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    Demand and Supply App

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    Zamri Zainal
    This document discusses the concepts of demand, supply, and how equilibrium price and quantity are affected by shifts in demand and supply. It provides the following key points: 1) An increase in demand for food due to rising incomes in Britain led to a higher equilibrium price and quantity as the demand curve shifted right. 2) Bad weather reduced the supply of food, shifting the supply curve left and increasing the equilibrium price while decreasing the equilibrium quantity. 3) A per-unit excise tax on beer decreases demand, lowering the price paid to sellers and reducing production along the supply curve. A per-unit subsidy does the opposite, shifting supply right and lowering the price while raising production.

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    Demand and Supply App

    Uploaded by

    Zamri Zainal
    210 views5 pages
    This document discusses the concepts of demand, supply, and how equilibrium price and quantity are affected by shifts in demand and supply. It provides the following key points: 1) An increase in demand for food due to rising incomes in Britain led to a higher equilibrium price and quantity as the demand curve shifted right. 2) Bad weather reduced the supply of food, shifting the supply curve left and increasing the equilibrium price while decreasing the equilibrium quantity. 3) A per-unit excise tax on beer decreases demand, lowering the price paid to sellers and reducing production along the supply curve. A per-unit subsidy does the opposite, shifting supply right and lowering the price while raising production.

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    This document discusses the concepts of demand, supply, and how equilibrium price and quantity are affected by shifts in demand and supply. It provides the following key points: 1) An increase in demand for food due to rising incomes in Britain led to a higher equilibrium price and quantity as the demand curve shifted right. 2) Bad weather reduced the supply of food, shifting the supply curve left and increasing the equilibrium price while decreasing the equilibrium quantity. 3) A per-unit excise tax on beer decreases demand, lowering the price paid to sellers and reducing production along the supply curve. A per-unit subsidy does the opposite, shifting supply right and lowering the price while raising production.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    210 views5 pages

    Demand and Supply App

    Uploaded by

    Zamri Zainal
    This document discusses the concepts of demand, supply, and how equilibrium price and quantity are affected by shifts in demand and supply. It provides the following key points: 1) An increase in demand for food due to rising incomes in Britain led to a higher equilibrium price and quantity as the demand curve shifted right. 2) Bad weather reduced the supply of food, shifting the supply curve left and increasing the equilibrium price while decreasing the equilibrium quantity. 3) A per-unit excise tax on beer decreases demand, lowering the price paid to sellers and reducing production along the supply curve. A per-unit subsidy does the opposite, shifting supply right and lowering the price while raising production.

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    SOME APPLICATIONS OF THE DEMAND AND SUPPLY ANALYSIS

    DEFINITION 1. Demand. Demand is the relationship between price and quantity demanded for a particular good and service in particular circumstances. For each price the demand relationship tells the quantity the buyers want to buy at that corresponding price. The quantity the buyers want to buy at a particular price is called the quantity demanded. 2. Law of Demand. The Law of Demand states that the quantity of goods demanded is inversely related to the goods price. When price goes up, quantity demands goes down, other things constant and when prices goes down, quantity demands goes up, other things constant. 3. Supply. Supply refers to the various quantities offered for sale at various prices. Quantity supplied refers to a specific quantity offered for sale at a specific price. 4. Law of Supply. More of a good will be supplied the higher its price, other things constant and less of a good will be supplied the lower its price, other things constant. 5. The first qualification of both the laws of demand and supply is that it assumes other things are held constant. SHIFTING IN DEMAND AND SUPPLY 6. Shifting Demand. Here are some things that would cause the demand curve to shift: a. A change in income for the average consumer. (1) If an increase in income causes an increase in the demand for a particular good, that good is a called a normal good. Example, sugar and oil. (2) If an increase in income causes a decrease in the demand for a particular good, that good is called an inferior good. Example, red beans. b. c. A change in population. Changes in the price of other goods.

    d.

    Changes in consumer tastes.

    7. Shifting Supply. Here are some things that would cause the supply curve to shift: a. Changes in the prices of input goods. (1) (2) b. c. Labor. Raw material.

    A change in technology. Changes in natural conditions. (1) (2) Rain fall. Environmental conditions.

    CHANGES IN DEMAND 8. In the early stages of industrialization, in Britain, new jobs in industry made people better off - for the first time, they had enough money income to buy food and improve their nutrition. That was the good news. The bad news was that the supply of food did not increase. 9. This means there was an increase in the demand for food, as shown in Figure A:

    S P2 P1

    D2 D1 Q1 Q2 FIGURE A: CHANGING EQUILIBRIUM WITH AN INCREASE IN DEMAND

    10. Before the increase in income, demand was D1 and supply was S, so that the equilibrium quantity of food sold was Q1 and the price per unit of food sold was P1. However, the increase in income resulted in a shift of the demand curve rightward, as shown by D2, and a new equilibrium quantity at Q2 and a price of P2. CHANGES IN SUPPLY 11. Agriculture is very sensitive to the weather, and bad weather can cause a reduction in the supply of food from normal levels. Figure B shows a decrease in the supply of food.

    S2 S1 P2 P1

    Q2

    Q1

    FIGURE B: CHANGING EQUILIBRIUM WITH A REDUCTION IN SUPPLY 12. With normal weather, supply would be S1 and demand is D, so that the equilibrium quantity of food sold was Q1 and the price per unit of food sold was P1. However, bad weather shifts the supply curve leftward, as shown by S2, and a new equilibrium quantity at Q2 and a price of P2. 13. Fluctuations in weather conditions from year to year result in changes in prices and production of food and agricultural commodities of all kinds. Since the weather is different in different parts of the world, there will usually be some crop in some part of the world that is in less supply because of weather conditions. 14. Note. In economic theory, the interaction of supply and demand is understood as equilibrium. 15. We may think of demand as a force tending to increase the price of a good, and of supply as a force tending to reduce the price. When the two forces balance one another, the price would neither rise nor fall, but would be stable.

    This analogy leads us to think of the stable or natural price in a particular market as the "equilibrium" price. 16. This sort of "equilibrium" exists when the price is just high enough so that the quantity supplied just equals the quantity demanded. If we superimpose the demand curve and the supply curve in the same diagram, we can easily visualize this "equilibrium" price. It is the price at which the two curves cross. APPLICATION IN DETAIL 17. There is an "excise tax" on beer. What happens to price and sales when such a tax is imposed? (The term "excise tax" is a bit redundant, since "excise" is an old word for "tax." Conventionally, though, an excise tax means a tax per physical unit; for example, per gallon).

    D1

    S
    TAX P P1

    Q1

    18. The figure shows the impact of an excise tax. From the point of view of sellers, the tax decreases demand from D to D1; the vertical distance between the two curves is the tax. The price paid to the seller falls, but not as much as the tax, because the cutback in production moves downward along the supply curve. 19. The Effects of Subsidy. A subsidy is a payment from the government to a firm or individual in the private sector, usually on the condition that the person or firm that receives the subsidy produce or do something, or to increase the income of a poor person. 20. For example, we will think of a subsidy for the production of rice. (Some countries have paid subsidies for the production of grain in order to make food cheaper for poor people). Let us suppose the government pays paddy planters a

    dollar per sack of paddy, in addition to whatever price they get in the marketplace. The figure shows the supply and demand for paddy. A subsidy per unit of production works pretty much like an excise tax, except in reverse. In particular, we can look at the change from the point of view either of buyers or sellers. In this example, we will look at the subsidy from the point of view of the buyers. From their point of view, the subsidy is an increase in supply.

    S1 S2 P1 P2

    Q1

    Q2

    21. Accordingly, the figure shows the subsidy shifting the supply curve to the right, from S1 to S2. The vertical distance is the amount of the subsidy: one dollar per sack. Demand is D. With supply S1- before the subsidy is given - the market equilibrium price is P1 and the equilibrium production is Q1. With supply S2 - when the subsidy is given - the market equilibrium price is P2 and the equilibrium production is Q2. We may conclude that a subsidy per unit of production reduces the market price (though not quite by the full amount of the subsidy) and increases the production of the item subsidized.

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