Best Price on Diet Pepsi Cans Near Me
Demand and Supply:
How Prices are determined in a Market Economy
How Prices are determined in a Market Economy
REVIEW: For review exercises click HERE
Introduction
Structural Adjustment Policies
In our introductory lecture on Structural Adjustment we discussed diverse policies that countries are adopting all effectually the word to promote economic growth (increasing output rather than increasing their power) and achieve productive and allocative efficiency. It is hoped that every bit economies move abroad from command economies (Chapter 23) toward mzrket economies or capitalism (chapter 4).
These policies are:
one. Privatization
2. Promotion of Competition
3. Limited and Reoriented Role for Authorities
four. Cost Reform: Removing Controls
5. Joining the World Economy
six. Macroeconomic Stability
Even though the concepts of SUPPLY and Need are microeconomic concepts, they are reviewed in this macroeconomics course because not all students have taken micro (ECO 211) and they are fundamental principles that all economic student should master. Nosotros volition study supply and demand in this "Macroeconomics of the Gloabal Econaomy" course to better empathise why at that place is a worldwide movement to remove toll controls and allow Supply and Demand make up one's mind prices.
In a capitalist economy, prices are very of import. They have ii cardinal functions:
- they RATION appurtenances and services, and
- the GUIDE resources to where they are wanted most
By doing this they help the economic system maintain allocative efficiency and productive efficiency.
In the 5Es lesson on allocative efficiency we discussed that it was adept for the price of plywood to increase in Florida after a hurricane. When the price increased two things happened: (one) plywood was rationed to its nigh important uses (non doghouses or decks), and (2) the high prices were an incentive for more plywood to be guided to Florida so that they had more than plywood. If the price of plywood was kept too low the result was allocative inefficiency (a shortage).
Prices are also very important in maintaining productive efficiency. In the 5Es lecture on Productive efficiency we defined it as producing at a minimum cost. In order to minimize costs, producers must know the prices of the resource. If these resource prices are determined by need and supply then they volition reflect the relative scarcity of the resources and their relative importance (more than scarce and important resources volition accept a college price) and the economy tin can attain productive efficiency.
In a capitalist order prices are adamant by the interaction of need and supply. Since prices are so important, nosotros need to amend understand how they are adamant. why is the price of gasoline $1.59 a gallon. Why does a candy bar cost $0.75? Why is the price of plywood normally $10 a sheet, just $30 a sheet afterwards a hurricane?
Demand
If the price of a production increases what happens to demand for that product? For example, If the cost of pizza increases, so the need for pizza does what?
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Zippo! If the price of pizza increases, the need for pizza does not change. This is considering in economic science we have a more than precise definition of demand. Demand is NOT the quantity that people buy.
DEFINITION: And so what is demand?
Demand is a schedule that shows the various quantities that consumers are willing and able to purchase at various prices in a given time period, ceteris paribus. We should wait more than closely at this definition.
Demand is a table of numbers. Expect at the table below. The whole tabular array might stand for my demand for pizza.
Demand Schedule and Curve
Every bit nosotros learned in a previous lesson, whatever indicate on a graph represents two numbers, then we tin can plot our demand table as in the graph below.
If we presume that at that place are quantities and prices in-between those in the table (for example if the cost was $four.50 how many pizzas would I buy?) nosotros can connect the points and nosotros get the demand curve (graph).
This is my demand for pizza. This demand curve does Not tell us what the toll will exist. To know what the price will be nosotros need both demand and supply.
But we can encounter what happens to demand if the price of pizzas increases. If the price of pizza increases, say from $6 to $9, nothing on the tabular array changes (need does not modify) because demand already includes various prices and various quantities. Demand (the table or the graph) does not change when the price changes because demand INCLUDES various prices and diverse quantities. Demand is NOT how much nosotros buy.
Annotation that our definition of demand includes the ceteris paribus supposition. When we develop a demand bend just the toll and quantity demanded change. Everything else is assumed to remain constant. I don't get a large increase in my income. I don't win the lottery. There isn't a new report out that states pizzas cause cancer. All other factors remain the same - only the price and quantity demanded alter.
Police of Demand
Every bit we tin can see on the demand graph, at that place is an inverse relationship between price and quantity demanded. Economists call this the Constabulary of Demand. If the price goes upward, the quantity demanded goes downwardly (simply demand itself stays the same). If the cost decreases, quantity demanded increases. This is the Police of Demand. On a graph, an changed relationship is represented past a downward sloping line from left to right.
Why?
Why is the constabulary of demand true? Why is the need curve downwardly sloping from left to correct? Why do people buy more at lower prices and less at higher prices?
As social scientists, economists try to explain human behavior. Information technology is common sense that people behave this manner - but how tin nosotros explain it? Economists have 3 explanations:
- diminishing marginal utility
- income effects
- substitution effects
Diminishing Marginal Utility
We learned in the 5Es lesson that equity helps reduce scarcity because of the law of diminishing marginal utility. This economical principle likewise explains why the demand curve is downward sloping.
Utility is the reason nosotros eat a good or service. You might telephone call it satisfaction. I go satisfaction (utility) when I drive my boat. I get utility (satisfaction?) when I get to the dentist. "Marginal" means EXTRA or ADDITIONAL. So, according to the police force of diminishing marginal utility, the EXTRA (not the total) utility diminishes for each additional unit consumed. If we are receiving less extra utility when nosotros buy i more of a product, we won't be willing to pay the aforementioned price. Subsequently all, it is the marginal utility that we are paying for.
The first piece of pizza that I consume I really enjoy. It gives me a lot of utility. Only later a few pieces, I don't get as much additional satisfaction from i more than slice every bit I did from the first slice. So, I volition only buy a second piece if it has a lower cost, since I am getting less additional utility from the second piece. this explains why we buy more when the price goes downwards and why we buy less when the price goes upwards. It explains the law of demand.
Income Effects
Another explanation of why the law of demand explains human behavior is "income effects".
If the toll of price of pizza decreases what happens to your income?
(Annotation: the "
" means "causes".)
? Nothing happens to your income when the price of pizza decreases? (Exercise you lot go a raise when Pizza Hut has a sale?), Only your Real income (or the purchasing ability of your income will increment.
And so, when pizza prices decrease your real income increases. (This is like the cost of pizza staying the aforementioned but you become a enhance.) The result is that we buy more than pizza (The quantity of pizza demanded increases when the price decreases.) this explains why the police of need is true.
Substitution Effects
The third explanation of the law of need is "substitution effects".
? If the toll of pizza decreases what happens to the price of Chinese nutrient at the restaurant downwardly the street? Probably nothing. (I know that the Chinese eating house where My wife and I eat does not change their prices when Pizza Hut has a sale.) But the RELATIVE price of Chinese food does increase
Now, as my married woman and I drive past Pizza Hut on our way to the Chinese restaurant and we see that Pizza Hut has a auction (
price of pizza) we showtime to recollect that the Chinese food seems more than expensive compared to the now cheaper pizza (
Market Demand
Definition:
Market need is the horizontal summation of the individual demand curves. Or, instead of merely my individual demand for a production what if there were two people, or more, in the market. the result would be tat for each toll, the quantities demanded would exist greater since there are more than people. The prices stay the same, but the quantities get larger, or the demand graph shifts horizontally (to the right).
Graphically:
Sample Problem:
Given the following individuals' need schedules for product X, and assuming these are the simply three consumers of 10, which gear up of prices and output levels below will be on the market need curve for this product?
ANSWER
Determinants of Demand
The price of the product
Economists stress the importance of price in determining how much people will buy. That is why they put price on the demand graph, but there are other things that touch on how much of a production we purchase besides the cost. When we developed my demand bend for pizza nosotros employed the ceteris paribus assumption. I didn't become a large increase in my income. I didn't win the lottery. There wasn't a new written report out that stated pizzas crusade cancer. All other factors remained the same - only the cost and quantity demanded inverse.Just at that place are other determinants of how much we demand (or buy) as well the cost. We call these the Not-Price determinants of Demand.
The non-price determinants of demand
Let's not talk about pizzas anymore and use a new product in our examples. - - - How well-nigh vodka? We know that when the cost of vodka goes up we buy less and when the toll goes downward we purchase more (this is the law of demand). Merely what else might cause the states to buy more vodka as well the price? In other words, IF THE Toll OF VODKA STAYED THE Same, what might cause us to buy more or less vodka?Economists classify the non-price determinants of demand into five groups:
- expected toll (Pe)
- cost of other goods (Pog)
- income (I or Y) (In Macroeconomics "I" normally stands for "investment" and "Y" stands for "income".)
- number of POTENTIAL consumers (Npot), and
- tastes and preferences (T).
Let's briefly expect at each one here and in more particular later on.
Pe - If we hear that at that place will be a new $v taxation on a canteen of vodka beginning next week, what happens to the amount of vodka sold this calendar week at the current price? It probably increases since some people will buy more now to avoid the higher time to come prices.
Pog - What happens to the amount of vodka sold if the price of gin increases? Might non some people who were going to purchase gin buy vodka instead since the cost of gin went up? Or what might happen to vodka sales if the price of tomato juice goes down? maybe now with the cheaper tomato juice prices some people might want to drink more bloody marys (vodka mixed with tomato plant juice)? If and then, vodka sales would go upward.
Y (or I) - If I get a heighten and my income increases I might buy more vodka - or if my income goes downwardly I would probably buy less vodka. (And if I lost my job I might purchase a lot of vodka :-)
Npot - What would happen to vodka sales if they lowered the drinking historic period. This would increment the number of potential vodka consumers and they would probably sell more vodka.
Finally T - Tastes and preferences really means "everything else". In that location are hundreds of factors that touch the quantity of vodka sold. Nosotros don't want to memorize hundreds of different determinants for each product, then economists group everything else into "tastes and preferences". Anything that might make consumers want more or less vodka volition alter the quantity sold. For example, if a new study says that drinking vodka causes incomprehension - people will purchase less. Right before a vacation people may purchase more.
In lodge to remember these determinants of demand, think of somebody who has had too much vodka to drink and they come up staggering into a liquor shop enervating, "G-g-requite m-me an-n-n-nother p-p-p-pint of v-v-vodka".
Get information technology? "p-p-p-pint " or P, P, P, I, Due north, T or Px, Pe, Pog, I, Npot, T
In guild to save me fourth dimension in typing, I volition type "P, P, I, N, T" instead of "the non-price determinants of demand".
Two Kinds of Changes Involving Demand
If the price of a product increases what happens to demand for that product? For example, If the price of pizza increases, then the demand for pizza does what? Nix, demand does non alter when the price changes, but the quantity demanded does change. This section volition assist the states to better understand the divergence between a change in quantity demanded ( 
Change in Quantity Demanded (
A change in quantity demanded caused ONLY by a change in the Cost of the product. On a graph it is represented past a movement Along a SINGLE demand curve.
So if the price of pizza increase from $half dozen to $9 we will get an subtract in quantity demanded ( 
Change in Demand (
When there is a change in demand itself we get a new demand schedule and bend. We have to modify the numbers in the demand schedule and this will SHIFT the demand curve.
If there is an increase in demand (
When we say that the demand curves shift to the right, it ways that we have to modify the numbers on the demand schedule. For the same prices, the quantities increase. This shifts the curve to the RIGHT.
A subtract in need volition so shift the need bend to the LEFT. For each price on the demand schedule, the quantities subtract.
Be sure to draw your arrows to the RIGHT and LEFT. Many students want to draw the arrows perpendicular to the need bend. Don't practice this. Always draw your arrows horizontally considering this indicates the the prices are the same, and only the quantities change.
A change in need is acquired by a CHANGE in the non-toll determinants of demand:
Pe, Pog, I, Npot, T If these modify we get a new demand schedule and curve. To understand why prices are what they are, and why they modify, we need to understand very well how these determinants motion the need curve. This is where it all begins. In our definition of demand we held these things constant (ceteris paribus), but in the real earth these things do change, irresolute demand, and ultimately changing prices. So allow'southward look at each determinant individually to understand how they each affect demand.
If you lot expect the price to go up in the future demand today volition increase (shift to the right). For example, if we read that in that location will be a new taxation on vodka starting next calendar week, people volition want to buy more now before the price increases. Retailers understand this. How often have you heard "SALE ENDS Mon"? They want you to expect the cost to increment in the future then you'll purchase information technology today.
The opposite happens when you expect the toll to go downwardly in the hereafter. In the past when my wife and I were shopping whenever I put something in the cart, she would take it out and put it dorsum on the shelf! I'd ask, "why are you doing that?". She would say that she expected information technology to go on auction soon and we should wait until it does. If you look the price to go down in the futurity demand today decreases. (f ¯Pe in the future Þ ¯D today). Simply, whenever I put something in the cart, she would have information technology out saying that she expects it to continue sale presently. After awhile I got a little upset, when I'd inquire her about the items she put in the cart and she'd say that they were on sale last calendar week and we missed information technology. Finally, I went to talk to the store director and explained the state of affairs to him. He saved our wedlock by explaining that most chain shop have a policy stating that if an particular goes on sale after y'all have purchased it, you can bring in the receipt within 30 days and get a refund. Retailers understand how price expectations affect demand.
The effect of a modify in the price of other goods on need depends on what type of other goods nosotros are talking virtually. There are three types:ane) substitute appurtenances
Substitute goods are appurtenances where if you buy more of one, y'all buy less of the other ane. Examples of substitutes include vodka and gin, hot dogs and hamburgers, chicken and beefiness, Coca-Cola and Pepsi.
Let'southward look at Coke and Pepsi. If the price of Coke increases it will increase the demand for Pepsi (the graph shifts to the right).I f you are going to purchase a tin can of Coke, you may walk right past the Pepsi machine, but when you notice that the cost of Coke has increased, you'll probably plough around and purchase the Pepsi. You weren't going to buy Pepsi before, but now, at the same price, yous are willing to buy information technology. And then the demand for Pepsi has increased. The need curve has shifted to the correct. At the same prices, the quantities demanded are greater.
If the price of Coke increases, what happens to the demand for Coke? - - - NOTHING. Price does not alter demand (as we have defined it) but it will alter the quantity demanded.
You've seen a good example of this in your local grocery store. For case, I may want to buy some coffee. And then I go to the coffee aisle and grab a can of Folgers and continue down the aisle. Simply at the stop of the aisle I run across a brandish of Maxwell Firm coffee on sale! What do I exercise with the Folgers in my shopping cart? - - - - - No, I don't put it back. I take it out of my cart and put it on the Maxwell Firm display. Haven't you seen various brands mixed in with such displays? The need for Folgers decreased (I no longer want it at that price, so I take information technology out of my cart) considering the price of Maxwell House decreased.
If:
2) complementary goods
Complementary goods are goods where if you lot buy more of one you lot too buy more of the other one. they become together like vodka and tomato juice, rum and Coke, film and picture show developing, hot dogs and hot canis familiaris buns.
Let's say that you desire to eat hot dogs tonight and yous go to your local grocery shop and put a bag of buns in your cart and head downwardly the aisle to the wieners. When you get to the wiener display you notice that their cost has increased significantly so you determine not to swallow hot dogs. What are you going to practise with the buns? You should put them back, but if y'all are similar many people you'll put them in the wiener display and motion on quickly. But the point is, you were going to buy the buns at their present price (they were already in your cart), but when you learned the price of hot dogs increased your demand for buns decreased (the need curve shifted to the left - at the same prices the quantities demanded decreased).
Of form, if the price of one production decreases (cheaper film developing), the demand for its complement (film) increases.
iii) independent appurtenances
Independent appurtenances are goods where if the price of i changes, it has no effect on the demand for to other ane. For instance, what happens to the need for newspaper clips if the price of surfboards increases? Nothing.
Summary (Pog):
1) normal appurtenancesFor most goods, chosen normal goods, if consumer incomes increase, demand will increase and vice versa.
And then if incomes increase, the demand curve for restaurant meals, and cars, and boats, volition shift to the right. At the same prices people will buy more.
2) inferior goods
For some goods, called inferior appurtenances, if consumer incomes increment demand will decrease, and vice versa. If only you lot had more money, yous would buy less of that product
The term "inferior good" does not mean they are of low quality. the definition of an junior adept is one where if your income increases, need decreases. There is an inverse human relationship between income and demand.
Examples of inferior goods might include used clothing, potatoes, rice, possibly generic foods. If y'all lose your job (so your income decreases) you may store for clothes at the Salvation Regular army Thrift Store (need for used wearable increases).
What is a normal good for ane consumer might be an junior practiced for another. For instance, if the income of one family increases they may buy a second small car (a normal good), but for another family, an increase in income may hateful that they don't buy a small car (an junior good) anymore and they buy a mini van instead.
An increase in the number of potential consumers will increment demand and vice versa.
Earlier nosotros say that if they lowered the drinking age, the demand for vodka would increment.
Often economists say that an increase in the "number of consumers" will increase demand. I adopt to use the terminology "number of POTENTIAL consumers" because if K-Mart has a sale on Pepsi (price of Pepsi decreases) what happens to demand for Pepsi? -- Zero (price does not change the need schedule). Merely, if Yard-Mart has a sale on Pepsi (toll of Pepsi decreases) what happens to the number of consumers ownership Pepsi? It will increment. (The law of demand says that if price goes down, quantity demanded goes up.) So, if they have more customers because the toll went down, what happens to demand? Nothing - (price does not alter the demand schedule).
Simply, if the number of POTENTIAL customers changes, demand will modify.
Four circumstances can change the number of potential consumers:
- population alter
If a new housing development is built in the empty field backside a modest store, the number of potential consumers increases, and demand will increase.
- expanded marketing surface area
Coors beer used to sold merely out Westward. President Ford used to take to have information technology flown in to the While Business firm because you couldn't buy it anyplace else. So when Coors expanded to all states, need increased because now there are more potential consumers.
- new competitor (changes the need curve facing and individual store, but NOT market need bend)
If a new liquor store moves in beyond the street from and existing shop, the demand for liquor of the existing store will subtract since now there are fewer potential consumers since some of the consumers walking past the store will accept already bought something at the new store.
- change in eligible consumers (i.e. drinking age)
If they lower the drinking historic period there volition be more than potential vodka drinkers so demand for vodka will increment.
There are hundreds of factors that affect the quantity of vodka sold. We don't want to memorize hundreds of different determinants for each product, then economists grouping everything else into "tastes and preferences". Tastes and preferences really refers to "everything else". Annihilation that increases a consumer'due south preference for a product volition increase need for that product. This will include ad and fads.
Supply
Introduction
Supply is more difficult for students to understand than demand. We are all consumers (demanders), but few of u.s. own a business organisation (suppliers). So, remember to retrieve of yourself equally a business possessor when we talk over supply.
Definition
Supply is a schedule which shows the various quantities businesses are willing and able to offer for sale at various prices in a given time catamenia, ceteris paribus.
Supply is NOT the quantity available for sale. This is the way the term is frequently used in the popular press. Supply is the whole schedule with many prices and many quantities.
Just like with need, there is a difference between a change in quantity supplied and a modify in supply itself. So, if the cost increases what happens to supply? The best Wrong answer would be "supply increases", simply information technology doesn't. Price does not alter supply, information technology changes quantity supplied, because supply means the whole schedule with diverse prices and various quantities.
Supply Schedule and Curve
Below is a hypothetical supply schedule for pizza.
If we plot these points (remember whatsoever bespeak on a graph but represents two numbers) We go the graph below.
If we assume there are quantities and prices in-between those on the schedule nosotros get a supply bend.
Law of Supply
The law of supply states that there is a straight relationship betwixt toll and quantity supplied. In other words, when the price increases the quantity supplied also increases. This is represented by an upwards sloping line from left to right.
Why?
Why is the law of supply true? Why is the supply curve upward sloping? Why will businesses supply more pizzas merely id the price is higher? I think it is just common sense. If you desire the pizza places to work harder and longer and produce more pizzas, you accept to pay them more, per pizza. But economists, every bit social science, want to explain common sense. We know businesses deport this way, but why?
There are two explanations for the law of supply and both have to do with increasing costs. Businesses require a higher price per pizza to produce more pizzas because they have college costs per pizza. Why?
First, there are increasing costs because of the law of increasing costs. In a previous lecture we explained that the production possibilities curve is concave to the origin considering of the police force of increasing costs. the law of increasing costs is true because non all resources are identical. Let's say a pizza place is just opening. The possessor figures that they will need five employees. Afterward putting an advertizing in the newspaper at that place are twenty applicants. 5 take had experience working in a pizza place before. They came to the interview clean and on time. The other fifteen had no work experience. Many came tardily. A few were caught steeling pepperoni on the fashion out. Ane spilled flour all over the floor. Which applicants will be hired? Of class it will be the five with experience and the other fifteen will exist rejected because they would be as well costly to rent. NOW, if the pizza identify wants to produce more pizzas they will need more workers. This ways they volition have to hire some of those who were rejected because they were more plush (less experienced, etc.). So, they volition only rent the more costly employees if they can get a higher price to cover the higher costs. this is one caption why the supply curve is upward sloping.
Second, there are increasing costs because some resources are fixed. This should not make sense to y'all. Why would at that place exist increasing costs if we use the aforementioned quantity of some resource? Well, let's say that the size of the kitchen and the number of ovens (uppercase resources) are stock-still. This means that they don't change. At present, if we desire to produce more than pizzas yous will accept to cram more workers into the same size kitchen. As they bump into each other and wait for an oven to be complimentary they still get paid, but the cost per pizza increases. Therefore they will not produce more pizza unless they can get a higher cost to cover these higher per unit costs. So the supply bend should be upward sloping.
Marketplace 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 (private supply), we keep the prices the same and add the quantities of additional pizza places. Prices stay the aforementioned, merely quantities increment because there are more pizza suppliers. So the marketplace supply of pizzas is farther to the right (horizontal) than the individual pizza place supply curves.
determinants of Supply
The price of the product (
Economists stress the importance of price in determining how much will exist produced. That is why they put cost on the supply graph, just there are other things that affect how much of a production will be produced besides the price. When nosotros developed the supply curve for pizza we employed the ceteris paribus supposition. we assumed all other things stayed constant. For instance there were no new technological discoveries, the prices of resources stayed the aforementioned, or no alter in taxes. All other factors remained the same - simply the cost and quantity supplied changed.Merely there are other determinants of how much business concern supply likewise the cost. We phone call these the Not-Price determinants of Supply.
The not-price determinants of Supply
Economists classify the non-price determinants of supply into 6 groups:a. Pe -- expected price
b. Pog -- price of other goods ALSO PRODUCED BY THE FIRM
c. Pres -- price of resources
d. T --engineering
e. T --taxes and subsidies
f. N -- number of producers/sellers
Two Kinds of Changes Involving Supply
Change in Quantity Supplied (
A change in Quantity supplied caused But by a change in the PRICE of the product. Information technology is represented by a movement Along a Unmarried supply bend.
Alter in Supply (
A change in supply is a shifting the supply curve because there is a new supply schedule. The supply curve either moves left or right (horizontally) since the prices stay the same and only the quantities change and quantity is on the horizontal centrality. Exist sure to describe your arrows to the Right and LEFT. Many students want to describe the arrows perpendicular to the supply curve. Don't do this. Ever draw your arrows horizontally because this indicates the the prices are the same, and simply the quantities change. Also, if you lot describe you arrows perpendicular to the supply curve and arrow pointing UP will point a DECREASE in supply. That could become confusing!
A alter in supply is caused by a change in the non-toll determinants of supply. these are the factors that we assumed were abiding when we used the ceteris paribus assumption to develop the supply curve.
Increase in Supply
If there is an increment in supply (
Decrease in Supply
If there is an decrease in supply (
Changes in supply are caused by a Alter in the non-price determinants of supply
Let'southward await at these determinants on at a fourth dimension. We must know how they shift the supply bend if nosotros are to use the supply and demand tool to understand how prices are determined in a market economy.
If a business organization expects that they tin get a college price in the future, what volition happen to supply today? They will be less willing to sell there products today because they will know that if they waited they could get a college cost then supply today would decrease, shift to the left. (Remember, supply is non the quantity bachelor for sale.)Let'due south say that you want to sell you car, somebody offers you lot $1500 today, and you have it. You are willing to sell your auto for $1500 today. So, somebody says that they will swoop you $2000 for your car if you could wait iii days. At present you expect that y'all can get a higher cost ($2000) in the future, so you will probably no longer want to sell your motorcar for $1500 today.
First, think of a business that produces two products, like farmers who can either grow corn or soybeans. And so the price of one increases, what happens to the supply of the other one.And then if the price of soybeans increases, what happens to the supply of corn?
If the price of soybeans increases the supply of corn will subtract. The supply curve of corn volition shift to the left every bit farmers plant more than soybeans and less corn.
If the price of soybeans increases, what happens to the supply of soybeans?
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Nothing. Remember, price does non change supply, it changes the quantity supplied. so if the toll of soybeans increases, we would get an increase in the quantity supplied (same supply curve, college quantity).
The price of resources (
If the price of a resource used to produce the product increases, this will increase the costs of production and the producer will no longer be willing to offer the same quantity at the same cost. They volition want a college price to cover the higher costs. This shifts the supply curve to the left (For Example: if the autoworkers unions receives a significant wage increase, this volition increase the costs of producing cars and decrease the supply of cars (
Does improved technology increase or decrease the costs of producing a production?Improved applied science DECREASES costs and therefore increases supply. If the technology did not decrease costs, then it wouldn't be used. If there is a loftier-tech expensive manner to produce a product and a depression-cost, low-tech, way to produce the same product, companies that use the low-cost methods will be able to sell the product at a lower price and beat out the high-price producers.
Improved applied science
What has improved technology done to the costs of medical care? Improved medical engineering science has INCREASED the toll of medical care BUT it has also changed the outcome. For instance allow'southward say that there is a disease where with existing low-price engineering science, half the patients die. Now, if they invent a new loftier-toll technology that will save all lives which engineering will be used? Of course the new high-cost technology will exist used, BUT THE Production HAS CHANGED. One production is when half the patients dice, the other production is when all patients live. Nosotros can't put two products on one supply curve.
Let's utilize one more than medical case. Why practice doctors nonetheless use low-tech stethoscopes? they were using similar stethoscopes a hundred years ago. Isn't hither a high-tech electronic stethoscope? Yes there is, so why don't doctors use it? Considering it is more expensive AND Information technology GIVES THE SAME RESULTS. Doctors will apply the cheaper engineering equally long as the results are the aforementioned. just obstetricians do use the more than expensive high-tech stethoscope because it gives them better results. The low-tech stethoscopes can't always pick out the fetal heart beat. the newer high-tech and higher-cost electronic stethoscopes can. The product changes.
And so, improved applied science will decrease costs and increase supply OR it will increase costs and change the product which we cannot put on one graph.
Here we will hash out excise taxes. Excise taxes are a "per-unit" tax imposed on the production or auction of a product. Examples include the gasoline tax (so much per gallon), the cigarette taxation (so much per pack) and the liquor tax (so much per bottle).Let's discuss the gasoline tax. If the revenue enhancement on gasoline increases will this affect the demand for gasoline or the supply of gasoline? If you said need - then which not-cost determinant of need has changed? remember price does not change demand.
If the tax on gasoline increases, this will heighten the toll of SELLING gasoline, and Subtract SUPPLY.
Who pays the gasoline tax? Who pays the wages of the gas station employees? Whether y'all answer the consumer of the gas station owner, y'all have to give the same answer for both questions. Both taxes and wages are costs to the producer or seller. Higher gasoline taxes do not shift the need bend, but they may result in a higher price and therefore a decrease in quantity demanded.
Subsidies are the opposite of taxes. Instead of the business organisation paying the regime, the government pays the business. There are fewer subsidies than taxes. But let'southward say the the government wants to encourage the use of solar energy so they put a subsidy (or increase 1) on solar energy equipment. this will decrease the costs of producing or selling the equipment because when they produce or sell one they get a refund (subsidy) from the regime.
An increase in the number of producers of a product will increase supply of that product. If the number of reckoner manufacturers increases, the supply of computers will increase (shift to the right).
Market Equilibrium -- Equilibrium Cost and Quantity
Now nosotros are ready to hash out PRICES. At the top of this online lecture I said:
"In a backer society prices are determined past the interaction of need and supply. Since prices are so important, nosotros need to better sympathize how they are determined. why is the cost of gasoline $ane.59 a gallon. Why does a candy bar cost $0.75? Why is the price of plywood commonly $10 a sheet, simply $30 a canvas afterwards a hurricane?"
Marketplace Equilibrium
Equilibrium means that there is no further trend to alter. When something is at equilibrium, information technology is at rest, not changing. Like a pendulum. when it is swinging, it is changing. Nosotros call this disequilibrium. Somewhen, it will stop swinging and achieve equilibrium.
Prices do something like. They move toward an equilibrium where they come up to rest and don't modify. But just similar yous can push a pendulum and cause information technology to swing and and so slow down and achieve equilibrium again, prices can be "pushed" and they volition change to a new equilibrium. It is the non-toll determinants of demand and supply that "push" prices to a new equilibrium. Nosotros call this "market equilibrium".
The equilibrium toll is the price where the quantity demanded equals the quantity supplied.
Sometimes I hear people say that equilibrium is where demand equals supply. Information technology is impossible for the whole demand bend to be the same equally the whole supply curve (NOT: D = S), but there is one toll where the quantity demanded equals the quantity supplied.
Market Disequilibrium
Why volition the price of pizzas be $9? Well, let'southward take a look at what happens if the price is not at equilibrium.
If the price is $12, the quantity demanded is 2000 (Qd = 2000) and the quantity that businesses are willing to supply is 4000 (Qs = 4000). The result will be a surplus of 2000 pizzas (4000 - 2000 = 2000). If at that place is a surplus (more bachelor than consumers are willing to purchase) the price will alter - decrease. Twelve dollars is not equilibrium - information technology will change.
See graph.
If the price is $6, the quantity demanded is 5000 (Qd = 5000) and the quantity that businesses are willing to supply is 2000 (Qs = 2000). The result will be a shortage of 3000 pizzas (5000 - 2000 = 3000). If in that location is a shortage (consumers are willing to purchase more than than is available) the price will change - increase. Six dollars is non equilibrium - it will change.
See graph.
Changes in Need AND Supply
At present that we can discover equilibrium AND we know what causes supply or demand to change, permit's see what happens to the equilibrium price and quantity if supply and/or demand changes. After nosotros do this, nosotros will put information technology all together. It all begins with a change in 1 of the eleven non-toll determinants:
Need:
SUPPLY:
so you must know how they touch on the graphs. We discussed this higher up and will review it again before long. Here, permit'southward but concentrate on what happens to toll and quantity if demand and/or supply changes.
Instance 1: D changes and supply stays the same
If demand increases (shifts to the right) what effect will this accept on PRICE and QUANTITY. Be certain to Depict THE GRAPHS. You can probably gauge what will happen to price and quantity and become it correct quite often, but why approximate when y'all can describe the graphs and go it correct almost all the time? BE SURE TO Depict THE GRAPHS!
Then, if demand increases and supply stays the aforementioned you go (encounter graph):
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| Demand increases:
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If demand decreases (shifts to the left) and supply stays the aforementioned you become (encounter graph):
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| Demand decreases:
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This is quite easy, only the central to agreement this are the not-price determinants of supply and demand. We will review them soon.
Case 2: S changes and demand stays the aforementioned
If supply increases (shifts to the right) what event will this have on Cost and QUANTITY. Be sure to DRAW THE GRAPHS. You can probably gauge what will happen to toll and quantity and go it correct quite frequently, only why guess when you can draw the graphs and get information technology right almost all the fourth dimension? Be Certain TO Depict THE GRAPHS!
So, if supply increases and demand stays the aforementioned y'all get (see graph):
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| Supply increases:
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If supply decreases (shifts to the left) and demand stays the same you get (come across graph):
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| Supply decreases:
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Instance 3: D and South both change
What if BOTH supply and need modify at the aforementioned time? This means what happens to price and quantity if a non-price determinant and supply AND a non-price determinant of demand change shifting the graphs at the same time?
1. S increases, D decreases
DON'T Wait!!!Graph information technology right now and determine what would happen to price and quantity if supply increases and demand decreases.
In a face-to-face class I would have my students do this themselves and tell me what happens to P and Q. So let's practise it in this distance learning class.
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What exercise you get? What happens to toll and quantity if supply increases (shifts to the correct) and need decreases (shifts to the left)?
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If supply increases and need decreases:
- price decreases
- quantity is INdeterminant
The toll volition decrease, but we cannot tell what happens to quantity. Quantity could increase, it could subtract or it could stay the same. What happens to quantity depends on how much the supply and demand curves shift and since nosotros were not told this, nosotros cannot determine what happens to quantity. Quantity is indeterminant.
See the graph below where we tin can run into that if need decreases a little (D2) and then the equilibrium quantity will increase, but if the need curve decreases a lot (D4) the equilibrium quantity volition decrease.
2. S decreases, D increases
What happens to price and quantity if supply decrease and demand increases?GRAPH IT!
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If supply decreases and demand increases:
- cost increases
- quantity is indeterminant
The price volition increase, but we cannot tell what happens to quantity. Quantity could increment, it could decrease or it could stay the same. What happens to quantity depends on how much the supply and demand curves shift and since we were not told this, we cannot determine what happens to quantity. Quantity is indeterminant. Try graphing different shifts in D and S and see what happens to quantity.
3. Southward increases, D increases
What happens to cost and quantity if both supply and demand increase (shift to the right)?GRAPH IT earlier scrolling (or looking) lower on this page.
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If supply increases and demand increases:
- quantity increases
- cost is INdeterminant
The quantity will increment, but nosotros cannot tell what happens to toll. The price could increase, it could decrease or information technology could stay the same. What happens to the cost depends on how much the supply and demand curves shift and since we were not told this, nosotros cannot determine what happens to cost. Price is indeterminant.
Run into the graph below where we tin meet that if supply increases a piffling (S1) and so the equilibrium price will increase, simply if the supply curve increases a lot (S3) the equilibrium price volition decrease.
iv. South decreases, D decreases
What happens to price and quantity if supply decrease and demand increases?GRAPH Information technology!
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If supply decreases and need decreases:
- quantity decreases
- price is indeterminant
The quantity will decrease, simply we cannot tell what happens to price. price could increase, it could decrease, or it could stay the same. What happens to toll depends on how much the supply and demand curves shift and since we were not told this, we cannot make up one's mind what happens to price. Price is indeterminant. Try graphing different shifts in D and S and run across what happens to price.
Using Supply and Demand
Now let'due south put it all together. We can employ our supply and demand model to sympathize why prices change. Information technology all begins with the non-price determinants of demand (
We will apply supply and demand curves to illustrate how changes in these non-toll determinants will touch the price and quantity of a production, ceteris paribus. Before yous gauge, answer the following questions:
(1) Which determinant has changed?
(2) Will it bear upon supply or demand?
(three) Will supply or demand increase or decrease?
(four) GRAPH IT! What happens to toll and quantity?
EXAMPLE 1
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Our goal is to sympathise what happens to Price and QUANTITY, but don't just judge. If you do simply think about it and attempt to figure it out in your head, y'all'll probably get it right a lot of the fourth dimension. But wouldn't you rather go it correct most, or all, of the time? We now have a tool (supply and demand) that we tin can utilise to better sympathise changes in price and quantity. So use the tool. In one case you get used to it you'll encounter its benefits.
Answer the four questions and the graph (tool) will requite y'all the answer.
(i) Which determinant has changed?Sometimes this is obvious. In this example it is income.(2) Volition it affect supply or demand?
Income is a determinant of DEMAND. But at other times this is more than difficult. For example Pe and Pog are determinants of BOTH demand and supply.(3) Will supply or need increase or decrease?
This is the key to using the tool correctly. We discussed above how the non-price determinants shift the curves. Computers are normal goods. This means that if incomes increment, demand for computers volition increase.(4) Finally, GRAPH It! the graph will tell you what happens to price and quantity. See graph beneath.
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Reply: So if consumer incomes increase, ceteris paribus, the cost of computers will increase and consumers volition buy more.
Case 2
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(1) Which determinant has inverse?Technology(2) Will it touch on supply or demand?
SUPPLY(iii) Will supply or demand increase or decrease?
SUPPLY WILL Increment (shift to the right)(4) GRAPH It! What happens to cost and quantity?
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EXAMPLE three
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If the graph above is for Nintendo 64 Video Game Systems, what volition happen to the price and quantity if there is a decrease in the price of personal computers?
(i) Which determinant has changed?Pog - the product on the graph is Nintendo Video Game Systems and the cost of some other product, computers, has changed(2) Will it affect supply or demand?
The non-price determinant, Pog, is a determinant for both supply and need. With supply nosotros said it refers to the toll of other good PRODUCED BY THE Same FIRM. Does Nintendo besides produce computers? NO.With demand, Pog refers to the price of substitute and the price of complements. Are video game systems and home computers substitutes or compliments? Most people would say they are substitutes. If you lot buy a new habitation computer, you can play games on the computer and maybe you won't buy a new video game system.
So, if in that location is a decrease in the cost of personal computers, DEMAND FOR VIDEO GAME SYSTEMS WILL CHANGE.
(three) Will supply or need increase or decrease?
if there is a subtract in the cost of personal computers, DEMAND FOR VIDEO GAME SYSTEMS WILL DECREASE (shift to the left).(four) GRAPH Information technology! What happens to price and quantity?
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More than EXAMPLES:
For REVIEW exercises click HERE
"Real Earth" Examples
In the "real world" the determinants are non as easy to pick out. The tool still works, but it takes a footling more than practice.
If yous read a paper or Internet news commodity near a production whose price and/or quantity has changed, y'all tin can use supply and demand to analyze WHY the cost and/or quantity has changed. We know that changes in the non-price determinants of demand and supply cause prices and quantities to change. And so, to sympathise why, nosotros accept to look for the not-price determinants in the article.
Real-WORLD EXAMPLE 1
Below is a portion of an commodity from CNNFN.COM
Read the article looking for the cause of the price modify and then use our supply and demand graph to ILLUSTRATE what has happened. This volition exist similar to the extra credit question that you lot will have on exam 1.
Remember to employ our tool correctly:
(i) Which determinants have inverse?
(2) Volition they affect supply, demand, or both?
(3) Will supply or demand increase or decrease?
(4) GRAPH It! Then show what happens to price and quantity?
Top PC makers cutting prices
Compaq clears out old models; Dell passes on lower component costs
February 1, 2000: 2:44 p.m. ET
NEW YORK (CNNfn) - Two of the world's largest figurer makers on Tuesday appear that they have cut prices on their commercial desktop PCs.
Compaq, the No. 1 PC maker, said it cutting prices up to 13 percent on most of its Deskpro series commercial PCs. The cost cuts are existence made to articulate the fashion for nine new Deskpro models. . . . . . . . . . . . . . . .Dell ( DELL : Research , Estimates ), the world'southward 2nd largest supplier of PCs, said it was cut prices because the cost of the components information technology uses to brand them take besides dropped.
Constructive Monday, a Dell Precision WorkStation 210 with a Pentium III processor running at 650 million cycles per 2nd will sell for $1,740, a 17.ane percent reduction, the company said. Dell also said it cut prices on the mid-range models in its Precision WorkStation 410 line by upwards to 15.5 percent.
(one) Which determinants have changed?
The article says " Dell ( DELL : Inquiry , Estimates ), the world's 2nd largest supplier of PCs, said it was cutting prices because the cost of the components it uses to make them have too dropped." This indicates the there has been a change in the cost of resources ((2) Will they affect supply, demand, or both?
SUPPLY(iii) Will supply or demand increment or subtract?
SUPPLY Volition INCREASE (shift to the right)(4) GRAPH IT! Then show what happens to cost and quantity?
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Real-Globe EXAMPLE ii
Below is a portion of an commodity from CNNFN.COM
http://cgi.cnnfn.com/output/pfv/2000/02/01/companies/pcs_prices/
Read the article looking for the cause of the cost change and and then use our supply and need graph to ILLUSTRATE what has happened. This volition be like to the extra credit question that y'all will take on exam i.
Remember to use our tool correctly:
(1) Which determinants have changed?
(2) Will they bear upon supply, need, or both?
(3) Will supply or demand increase or decrease?
(4) GRAPH Information technology! Then evidence what happens to cost and quantity?
Air customers to pay for fuel
With demand for seats still strong, nearly carriers announce fuel surcharges
By Staff Writer Chris Isidore
January 21, 2000: 3:54 p.chiliad. ET
NEW YORK (CNNfn) - Airlines are finding a source of relief for oil toll shocks they've rarely tapped before: their passengers.
With oil prices hitting a postal service-Gulf War high Friday, three more than carriers - Us Airways, America West and Trans World Airlines - announced surcharges, charging customers $20 per round-trip ticket on virtually all domestic flights.
That meant that eight of the 9 largest carriers in the country now had the charges, with just No. 7 Southwest Airlines ( LUV ), the Dallas-based discount carrier, holding off at this time.
Demand for seats opens door
The surcharge is unique in its acceptance by the typically cutthroat airline industry, and is a sign that demand for air travel remains stiff.
The Air Ship Clan report that 71.3 percent of its members' seats were filled last year, the best rate in the history of passenger jet travel.
With demand remaining strong despite the spike, airlines are in a improve position to seek college fares.
"In the past, when we had the tremendous run up in fuel, nosotros too had a recession," said David Swierenga, the ATA'southward chief economist. "Those two things together clobbered the industry. Now the economy is moving ahead , and carriers will have a little more than flexibility on the pricing side.". . . . . . . . .
ANSWER: I have highlighted in red the important parts of this article. Let's analyze each one.
"With oil prices hitting a post-Gulf War high Fri, three more carriers - United states Airways, America West and Trans Earth Airlines - announced surcharges, charging customers $20 per round-trip ticket on virtually all domestic flights."
(ane) Which determinant has changed?Price OF Resources. Oil (fuel) is a resources used by the airline manufacture(2) Will they touch on supply or need?
SUPPLY(3) Will supply or demand increment or decrease?
SUPPLY Volition Decrease (shift to the left)(4) GRAPH IT! Then show what happens to price and quantity?
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The article also says:
" The surcharge is unique in its acceptance past the typically cutthroat airline industry, and is a sign that demand for air travel remains strong. " AND "Now the economy is moving ahead".
(1) Which determinant has changed?INCOME ("The economy is moving alee" means incomes are rising.)(2) Volition they affect supply or demand?
DEMAND(iii) Volition supply or demand increase or decrease?
DEMAND WILL Increase (assuming air travel is a normal skillful)(iv) GRAPH IT! Then show what happens to price and quantity?
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At present LET'S PUT BOTH CHANGES ON THE SAME GRAPH. You lot must do this to prove the overall issue of all changes. We have a decrease in supply caused past higher resource prices and an increase in demand caused by higher incomes,
The result is higher prices (see graph) and the quantity stays well-nigh the same as the article states (therefore I shifted the curves the same amount).
Other articles that you can analyze yourself:
- http://cnn.com/Usa/9907/27/gas.prices/
- http://cnnfn.com/2000/01/21/companies/airfuel/
- http://cnn.com/US/9908/09/rv.boom/
ANSWERS
Market place Supply: right answer "B" [Return]
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Source: http://www2.harpercollege.edu/mhealy/eco212i/lectures/s&d/s&d.htm
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