supply curve to shift to the left.
• illustrate and explain how an increase in the number of producers increases the supply of a product.
• illustrate and explain how an increase in inputs costs (i.e., the costs of production) decreases the supply of a product.
• illustrate and explain how a technological innovation increases the supply of a product.
• illustrate and explain how a change in weather can decrease the supply of a product.
• illustrate and explain how a change in weather can increase the supply of a product.
• illustrate and explain how a change in expectations can increase the supply of a product.
• illustrate and explain how a change in expectations can decrease the supply of a product.
• explain the meaning of the Latin phrase “ceteris paribus.”
• define and explain the difference between an equilibrium price and a market price.
• determine the equilibrium price and quantity from a table of prices and the related quantity supplied and quantity demanded.
• determine the equilibrium price and quantity from a graph of a supply curve and a demand curve.
• define and explain the difference between a surplus and a shortage.
• explain why a surplus occurs when the market price is above the equilibrium price.
• explain why a shortage occurs when the market price is below the equilibrium price.
• determine whether there is a surplus or shortage in a market from a table of prices and the related quantity supplied and quantity demanded.
• determine whether there is a surplus or shortage in a market from a graph of a supply curve and a demand curve.
• determine the size of a surplus or shortage in a market from a table of prices and the related quantity supplied and quantity demanded.
• determine the size of a surplus or shortage in a market from a graph of a supply curve and a demand curve.
• explain why a surplus at the current market price has a tendency to cause the market price to go down.
• explain why a shortage at the current market price has a tendency to cause the market price to go up.
• define price controls and explain their purpose.
• define a price floor and explain its purpose.
• define a price ceiling and explain its purpose.
• define minimum wage laws and explain their objective.
• explain how minimum wage laws are examples of a price floor.
• explain the criticisms of minimum wage laws.
• discuss alternative policies that could be used instead of minimum wages and explain why they would be better or worse than the minimum wage.
• define rent controls and explain their objective.
• explain how rent controls are examples of a price ceiling.
• explain the criticisms of rent controls.
• discuss alternative policies that could be used instead of rent controls and explain why they would be better or worse than rent controls.
• define farm price supports and explain their objective.
• explain how farm price supports are examples of a price floor.
• explain the criticisms of farm price supports.
• discuss alternative policies that could be used instead of farm price supports and explain why they would be better or worse than farm price supports.
• use supply and demand analysis to illustrate and explain price changes reported in the news.
Thursday, May 1, 2008
Module 4: Supply and Demand Analysis - Topics
Click on the hyperlinks below to go to a portion of the blog devoted to that topic:
Supply & Demand Analysis - Learning Objectives
The Fundamentals of Supply & Demand Analysis
Demand
The Income Effect
The Substitution Effect
Shifts in Demand
Demand vs. Quantity Demanded
Supply
Why do sUPply curves slope UPward?
Shifts in Supply
Supply vs. Quantity Supplied
Equilibrium
Prices Above Equilibrium
Prices Below Equilibrium
Shifts in Demand
An Increase in Demand
A Decrease in Demand
Shifts in Supply
An Increase in Supply
A Decrease in Supply
Shifts in Supply & Demand
An Increase in Supply & Demand
An Increase in Supply & a Decrease in Demand
A Decrease in Supply & an Increase in Demand
A Decrease in Supply & Demand
Price Controls
Price Floors
Minimum Wage Laws
Price Ceilings
Rent Controls
Questions for Further Study
ceteris paribus
Supply & Demand Analysis - Learning Objectives
The Fundamentals of Supply & Demand Analysis
Demand
The Income Effect
The Substitution Effect
Shifts in Demand
Demand vs. Quantity Demanded
Supply
Why do sUPply curves slope UPward?
Shifts in Supply
Supply vs. Quantity Supplied
Equilibrium
Prices Above Equilibrium
Prices Below Equilibrium
Shifts in Demand
An Increase in Demand
A Decrease in Demand
Shifts in Supply
An Increase in Supply
A Decrease in Supply
Shifts in Supply & Demand
An Increase in Supply & Demand
An Increase in Supply & a Decrease in Demand
A Decrease in Supply & an Increase in Demand
A Decrease in Supply & Demand
Price Controls
Price Floors
Minimum Wage Laws
Price Ceilings
Rent Controls
Questions for Further Study
ceteris paribus