Unformatted text preview: ECON 110
Spring, 2009 William Chow Highlight
Highlight Factors affecting supply
Change in demand and supply
Applications Prices of related goods produced
Prices A substitute in production for a good is another good that can be produced using the same resources, e.g. residential flats and industrial complexes
Goods are complements in production if they must be produced together, e.g. beef and leather
The supply of a good increases and its supply curve shifts rightward if the price of a substitute in production falls or if the price of a complement in production rises Other factors
Other Expected future prices: If the price of a good is expected to fall in the future, current supply increases and the supply curve shifts rightward
The number of suppliers: The larger the number of suppliers of a good, the greater is the supply of the good. An increase in the number of suppliers shifts the supply curve rightward
Technology: Advances in technology create new products and lower the cost of producing existing products, so they increase supply and shift the supply curve rightward Market Equilibrium
Market When demand and supply come to meet one another, a market equilibrium can be achieved
An equilibrium is a state at which things have no tendency to change
This shows the unique price (equilibrium price) at which QD = QS Market Equilibrium
Market The buying and selling plans are hence balanced
The equilibrium quantity is the quantity bought and sold at the equilibrium price This indicates the prevailing market price and the amount of transactions dealt in the market Market Equilibrium – Important
Note Price regulates buying and selling plans
Price serves as signals for buyers and sellers to adjust their plans Changes in Demand and/or
Application Event: The WSJ reports that the prices of PC components are expected to fall by 58 percent over the next six months.
Scenario 1: You manage a small firm that manufactures PCs.
Scenario 2: You manage a small software company. Application
Application Use Comparative Static Analysis to see the Big Picture.
Comparative static analysis shows how the equilibrium price and quantity will change when a determinant of supply or demand changes. Big Picture: Impact of decline in
component prices on PC market
P* D Q 0 Q* Quantity of PC’s Scenario 2
Scenario More complicated chain of reasoning to arrive at the “Big Picture.”
Step 1: Use analysis like that in Scenario 1 to deduce that lower component prices will lead to
• a lower equilibrium price for computers.
• a greater number of computers sold. Step 2: How will these changes affect the “Big Picture” in the software market? Scenario 2
of Software S P1
Q0 Q1 Quantity of
Conclusion Scenario 1: Equilibrium price of PCs will fall, and equilibrium quantity of computers sold will increase.
Scenario 2: Software prices are likely to rise, and more software will be sold. ...
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