Effect of a Shift in Supply or Demand

The analysis of the supply-and-demand app can do much “more than tell us about the equilibrium price and quantity. It can also be used to diet the impact of changes in economic condition on prices and quantities. Let’s change our exam to the staff of life, bread. Suppose that a spell of weather raises the price of wheat, a key ingredient bread. That shifts the supply curve for bread to left. This is-illustrated in Figure 3-8 (0), where bread supply curve has shifted from SS to S’S’. contrast, the demand. curve has not shifted be people’s sandwich demand is largely -unaffected farming weather.

What happens in the bread market? The harvest causes bakers to produce less bread at old price, so quantity.demands exceeds quadrille supplied. The price of bread therefore rises, coursing production and thereby raising quantity supplied, while simultaneously discouraging consumption and lowering quantity demanded. The price continues. to rise until, at the new equilibrium price, the amounts demanded and supplied are once again equal. (a) If supply shifts leftward, a shortage will develop at the original price. Price will be bid up until quantities willingly bought and sold are equal, at new equilibrium E’. (b) A shift in the demand curve leads to excess demand. Price will be bid up as equilibrium price and quantity move upward to E’. .

As Figure 3-8 (4) shows, the new equilibrium is d at E’, the intersection of the new supply curve S’ and the original demand curve. ·Thus a bad har (or any leftward shift of the supply curve) raises . es and, by the law of downward-sloping demand, rs quantity demanded.

Suppose that new baking technologies lower and therefore increase supply. That means the curve shifts down and to the right. Draw in a S’S’ curve, along with the new equilibrium E”‘. is the equilibrium price lower? Why is the equilibrium quantity higher?

we can also use our supply-and-demand apparatus examine how changes in demand affect the equilibrium. Suppose that there is a sharp increase in family incomes, so eve. , one wants to eat . more bread. This is represented in Figure 3-8. (b) as a “demand shift” in which, at every price, consumers demand a higher quantity of bread. The demand curve thus shifts rightward from DD to D’D’.

The demand Shift producer a shortage of bread at the old price. A scramble· for bread ensues. with long lines in the bakeries. Praia are bid upward until supply and demand crone .11. into balance at a higher price. Graphically, the . increase in demand has changed the market equilibrium from E to E’in Figure 3-8 (b).

For both examples of shift a Shift in supply and a shift in demand-a variable uncle the demand or supply curve baa- changed. If the case of supply, there might have been a change in technology or in- put prices. For the demand Shift. one’ oft-be influences affecting consumer demand -incomes , population, the prices of related goods, or tacks changed and thereby stiffed the demand schedule (acc Table 3-6). When the elements underlying demand or sup- ply change, this-leads to shifts in demand or supply and to changes in the market equilibrium of price and quantity.

Interpreting, Changes In Price and Quantity

Let’s go back to our bread example. Suppose that you go to the store and see that the price of bread: has doubled. Does the increase in price mean that the demand for bread has risen, or does it mean that bread has become more expensive to produce? The correct answer is that without more information, you don’t know-it could be either one, or even both. Let’s look at another example. If fewer airline ticket. are sold, is the cause that airline fares have gone up or that demand for air travel has gone down? Air- lines will be most interested in the answer to this question.

Economists deal with these sorts of questions all the time: When prices or quantities change in a market, does the situation reflect a change on the supply side or the demand side? Sometimes, in simple situations, looking at price and quantity simultaneously gives you a clue about whether it’s the supply curve that’s shifted or the demand- curve. For example, a rise in the price of bread accompanied by a in quantity suggests that the supply curve has shifted to the left (a decrease in supply). A rise in price accompanied by a decrease in quantity in suggests that the demand curve for bread has probably shifted to the right (an increase in demand).

This point is illustrated in Figure 3-9. In both . panel (4) and panel (6), quantity goes up. But in (4) the price riles, and in (b) the price falls. Figure 3-9

(a) shows the case of an increase in demand, or a shift in the demand curve. As a result of the shift, the equilibrium quantity demanded increases from 10 to 15 units. The case of a movement along the demand curve is shown in Figure 3-9 (b). In this case, a supply shift changes the market equilibrium from point E to point E”. As a result. the quantity demanded changes from 10 to 15 units. But demand does not change in this case; rather, quantity demanded increases as consumers move along their demand curve from -E’ to E’ in response to a price change.

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