Supply and demand together determine the prices of goods and services; prices in turn are the signals that guide the allocation of resources. When some event in the market shifts either the demand curve or the supply curve (or both), the equilibrium in the market changes. This results in a new price and a new quantity exchanged between buyers and sellers. To determine the effects of any event, 1. Decide whether event shifts the supply curve, the demand curve, or both. 2. Decide in which direction curve shifts. 3. Use supply-demand diagram to see how the shift changes equilibrium price and quantity. 6
Terms for Shifts versus Movements along the curve: Change in supply: a shift in the Supply curve occurs when a non-price determinant of supply changes (like technology or costs) Change in the quantity supplied: a movement along a fixed Supply curve occurs when Price changes Change in demand: a shift in the Demand curve occurs when a non-price determinant of demand changes (like income or number of buyers) Change in the quantity demanded: a movement along a fixed Demand curve occurs when Price changes How an Increase in Demand Affects the Equilibrium 7
How a Decrease in Supply Affects the Equilibrium Other Examples of Market Equilibrium Analysis and Curve Shifts: Events in the Middle East lead to expectations of higher oil prices in few months. In response, owners of Texas oilfields decide to save some inventory to sell later at the higher price. What happens now to the equilibrium price of oil? Draw a supply and a demand curve for hybrid cars. What happens if the price of gas increases AND new technology reduces production costs? 8
Some interesting topics Changes in equilibrium due to shifts in demand and supply: a) Government intervention and the reduction of smoking: informative and persuasive advertising versus tobacco taxation. b) The baby boomer effect on real estate prices, equity prices and bond prices. c) The effect of winter freeze on the prices of green beans, tomatoes and on the size of Tropicana Orange Juice containers. d) The 2005-2007 depreciation of the dollar versus the price of U.S. food commodities. 9
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- Supply And Demand