10/22/2014crc economics1. 10/22/2014crc economics2 what did you study last time? chapter 4 the...

04/11/23 CRC Economics 1


What did you study last time?

Chapter 4The Market Forces of Demand &

Supply

III. Market situations


What do you study now?

Chapter 4The Market Forces of Demand & Supply

IV. Effects of changes in demand and/or supply on markets


Do you know …

what causes shifts (changes) in demand and supply?

what happens in a market when only demand shifts/changes?

what happens in a market when only supply shifts/changes?


Do you know …

what happens in a market when both demand and supply shift/change?

how to analyze changes in equilibrium?


1. What cause shifts (changes) in demand and supply?

Shifts (Changes) in the

demand curve supply curve

are caused by changes in non-price factors (determinants):

income weather

prices of related goods prices of resources

tastes technology

expectations expectations

number of buyers number of sellers


2a. What happens in a market when only demand shifts/changes?

8

4

Qx (units)

Px ($)

O 1

1

S

4

3

2

D

What happens if demand increases by 4 units at each price?

EPe

Qe

D’

E’

6

Q’e

P’e

2

Suppose that a market is originally at equilibrium.

An increase in demand increases both price and quantity in the market.


2b. What happens in a market when only demand shifts/changes?

8

4

Qx (units)

Px ($)

O 1

1

S

4

3

2

D

EPe

Qe

6

D’’

E’’P’’e

2

Q’’e

What happens if demand decreases by 4 units at each price?


A decrease in demand decreases both price and quantity in the market.


3a. What happens in a market when only supply shifts/changes?

8

4

Qx (units)

Px ($)

O 1

1

S

4

3

2

D

EPe

Qe

S’

E’

6

Q’e

P’e

2

What happens if supply increases by 4 units at each price?


An increase in supply decreases price and increases quantity.


3b. What happens in a market when only supply shifts/changes?

8

4

Qx (units)

Px ($)

O 1

1

S

4

3

2

D

EPe

Qe

6

S’’

E’’

P’’e

2

Q’’e

What happens if supply decreases by 4 units at each price?


A decrease in supply increases price and decreases quantity.


4. Effects of changes in D or S on the market—Summary table 1

is unchanged(stays the same) increases

is unchanged(stays the same)

increases

P is the sameQ is the same

P increasesQ increases

P decreasesQ increases

decreases

P increasesQ decreases

decreases P decreasesQ decreases

and supply

If Demand


5a. What happens in a market if both D & S increase?



increases




and supply

If Demand

P is ambiguousQ increases


5b. What happens in a market if both D & S decrease?




decreases



and supply

If Demand

P is ambiguousQ decreases


5c. What happens in a market if D increases & S decreases?



increases



decreases


and supply

If Demand

P increasesQ is ambiguous


5d. What happens in a market if D decreases & S increases?






and supply

If Demand

P decreasesQ is ambiguous


5e. Effects of changes in D and/or S on the market—Summary table 2



increases




decreases



and supply

If Demand

P is ambiguousQ increases

P increasesQ is ambiguous

P decreasesQ ambiguous

P is ambiguousQ decreases


5f. What happens in a market if both D & S shift/change?

If

D > S

then

D dominates the market, i.e. the market isaffected by the change in demand only.

D = S No side dominates the market, so either Pe or Qe would be the same as the original.

D < S

To remove the “ambiguity” in price or quantity, we needmore information about the magnitude of the changes.

S dominates the market, i.e. the market isaffected by the change in supply only.


6. How to analyze changes in equilibrium?

By following the steps below: i. Determine the market in

question;ii. Determine the event;iii. Decide whether the event

shifts/changes the demand curve or the supply curve (or both);


6. How to analyze changes in equilibrium?

iv. Decide which direction the curve(s) shift(s);

v. Use the demand-supply diagram to see how the shift(s) change(s) the equilibrium.


Now you know …

what causes shifts (changes) in demand and supply.

what happens in a market when only demand shifts/changes.

what happens in a market when only supply shifts/changes.


Now you know …

what happens in a market when both demand and supply shift/change.

how to analyze changes in equilibrium.


Summary

One has to be able to determine the market’s original situation (before the changes) and the market’s new situation (after the changes).

Changes in market equilibrium are caused by changes in the other factors that affect (shift) demand and/or supply curves.


Summary

Supply & demand together determine the prices of G&S.

In market economies, prices are the signals that guide the allocation of resources.


What did you study?

Chapter 4The Market Forces of Demand & Supply

IntroductionI. Demand (D)II. Supply (S)III. Market situationsIV. Effects of changes in demand & supply on

markets


What will you study next?

Chapter 5Elasticity & Applications

I. Price elasticity of demandII. Income elasticity of demandIII. Cross-price elasticity of demandIV. Price elasticity of supplyV. Applications

10/22/2014crc economics1. 10/22/2014crc economics2 what did you study last time? chapter 4 the...

Documents

p decreases q decreases

d decreases s increases

d increases s decreases

demand increases

demand decreases

n d p increases q

n d p decreases q

ambiguous q decreases