Supply And Demand Homework Problems For 3rd

Now let's get to the really fun stuff, showing how the forces of supply and

demand lead to a so-called equilibrium in

the market and thereby set the market price.

And let's start out by defining what an equilibrium is.

The concept itself comes from physics.

Specifically classical mechanics. To say something is in equilibrium

is to say that the dynamic forces pushing on it cancel each other out.

In supply and demand analysis, equilibrium means that the upward pressure

on price is exactly offset by the downward pressure on price.

The equilibrium price is the price towards

which the invisible hand drives the market.

Now, how about instead of the price being too high, it starts

out too low in the cornflakes market, say at 2 instead of 3.

In this case, consumer will demands 15 million boxes, but

firms will be willing to supply only 7 million boxes.

In this case, we have a shortage of 8 million boxes.

A excess of quantity demanded over quantity supplied.

So what you think firms are going to do in this situation?

With consumers clamoring for their product, the best guess is

that they will raise the price and they will keep on

raising the price right up until it reaches the point

where demand and supply are in balance in the market clears.

By now you should be getting to see just how powerful the apparatus of

supply and demand is in helping us to predict changes in our market system.

For example, suppose a drought in

the Midwest severely damages the wheat harvest.

Since wheat is a key ingredient of bread, this

will shift the supply curve for bread to the left.

This is illustrated in this figure. Where the bread

supply curve has shifted from S S to S prime S prime.

Note however that the demand curve has not shifted.

This is because people have the same desire for

their daily sandwich whether the harvest is good or bad.

So what do you think happens next?

Well, the bad harvest causes bakers to produce less bread at the old price.

So quantity demanded exceeds quantity supplied.

The price of bread therefore rises

encouraging production and thereby raising quantity supplied.

This simultaneously discourages consumption and lowers quantity demanded.

And the price continues to rise until at the new equilibrium price, the amounts

demanded and supplied are once again equal.

This new equilibrium is founded E double prime.

The intersection of the new supply curve, S

prime S prime and the original demand curve.

Thus a bad harvest or any leftward shift at the supply curve, raises

prices and by the law of downward slope in demand, lowers quantity demanded.

In contrast, suppose that a new baking

technology lowers costs and therefore increases supply.

This means the supply curve shifts down in to the right.

Try drawing this curve, and you see why the equilibrium price

is lower and the equilibrium quantity higher at E double prime.

This table summarizes the effect of price and quantity of different demand

and supply shifts. Try and replace the question marks with up

or down arrows. Does your table look like this?

Беккер не раздумывая просунул ногу в щель и открыл дверь. Но сразу же об этом пожалел. Глаза немца расширились. - Was tust du. Что вы делаете.

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