Microeconomics/Supply and Demand - Wikibooks, open books for an open world
supply market price market quantity sold positive (or direct) relationship individual supply Fill in the Blank. 1. A curve Either the couch or the armchair could fulfill her need for For the following questions, refer to the graph shown above. a. In this diagram, supply and demand have shifted to the right. This has led an increase in quantity (Q1 to Q2) but price has stayed the same. To know what the price will be we need both demand and supply. When we develop a demand curve only the price and quantity As we can see on the demand graph, there is an inverse relationship between price and quantity .. If a new housing development is built in the empty field behind a small.
Advances in Technology In the early s, improved technology in the auto-making industry greatly reduced the amount of time and other resources needed to make many new automobiles. Therefore, a larger quantity supplied of autos was offered for sale at every price.
The Law of Diminishing Returns When a business wants to expand, it has to consider how much expansion will really help the business. Read on to learn why hiring more workers is not always the best option for businesses. Imagine that you own a business, and you want to expand production. Assume you have 10 machines and employ 10 workers, and you hire an 11th worker. Now, production increases by 1, units per week.
When you hire a 12th worker, however, production increases by only per week. If you continue to hire more workers, production will continue to increase, but the rate of increase will fall. If you continue to hire still more workers, your overall output will eventually decrease. Quantity Supplied Remember that there is a difference between a change in supply and a change in quantity supplied.
Change in Supply This is caused by something other than price, and it causes the entire supply curve to shift to the left or right. Change in Quantity Supplied This is caused by a change in the price of a good, and it is shown as a movement along the supply curve.
This example illustrates the law of diminishing returns, which says that adding units of one factor of production increases total output. After a certain point, however, the extra output for each additional unit hired will begin to decrease.
Content Vocabulary law of supply: At one point in time, they all were in short supply—and usually right before the December holiday season. Around that time of year, you can often see empty shelves in stores where the hot items have sold out. As you will read, shortages occur when the quantity demanded is larger than the quantity supplied at the current price.
Equilibrium Price In free markets, prices are determined by the interaction of supply and demand. What happens to the price of the systems over time? Read on to learn about equilibrium price, the point at which demand and supply meet.
In the real world, demand and supply operate together. As the price of a good goes down, the quantity demanded rises and the quantity supplied falls. As the price goes up, the quantity demanded falls and the quantity supplied rises. Is there a price at which the quantity demanded and the quantity supplied meet? This level is called the equilibrium price.
At this price, the quantity supplied by sellers is the same as the quantity demanded by buyers. One way to visualize equilibrium price is to put the supply and demand curves on one graph, as shown in Figure 7. Where the two curves intersect is the equilibrium price. Equilibrium Price How does the market reach an equilibrium price?
At this price, million are supplied but 1, million are demanded, leaving a shortage. The price tends to change until it reaches equilibrium. Change in Equilibrium Price When the supply or demand curves shift, the equilibrium price also changes. What happens when there is an increase in the demand for DVDs?
Assume that scientists prove that watching a lot of movies increases life span. This discovery will cause the entire demand curve to shift outward to the right, as shown in Figure 7. What about changes in supply? You can show these in a similar fashion. Assume that there is a major breakthrough in the technology of producing DVDs.
The supply curve shifts outward to the right. The new equilibrium price will fall, and both the quantity supplied and the quantity demanded will increase. Prices as Signals Under a free-enterprise system, prices function as signals that communicate information and coordinate the activities of producers and consumers.
Read on to learn about shortages, surpluses, and their effect on prices. A few were caught steeling pepperoni on the way out. One spilled flour all over the floor. Which applicants will be hired? Of course it will be the five with experience and the other fifteen will be rejected because they would be too costly to hire.
NOW, if the pizza place wants to produce more pizzas they will need more workers. This means they will have to hire some of those who were rejected because they were more costly less experienced, etc. So, they will only hire the more costly employees if they can get a higher price to cover the higher costs. Second, there are increasing costs because some resources are fixed. This should not make sense to you. Why would there be increasing costs if we use the same quantity of some resource?
Well, let's say that the size of the kitchen and the number of ovens capital resources are fixed. This means that they don't change. Now, if we want to produce more pizzas you will have to cram more workers into the same size kitchen.
As they bump into each other and wait for an oven to be free they still get paid, but the cost per pizza increases.
Therefore they will not produce more pizza unless they can get a higher price to cover these higher 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 one pizza place is willing and able to produce at different prices individual supplywe keep the prices the same and add the quantities of additional pizza places. Prices stay the same, but quantities increase because there are more pizza suppliers.
So the market supply of pizzas is further to the right horizontal than the individual pizza place supply curves. That is why they put price on the supply graph, but there are other things that affect how much of a product will be produced besides the price. When we developed the supply curve for pizza we employed the ceteris paribus assumption.
For example there 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 changed. But there are other determinants of how much business supply besides the price.
We call these the Non-Price determinants of Supply. The non-price determinants of Supply Economists classify the non-price determinants of supply into 6 groups: Pe -- expected price b. Factors affecting[ edit ] Price: As the price of a product rises, its supply rises because producers are more willing to manufacture the product because it's more profitable now. Price of other commodities: There are two types Competitive supply: If a producer switches from producing A to producing B, the price of A will fall and hence the supply will fall because it's less profitable to make A.
A rise in one product may cause a rise in another. For instance, a rise in the price of wooden bedframes may cause a rise in the price of wooden desks and chairs.
This means supply of wooden bedframes, chairs and desks will rise because it's more profitable. If production costs rise, supply will fall because the manufacture of the product in question will become less profitable. Change in availability of resources: If wood becomes scarce, fewer wooden bedframes can be made, so supply will fall. Demand[ edit ] A desire becomes demand when it meets the three important factors: Similar to supply, there is a relationship between price and demand; the more people want, the more it will cost, if the supply remains the same.
To return to our example of houses, let's say there are 15 people selling houses, and 10 buying; the buyers have more influence on the sellers, and the prices will be low.
Demand and Supply
If 5 more people decide to buy houses, then the price will go up, and if another 5 decide to buy one of these houses, the price will climb even further. Thus when demand is high, the price goes up and consequently the supply contracts; and when the demand is low, the supply expands while the prices go down.
The inverse here is true as well; if people will sell their house for less, they will find more people interested in buying. The reason why demand behaves this way is fairly obvious: Likewise, when a good is on sale, or its prices drop, people will become more willing to spend money on it.
Consumer Behavior[ edit ] The way consumers behave can affect demand in many ways. Consumers gain satisfaction from the consumption of goods or services. This satisfaction is called utility. The law of diminishing marginal utility is a theory in economics that says that with increased consumption, satisfaction decreases. It tastes good and satisfies you, so you have another one, and another etc. Eventually, you eat so many, that your satisfaction from each hot dog you consume drops.
You would only consume another if price drops. But that won't happen, so you leave, and demand for the hot dogs falls. Consumer surplus is a term used to describe the difference between the price of a good and how much the consumer is willing to pay. Back at the park, they are still selling hot dogs, but now for 80 cents.
For each hot dog, you get 20 cents of consumer surplus The income effect occurs when the incomes of consumers change. But over the weekend, you got a pay rise, and have more money in your pockets! The substitution effect is similar.Finding equilibrium price and quantity using linear demand and supply equations
But, on the other side, the rival hot dog stand now sells hot dogs for only 50 cents. You are more likely to go to that stand because it is cheaper. Demand Curve[ edit ] A curve that shows the relationship between the price level of a good and the quantity of the good demanded at that price is called the demand curve at any given point in time.