APMacro: Supply and Demand Review


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Supply and Demand Review

 

  • A market is any institution or arrangement that brings together buyers and sellers of a product, service, or resource.
  • Demand is a schedule or curve representing the willingness of buyers in a specific period to purchase a particular product at each f the various prices. The law of demand implies that consumers will buy more of a product at a low price than at a high price. So, other things equal, the relationship between price and quantity demanded is negative or inverse and is graphed as a downward sloping curve. Market demand curves are found by adding horizontally the demand curves of the many individual consumers in the market.
  • Changes in one or more of the determinants of demand: consumer tastes, the number of buyers in the market, the money incomes of consumers, the prices of related goods, and price expectations, shift the market demand curve. A shift to the right is an increase in demand; a shift to the left is a decrease in demand. A change in demand is different from a change in quantity demanded, the latter being a movement from one point to another point on a fixed demand curve because of a change in the product’s price.
  • Supply is a schedule or curve showing the amounts of a product that producers are willing to offer in the market at each possible price during a specific period. The law of supply states that, other things equal, producers will offer more of a product at a higher price than at a low price.Thus the relationship between price and quantity supplied is positive or direct, and supply is graphed as an upward sloping curve. The market supply curve is the horizontal summation of the supply curves of the individual producers of the product.
  • Changes in one or more of the determinants of supply: resources prices, production techniques, taxes or subsidies, the prices of other goods, price expectations, or the number of sellers in the market, shift the supply curve of a product. A shift to the right is an increase in supply; a shift to the left is a decrease in supply. In contrast, a change in the price of the product causes a change in the quantity supplied, which is a movement from one point to another on a fixed supply curve.
  • The equilibrium price and quantity are established at the intersection of the supply and demand curves. The interaction of market demand and market supply adjusts the price to the point at which quantities demanded and quantities supplied are equal. This is the equilibrium price. The corresponding is the equilibrium quantity.
  • The ability of market forces to synchronize selling and buying decisions to eliminate potential surpluses and shortages is known as the rationing function of prices.
  • A change in either demand or supply changes the equilibrium price and quantity. Increases in demand raise both equilibrium price and equilibrium quantity.Decreases in demand lower both equilibrium price and equilibrium quantity. Increases in supply lower equilibrium price and raise equilibrium quantity. Decreases in supply raise equilibrium price and lower equilibrium quantity.
  • Simultaneous changes in demand and supply affect equilibrium price and quantity in various ways, depending on their direction and relative magnitudes.
  • A price ceiling is a maximum price set by government and is designed to help consumers. A price floor is a minimum price set by government and is designed to aid producers.
  • Legally fixed prices stifle the rationing function of price and distort the allocation of resources. Effective price ceilings produce persistent product shortages, and if an equitable distribution of the product is sought, government must ration the product to consumers. Price floors lead to persistent product surpluses, and the government must either purchase the product or eliminate the surplus by imposing restrictions on production or increasing private demand.

Arrows-02-june

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