EC111LectNG2

EC111LectNG2 - University of Essex Department of Economics...

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University of Essex Session 2011/12 Department of Economics Autumn Term EC111: INTRODUCTION TO ECONOMICS Shifts in demand and supply A shift in demand (due to something other than own price) The demand curve shifts from D 1 to D 2 . The equilibrium quantity increases (by less then the demand shift) and the equilibrium price increases. It is a shift of the demand curve and a movement along the supply curve. What could cause the demand shift? More buyers enter the market An increase in income (perhaps a change in income distribution). A change in consumer tastes. An increase in the price of goods that are substitutes in consumption. A fall in the price of goods that are complements in consumption. P P 2 P 1 Q 1 Q 2 Q D 1 D 2 S
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A shift in the supply curve (due to something other than own price) The supply curve shifts out from S 1 to S 2 . Equilibrium quantity increases and equilibrium price falls. A shift of the supply curve and a shift along the demand curve. Note: these shifts do not have to be parallel What could cause an outward supply shift? More suppliers enter the market A change (improvement in) production technology. A fall in the price of factors of production. P P 1 P 2 Q 1 Q 2 Q D S 2 S 1
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The identification problem Often we just observe equilibrium combinations of price and quantity, not the supply and demand schedules themselves. Can we conclude from the diagram that the demand curve has shifted but not the supply curve? Only that demand has shifted to the left more than supply. Example: the beef crisis led to leftward shifts in both supply and demand In the real word ceteris paribus does not hold. If we want to identify the demand curve we must allow for other things that shift both demand and supply. P P 1 P 2 Q 2 Q 1 Q
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Time to adjust Example: The pork market following the beef crisis. Q: If pork and beef are substitutes why has the demand for pork shifted to the right, given that the price of beef has fallen? In the short run there is a big rise in prices but that induces more farmers to switch to pork. The long run supply curve is flatter and so quantity rises by more and price rises by less in the long run. Demand curves may also be flatter in the long run. E.g an unexpected rise in the
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This note was uploaded on 03/15/2012 for the course EC 111 taught by Professor Timhatton during the Spring '12 term at Uni. Essex.

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EC111LectNG2 - University of Essex Department of Economics...

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