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Summary Varsity College BCOM Year 1 Economics Ch 5
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Economics Ch 5Ch 5 – Demand and supply in action
5.1 Changes in demand
INCREASE IN DEMAND 1- Increase in demand
Results in an increase in the price of a product and an increase in the
quantity exchanged, ceteris paribus.
Sources of an increase in demand:
- Increase in price of a sub product
- Increase in income
- Change in preference
- Expected increase in the price of the product
Supply remains unchanged, but the quantity supplied increases as the price
of the product increases.
An excess demand / market shortage results in an increased price of the
product. The price of the product is bid up as purchasers compete to obtain the available quantity supplied,
while the quantity demanded falls. the process continues until equilibrium is re-established.
DECREASE IN DEMAND
Result in a decrease in the price of the product and a decrease in the
quantity exchanged, ceteris paribus.
Supply remains unchanged, when demand decreases, the price of the product
falls and this leads to a reduction in the quantity supplied.
The supply curve remains unchanged, but there is a downward movement
along the supply curve. When the demand decreases, there is an excess
supply at the original price. Excess supply results in reduction in price as
sellers compete go sell their excess stocks, as the price falls, the quantity
supplied also falls, while the quantity demanded increases, until equilibrium is
re-established.
2 - Decrease in demand
1
, Economics Ch 5
5.2 Changes in supply
INCREASE IN SUPPLY
Result in a fall in the price of a product and an increase in the quantity
exchanged, ceteris paribus.
This shift means that more goods are supplied at each price than before or
alternatively, that each quantity is supplied at a lower price than before.
Supply could increase because of:
- Fall in price of alternative product or rise in the price of a joint
product
- Reduction in the price of any of the factors of production or other
inputs
- Improvement in productivity of factors of production
Demand remains unchanged when supply increases but the quantity demanded increases as the price of the
product falls. An excess supply results in a decrease in the price of then product. Firms compete with each
other by lowering the price of a product. As the price falls, the quantity demanded increases, while the quantity
supplied falls.
DECREASE IN SUPPLY
Result in an increase in the price of the product and a decrease in quantity exchanged, ceteris paribus.
A decrease in supply means that fewer goods are supplied at each quantity is
supplied at a higher price than before.
Demand remains unchanged but there is an upward movement along the
demand curve. When supply decreases, there is excess demand at the original
price. Excess demand (or a market shortage) results in an increase in the price
of the product. Consumers bid up the price of the product in their attempt to
obtain the available quantity supplied. As the price increases, the quantity
demanded decreases, while the quantity supplied increases. This process
continues until equilibrium is re-established.
5.3 Simultaneous changes in demand and supply
When only demand or only supply changes, it is possible to predict what will happen to equilibrium prices and
quantities in the market. However, if demand and supply change simultaneously, the precise outcome cannot
be predicted. This is a special case of a more general problem in economic theory (as well as in most other
theories). When one factor is allowed to change, it is usually possible to determine or predict the effects of such
a change. But when more than one change is involved, it is hard to predict the outcome.
An increase in demand leads to an increase in the equilibrium price. Decrease in supply leads to increase in
equilibrium price. The two forces work in opposite directions as far as the equilibrium quantity is concerned and
the outcome will depend on the relative magnitudes of the changes in demand and supply.
3 - the relative 6 - relative change in
4- The relative
2 change in supply is demand is greater
changes in supply and
greater than the than the relative
demand are equal
relative change in change in supply
demand
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