Economics for Dummies_ by Economics for Dummies
Author:Economics for Dummies
Language: eng
Format: epub
Tags: Economics for Dummies
Quantity
As we discuss in the previous section, any such shortage causes buyers to bid up the price. The result is that the price rises and continues to rise until it reaches P* v the price where demand curve D } crosses supply curve S.
Note that when moving from the first equilibrium to the second, the equilibrium quantity increases from Q* to Q*.. This result makes good sense because if demand increases and buyers are willing to pay more for something, you expect more of it to be supplied. Also, the price goes up from one equilibrium to the other because to get suppliers to supply more in a world of rising costs, you have to pay them more.
Much more subtle, however, is that the slope of the supply curve interacts with the demand curve to determine the size of the changes in price and quantity. Refer back to the perfectly vertical supply curve of the left-hand graph of Figure 8-7. For such a supply curve, any increase in demand increases the price only, because the quantity can't increase. On the other hand, if you're dealing with the perfectly horizontal supply curve of the right-hand graph of Figure 8-7, a rightward shift in demand increases the quantity only, because the price is fixed at P'.
Thinking through these two extreme cases hammers home that in a situation like Figure 8-11, neither demand nor supply is in complete control. Their interaction jointly determines equilibrium prices and quantities and how they change if the demand curve or the supply curve shifts.
Chapter 8: Supply and Demand Made Easy # y /
Reacting to a decrease in supply
To show you how the market equilibrium changes when the supply curve shifts, consider Figure 8-12 in which the supply curve shifts from S o to S ; because of an increase in production costs. (As we discuss in the earlier section 'Cost changes: Shifting the supply curve', this increase in costs can be considered to shift the supply curve up or to the left. In Figure 8-12, we use a vertical arrow to indicate a vertical shift, but a left arrow to indicate a leftward shift is just as correct.)
The shift in supply causes the market equilibrium to adjust. The original equilibrium is at price P* and quantity Q* o , which is the point where the demand curve D and the original supply curve S o cross. When production costs increase, the supply curve shifts to 5 r
For a moment, the price remains at P* o . But this price can't continue because the quantity demanded at this price, Q* o , exceeds the quantity supplied, Q s r This situation of excess demand causes the price to be bid up until reaching the new equilibrium price of P* 7 , at which price the quantity demanded equals the quantity supplied at Q*,.
Figure 8-12:
The supply curve shifts vertically when market equilibrium resets.
a s
a*
0
Quantity
When you compare this situation of increasing costs with the situation of increasing demand in the previous section, you notice that in both cases the equilibrium price rises.
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