Demand is the desire and ability to consume certain quantities of a good and service at certain prices at a particular point of time. While supply mean that the quantity of goods and services willing to be produced by firms or offered for sale at a particular time or particular place at alternative prices.

Example of a demand schedule

The law of demand

The law of demand state that, there is an inverse relationship between quantity demanded of any good and the price charged. It’s also stated that when price of a certain good rise, the quantity demanded of that good falls and when the price of a certain good falls, quantity demanded of that good rises. The negative relationship between price and quantity demanded can be shown using a demand curve. A demand curve can be plotted using a demand schedule; the schedule allows us to see the quantity of a good demanded at various prices. Factors other than price which affect demand, the price of good itself is the main factor affecting the quantity demanded. However, there are other factors like income, price of related goods, preferences and expectations which would affect demand. Beside that, the level of income would also affect the demand. The prices of other related goods will also affect the demand.

Example of a demand schedule

At Rm0.60 per kg, the quantity demanded is 10000 kilograms per week. While at a higher price of rm0.70 per kg, the quantity has fallen to 7500 kilograms per week. With the varying quantity demanded for rice, the entire demand curve could be traced out.

The negative relationship between price and quantity demanded can be shown using a demand curve. A demand curve is a graphical representation between the price of a good and the quantity demanded.

Movement along a demand curve and shift of demand

Concept 1

If there is a change in price of good or service, It indicates that change in quantity demanded which is the movement along the demand curve

Concept 2

If there are change in the level of income, tastes and preferences, price of related goods or services, expectations and other influencing factors. This will indicates the change in demand, which is shift of the demand curve.

Shifts of demand curve

Changes to factors other than the price of the good itself will result in the changes of the demand of good 1. Diagrammatically, it is shown as a shift in the entire demand curve for good 1.

http://www.youtube.com/watch?v=ZR2255CEhvk

Market demand curve

Market demand is define as the sum of all quantities of good and service demanded per period by all the households buying in the market for that good or service. Market demand is obtained by adding up all the individual households demand curve. This is also know as the horizontal summation.

The same as individual demand curve, the market demand curve is generally downward sloping. The entire market demand curve can be traced out for the various price of the good and resulting market quantity demanded.

Price theory – supply

Unlike the demand in which it deals with consumer behaviour, the supply theory deals with the behaviour of firms, as the target of business firms to obtain profits, supply decisions depend on the profit potential.

Law of supply

Law of supply is positive relationship between price and quantity supplied.  An increase in the market price, ceteris paribus, which leads to an increase in the quantity supplied. Conversely, a decrease in the market price, ceteris paribus, leads to a decrease in the quantity supplied.

The quantity supplied of a good is depended solely on the price of good itself. The supply of good also depends on the prices of other goods, price of factors of production and state of technology.

Supply schedule

The farmer supply schedule for soybeans

Supply curve, it is observed that supply is determined by choices made by the firm. A producer will supply more when the price of output is higher, vice-versa. The slope of the curve is positive or upward sloping. The quantity supplied no longer increases when the price rises from $4 to $5. This is due to the constraints in resources that the firm is facing in the short-run. Therefore, the firm is unable to increase production despite an increase in market price. Firms supply more when price is high because When the price is high, selling is profitable so the amount supplied is large. Larger quantity supplied means that firms will work longer hours, buy more machines and hire more workers. Firms supply less when price is low, in contrast, if price is low business is less profitable and so firms will produce less and hire less workers and machines. Some may even shut down and the quantity supplied may fall to zero. If factor prices (prices of land, capital or labor) rises, this will cause the cost of production to rise as well; as a result, supply will fall. If factor prices fall, supply will rise as the firms will be able to gain more profits, by taking advantage of the fall in cost of production. State of technology also becomes a factor. If there is advancement in the sate of technology, this will help to lower the cost of production in a result, the firm will be able to supply more.

Movement along a supply curve

Concept 1

If there is a change in price of good or service, this indicates that change in quantity supplied

As observed, and change in the price of good will change the quantity supplied for good 1, diagrammatically, it can be shown as a movement along the supply curve for good 1.

When the price rise from P₀ to P_1, quantity supplied will rise from Q₀ to Q₁. This is an upward movement along the supply curve. It is also known as an expansion.

When the price falls from P₁to P₀, quantity supplied will fall from Q₁ to Q₀. This is a downward movement along the supply curve, it is also knows as a contraction.

Concept 2

if there are changes in the following factors such as price of other goods, prices of factors of production, state of technology and other relevant factors, this indicates change in supply. Changes to factors other than the price of the good itself will cause the change of the supply of good 1. Diagrammatically, it is shown as a shift in the entire supply curve for good 1.

Shift of the supply curve to the right (S₀ to S₂) means supply increases from Q_{0 to} Q2. Shift of the supply curve to the left (S₀ to S₁), means supply decreases from Q₀ to Q₁.

Market supply

Market supply is the sum of all quantities of a good and service willing to be supplied per period by all firms. It is obtained by adding all the individual firms supply curve. The market supply shows the total industry output.

http://www.guardian.co.uk/environment/2012/aug/21/fish-demand-uk-sea-supply

Based on this article, I found out that the price of fish will go up; the demand also will go down and with the ceteris paribus condition. The quantity of fishes is far lower that the quantity demanded. This will cause the fish price to increase because there are limited fishes. In this case the price will increase and this will help lower the demand for fish. The diagram below will show you why.

The demand will shift to left because European Union’s is tightening common fisheries policy. Not only will those, bad wheatears also affect the quantity of fishes to decrease. In this case Price of fish remains the same but the quantity demand of fish will decrease.

Price of fishes will increase and the quantity supplied will increase because when the price of fishes in UK increases, the UK governments import more fishes from China. The price will move to P₀ to P₁ and quantity supplied will move to Q₀ to Q₁

.

With the increasing in price of fishes the quantity supply will decrease because consumer will find substitute goods. Consumers will go for chicken beef or lamb rather that fishes because is cheaper. Not only that, with the new fisheries policy the quantity supply will also fall because the fisheries policy control the quantity of fish importing to the country. This will shift the supply curve to the left. Price will stay the same but the quantity will decrease.

References

Besanko & Braeutigam (2005) p.33.

Goodwin, N, Nelson, J; Ackerman, F & Weissskopf, T: Microeconomics in Context 2d ed. Sharpe 2009

Basij J. Moore, Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press, 1988

Paul A. Samuelson, “Reply” in Critical Essays on Piero Sraffa’s Legacy in Economics (edited by H. D. Kurz) Cambridge University Press, 2000

A monopoly exists when a specific firm or enterprise is the only supplier for a product and controls the whole market for the product. Monopolies are characterized by a lack of economic competition to produce the good or service and a lack of substitute goods. The firm which is the monopoly has the ability to raise the price or exclude competitors.  Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market).

The monopoly has few characteristic. Firstly, it’s a profit maximize. Since that the monopoly is has no substitute, therefore the monopoly can raise the price to gain maximum profits without worrying that the customer will switch to other brands. The monopoly is also a price maker. The monopoly decides how the price of the good should be like since there are no other competitors, so they do not have to fight for the lowest price. Monopolies have high barriers to entry therefore other sellers are unable to enter the market of monopoly. Besides that, the monopoly is a single seller. In a monopoly, there is one seller of the good that produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry. Lastly, a monopoly is also a price discriminator. A monopolist can change the price and quality of a product. He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market.

Monopolies derive their market power from barriers to entry which prevent a potential competitor to enter the market and compete. There are three major types of barrier to entry which is economic, legal and deliberate. Economic barriers include economies of scale, capital requirements and cost advantages. Legal barriers are legal right which can provide an opportunity to monopolise the market of a good. Deliberate action is an action in which the company wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force.

While monopoly and perfect competition mark the extremes of market structures there is some similarity. The cost functions are the same. Both monopolies and perfectly competitive companies minimize cost and maximize profit. The shutdown decisions are the same. Both are assumed to have perfectly competitive factors markets. There are distinctions, some of the more important of which are as follows:

• Marginal revenue and price: In a perfectly competitive market, price equals marginal cost. In a monopolistic market, however, price is set above marginal cost.
• Product differentiation: There is zero product differentiation in a perfectly competitive market. Every product is perfectly homogeneous and a perfect substitute for any other. With a monopoly, there is great to absolute product differentiation in the sense that there is no available substitute for a monopolized good. The monopolist is the sole supplier of the good in question.A customer either buys from the monopolizing entity on its terms or does without.

Number of competitors: PC markets are populated by an infinite number of buyers and sellers. Monopoly involves a single seller.

Barriers to Entry: Barriers to entry are factors and circumstances that prevent entry into market by competitors and limit new companies from operating and expanding within the market. PC markets have free entry and exit. There are no barriers to entry, exit or competition. Monopolies have relatively high barriers to entry. The barriers must be strong enough to prevent or discourage any potential competitor from entering the market.

Elasticity of Demand: The price elasticity of demand is the percentage change of demand caused by a 1% change of relative price. A successful monopoly would have a relatively inelastic demand curve. A low coefficient of elasticity is indicative of effective barriers to entry. A PC company has a perfectly elastic demand curve. The coefficient of elasticity for a perfectly competitive demand curve is infinite.

Excess Profits: Excess or positive profits are profit more than the normal expected return on investment. A PC company can make excess profits in the short term but excess profits attract competitors, which can enter the market freely and decrease prices, eventually reducing excess profits to zero.^] A monopoly can preserve excess profits because barriers to entry prevent competitors from entering the market.

Profit Maximization: A PC company maximizes profits by producing such that price equals marginal costs. A monopoly maximises profits by producing where marginal revenue equals marginal costs. The rules are not equivalent. The demand curve for a PC company is perfectly elastic – flat. The demand curve is identical to the average revenue curve and the price line. Since the average revenue curve is constant the marginal revenue curve is also constant and equals the demand curve, Average revenue is the same as price (AR = TR/Q = P x Q/Q = P). Thus the price line is also identical to the demand curve. In sum, D = AR = MR = P.

P-Max quantity, price and profit: If a monopolist obtains control of a formerly perfectly competitive industry, the monopolist would increase prices, reduce production, and realise positive economic profits.

Supply Curve: in a perfectly competitive market there is a well defined supply function with a one to one relationship between price and quantity supplied. In a monopolistic market no such supply relationship exists. A monopolist cannot trace a short term supply curve because for a given price there is not a unique quantity supplied. As Pindyck and Rubenfeld note a change in demand “can lead to changes in prices with no change in output, changes in output with no change in price or both”. Monopolies produce where marginal revenue equals marginal costs. For a specific demand curve the supply “curve” would be the price/quantity combination at the point where marginal revenue equals marginal cost. If the demand curve shifted the marginal revenue curve would shift as well and a new equilibrium and supply “point” would be established. The locus of these points would not be a supply curve in any conventional sense.

Reference

• Milton Friedman (2002). “VIII: Monopoly and the Social Responsibility of Business and Labor” (paperback). Capitalism and Freedom (40th anniversary edition ed.). The University of Chicago Press. p. 208. ISBN 0-226-26421-1.
• Blinder, Alan S; William J Baumol and Colton L Gale (June 2001). “11: Monopoly” (paperback). Microeconomics: Principles and Policy. Thomson South-Western. p. 212.ISBN 0-324-22115-0. “A pure monopoly is an industry in which there is only one supplier of a product for which there are no close substitutes and in which is very difficult or impossible for another firm to coexist”
• Barak Orbach & Grace Campbell, The Antitrust Curse of Bigness, Southern California Law Review (2012).
• Binger, B & Hoffman, E.: Microeconomics with Calculus, 2nd ed. p. 391 Addison-Wesley 1998.

As part of our introduction to the theory of the firm, we first consider the nature of production of different goods and services in the short and long run.

The concept of a production function

The production function is a mathematical expression which relates the quantity of factor inputs to the quantity of outputs that result. We make use of three measures of production / productivity.

• Total product is simply the total output that is generated from the factors of production employed by a business. In most manufacturing industries such as motor vehicles, freezers and DVD players, it is straightforward to measure the volume of production from labor and capital inputs that are used. But in many service or knowledge-based industries, where much of the output is “intangible” or perhaps weightless we find it harder to measure productivity
• Average product is the total output divided by the number of units of the variable factor of production employed (e.g. output per worker employed or output per unit of capital employed)
• Marginal product is the change in total product when an additional unit of the variable factor of production is employed. For example marginal product would measure the change in output that comes from increasing the employment of labor by one person, or by adding one more machine to the production process in the short run.

 The Short Run Production Function

The short run is defined in economics as a period of time where at least one factor of production is assumed to be in fixed supply i.e. it cannot be changed. We normally assume that the quantity of capital inputs (e.g. plant and machinery) is fixed and that production can be altered by suppliers through changing the demand for variable inputs such as labor, components, raw materials and energy inputs. Often the amount of land available for production is also fixed.

The time periods used in textbook economics are somewhat arbitrary because they differ from industry to industry. The short run for the electricity generation industry or the telecommunications sector varies from that appropriate for newspaper and magazine publishing and small-scale production of foodstuffs and beverages. Much depends on the time scale that permits a business to alter all of the inputs that it can bring to production.

In the short run, the law of diminishing returns states that as we add more units of a variable input (i.e. labor or raw materials) to fixed amounts of land and capital, the change in total output will at first rise and then fall.  Diminishing returns to labor occurs when marginal product of labor starts to fall. This means that total output will still be rising but increasing at a decreasing rate as more workers are employed. As we shall see in the following numerical example, eventually a decline in marginal product leads to a fall in average product.

What happens to marginal product is linked directly to the productivity of each extra worker employed. At low levels of labor input, the fixed factors of production – land and capital, tend to be under-utilized which means that each additional worker will have plenty of capital to use and, as a result, marginal product may rise. Beyond a certain point however, the fixed factors of production become scarcer and new workers will not have as much capital to work with so that the capital input becomes diluted among a larger workforce.
As a result, the marginal productivity of each worker tends to fall – this is known as the principle of diminishing returns.

An example of the concept of diminishing returns is shown below. We assume that there is a fixed supply of capital (e.g. 20 units) available in the production process to which extra units of labor are added from one person through to eleven.

• Initially the marginal product of labor is rising.
• It peaks when the sixth worked is employed when the marginal product is 29.

Marginal product then starts to fall. Total output is still increasing as we add more labor, but at a slower rate. At this point the short run production demonstrates diminishing returns.

Average product will continue to rise as long as the marginal product is greater than the average – for example when the seventh worker is added the marginal gain in output is 26 and this drags the average up from 19 to 20 units. Once marginal product is below the average as it is with the ninth worker employed (where marginal product is only 11) then the average will decline.

This marginal-average relationship is important to understanding the nature of short run cost curves. It is worth going through this again to make sure that you understand it.

 Criticisms of the Law of Diminishing Returns

How realistic is this notion of diminishing returns? Surely ambitious and successful businesses do what they can to avoid such a problem emerging.

It is now widely recognized that the effects of globalization, and in particular the ability of trans-national corporations to source their factor inputs from more than one country and engage in rapid transfers of business technology and other information, makes the concept of diminishing returns less relevant in the real world of business. You may have read about the expansion of “out-sourcing” as a means for a business to cut their costs and make their production processes as flexible as possible.
In many industries as a business expands, it is more likely to experience increasing returns. After all, why should a multinational business spend huge sums on expensive research and development and investment in capital machinery if a business cannot extract increasing returns and lower unit costs of production from these extra inputs?

Long run production – returns to scale

In the long run, all factors of production are variable. How the output of a business responds to a change in factor inputs is called returns to scale.

• Increasing returns to scale occur when the % change in output > % change in inputs
• Decreasing returns to scale occur when the % change in output < % change in inputs
• Constant returns to scale occur when the % change in output = % change in inputs

A numerical example of long run returns to scale

In the example above, we increase the inputs of capital and labour by the same proportion each time. We then compare the % change in output that comes from a given % change in inputs.

• In our example when we double the factor inputs from (150L + 20K) to (300L + 40K) then the percentage change in output is 150% – there are increasing returns to scale.
• In contrast, when the scale of production is changed from (600L + 80K0 to (750L + 100K) then the percentage change in output (13%) is less than the change in inputs (25%) implying a situation of decreasing returns to scale.

As we shall see a later, the nature of the returns to scale affects the shape of a business’s long run average cost curve.

The effect of an increase in labour productivity at all levels of employment

Productivity may have been increased through the effects of technological change; improved incentives; better management or the effects of work-related training which boosts the skills of the employed labour force.

Both of this video will help to understand more about Short and Long run production, if you are kinda lost i recoomend you to watch both video =

http://www.youtube.com/watch?v=jFKZqi1Bl-k

http://www.mindbites.com/lesson/11140-economics-short-run-long-run-average-cost-curve

This is the link to the acticle: http://www.kiplinger.com/businessresource/forecast/archive/automakers_have_few_options_080722.html

General Motors Company, commonly known as GM (General Motors Corporation before 2009), is an American multinational automotive corporation headquartered in Detroit, Michigan, and the world’s largest automaker, by vehicle unit sales, in 2011, employing 202,000 people and doing business in some 157 countries. General Motors produces cars and trucks in 31 countries, and sells and services these vehicles through the following four regional segments, which are GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO), and GM South America (GMSA), through which development, production, marketing and sales are organized in their respective world regions, plus as fifth segment GM Financial.^[4]:p.12/13

General Motors (GM) automobile marques are Alpheon, Baojun, Buick, Cadillac, Chevrolet, GMC,Jiefang, Opel, Vauxhall, Holden, and Wuling.

GM acts in most countries outside the USA via direct subsidiaries, but in China through 10 joint ventures, among them Shanghai GM and SAIC-GM-Wuling Automobile. GM owns (per 31 December 2011) 77.0% of its joint venture in South Korea, GM Korea^. GM’s OnStar subsidiary provides vehicle safety, security and information services.

In the articles above, I understand that General Motor is trying production of smaller cars, such as revamped Cobalts and Ford Fiestas to increase their profit for the short run.  Suppose the demand for revamped Cobalts and Ford Fiestas has greatly increased, prompting General Motor to produce more revamped Cobalts and Ford Fiestas. My assumption will be we should be able to order more raw materials with little delay, so we consider raw materials to be a variable input. We’ll need extra labor, but we can likely increase our labor supply by running an extra shift and getting existing sells men to work overtime, so this is also a variable input. The equipment on the other hand, may not be a variable input. It may be time consuming to implement the use of additional equipment. It depends how long it would take us to buy and install the car together and how long it would take us to train the sells men to sell the cars. Adding an extra factory is certainly not something we could do in a short period of time, so this would be the fixed input. We see that the short run is the period in which we can increase production by adding more raw materials and more labor. In the short run we cannot add another factory, but in the long run all of our inputs are variable, including our factory space.

The increase in demand revamped Cobalts and Ford Fiestas will have different implications in the short run and the long run at the industry level. In the short run each of the firms will increase their labor supply and raw materials to meet the added demand for revamped Cobalts and Ford Fiestas. At first only existing firms will be likely to capitalize on the increased demand as they will be the only ones who will have access to the four inputs needed to make the cars. However we know that in the long run the factor input is variable as well. This means that General Motor can change the size and number of factories they own and new car companies can build or buy factories to produce cars. In the long run we will see new car companies enter the car market, while we will not in the short run because firms will not be able to acquire all of the inputs they need.

Reference

• Armen, Alchian, 1959. “Costs and Outputs,” in M. Abramovitz, ed., The Allocation of Economic Resources, ch. 2, pp. 23-40. Stanford University Press. Abstract.
• Hirshleifer, Jack, 1962. “The Firm’s Cost Function: A Successful Reconstruction?” Journal of Business, 35(3), pp. 235-255.
• Boyes, W., 2004. The New Managerial Economics, Houghton Mifflin. ISBN 0-395-82835-X
• Melvin & Boyes, 2002. Microeconomics, 5th ed. Houghton Mifflin.
• Panico, Carlo, and Fabio Petri, 2008. “Long run and short run,” The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
• Perloff, J, 2008. Microeconomics Theory & Applications with Calculus. Pearson. ISBN 978-0-321-27794-7
• Pindyck, R., & D. Rubinfeld, 2001. Microeconomics, 5th ed. Prentice-Hall. ISBN 0-13-019673-8
• Viner, Jacob, 1940. “The Short View and the Long in Economic Policy,” American Economic Review, 30(1), Part 1, pp. 1-15. Reprinted in Viner, 1958, and R. B. Emmett, ed. 2002, The Chicago Tradition in Economics, 1892-1945, Routledge, v. 6, pp. 327- 41. Review extract.
• Viner, Jacob, 1958. The Long View and the Short: Studies in Economic Theory and Policy. Glencoe, Ill.: Free Press.

Market Equilibrium

When the supply and demand curves intersect, the market is in equilibrium.  This is where the quantity demanded and quantity supplied are equal.  The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity.

Putting the supply and demand curves from the previous sections together, these two curves will intersect at Price = RM6, and Quantity = 20. In this market, the equilibrium price is RM6 per unit, and equilibrium quantity is 20 units. At this price level, market is in equilibrium. Quantity supplied is equal to quantity demanded  (Qs = Qd). Market is clear.

Surplus and shortage:

If the market price is above the equilibrium price, quantity supplied is greater than quantity demanded, creating a surplus.

Example: if you are the producer, you have a lot of excess inventory that cannot sell. Will you put them on sale? It is most likely yes. Once you lower the price of your product, your product’s quantity demanded will rise until equilibrium is reached. Therefore, surplus drives price down.

If a surplus exists, price must fall in order to entice additional quantity demanded and reduce quantity supplied until the surplus is eliminated. The above diagram will show you why.

If the price is greater than RM10, say RM20, the quantity demanded = 210 and the quantity supplied = 700. The result would be a huge surplus of 490 pizzas produced, with no one willing to buy them for RM20. This surplus would force prices to fall, causing pizza supplies to cut back production and pizza buyers would be willing to buy more pizzas as the price falls, until the price reaches RM10.

If the market price is below the equilibrium price, quantity supplied is less than quantity demanded, creating a shortage. The market is not clear. It is in shortage. Market price will rise because of this shortage.

Example: if you are the producer, your product is always out of stock. Will you raise the price to make more profit? Most for-profit firms will say yes. Once you raise the price of your product, your product’s quantity demanded will drop until equilibrium is reached.  Therefore, shortage drives price up.

If a shortage exists, price must rise in order to entice additional supply and reduce quantity demanded until the shortage is eliminated. The above diagram will show you why.

If the price is less than RM10, say RM5, the quantity demanded = 650 and the quantity supplied = 300. The result would be a shortage of 350 pizzas. This shortage would force prices up, causing pizza suppliers to produce more and consumers to buy less, until the price reaches RM10.

This video will help to understand more about market equilibrium and surplus and shortage = http://www.youtube.com/watch?v=W5nHpAn6FvQ

Price Floors and Price Ceilings

If the market price is higher than RM6 (where Qd = Qs), for example, P=8, Qs=30, and Qd=10. Since Qs>Qd, there are excess quantity supplied in the market, the market is not clear. Market is in surplus.

THE PRICE WILL DROP BECAUSE OF THIS SURPLUS.

If the market price is lower than equilibrium price, RM6, for example, P=4, Qs=10, and Qd=30. Since Qs<Qd, there are excess quantity demanded in the market. Market is not clear. Market is in shortage.

THE PRICE WILL RISE DUE TO THIS SHORTAGE.

Government regulations will create surpluses and shortages in the market.  When a price ceiling is set, there will be a shortage. When there is a price floor, there will be a surplus.

Price Floor: is legally imposed minimum price on the market. Transactions below this price are prohibited.

•Policy makers set floor price above the market equilibrium price which they believed is too low.

•Price floors are most often placed on markets for goods that are an important source of income for the sellers, such as labor market.

•Price floor generate surpluses on the market.

•Example: minimum wage.

Price Ceiling: is legally imposed maximum price on the market. Transactions above this price are prohibited.

•Policy makers set ceiling price below the market equilibrium price which they believed is too high.

•Intention of price ceiling is keeping stuff affordable for poor people. •Price ceiling generates shortages on the market.

•Example: Rent control.

This video will help to understand more about price floors and price ceilings = http://www.youtube.com/watch?v=XgBPAucs-W4&feature=relmfu

Changes in equilibrium price and quantity:

Equilibrium price and quantity are determined by the intersection of supply and demand. A change in supply, or demand, or both, will necessarily change the equilibrium price, quantity or both. It is highly unlikely that the change in supply and demand perfectly offset one another so that equilibrium remains the same.

Example: This example is based on the assumption of Ceteris Paribus.

1) If there is an exporter who is willing to export oranges from Florida to Asia, he will increase the demand for Florida’s oranges. An increase in demand will create a shortage, which increases the equilibrium price and equilibrium quantity.

2) If there is an importer who is willing to import oranges from Mexico to Florida, he will increase the supply for Florida’s oranges. An increase in supply will create a surplus, which lowers the equilibrium price and increase the equilibrium quantity.

3) What will happen if the exporter and importer enter the Florida’s orange market at the same time? From the above analysis, we can tell that equilibrium quantity will be higher. But the import and exporter’s impact on price is opposite. Therefore, the change in equilibrium price cannot be determined unless more details are provided. Detail information should include the exact quantity the exporter and importer is engaged in. By comparing the quantity between importer and exporter, we can determine who has more impact on the market.

Example 1: Suppose that the price of Indian food delivery rises. What happens to the market for pizza? Let’s figure this out with a 3 step approach:

• Step 1: Will this affect the demand or supply curve? Indian food is a substitute for pizza, so the price of Indian food affects the demand curve
• Step 2: In what direction will the affected curve moves? The price of Indian food, a substitute, INCREASES, so the demand for pizza INCREASES, or the demand curve shifts right.
• Step 3: What is the resulting impact on the equilibrium price and quantity? This is easiest to answer with a graph. If you look at the graph below you will see that the new equilibrium has a higher price and larger quantity. An increase in demand results in an increase in price and quantity.

Example 2: Suppose instead that the Indian food business is incredibly popular and profitable. What happens to the market for pizza? Again, we use the same three step approach:

• Step 1: Will this affect the demand or supply curve? The Indian food business is an alternative to the pizza business, affecting the supply curve
• Step 2: In what direction will the affected curve moves? The profitability of Indian food means that some pizza places will switch to Indian food places, so the supply of pizza DECREASES, or the supply curve shifts left.
• Step 3: What is the resulting impact on the equilibrium price and quantity? This is easiest to answer with a graph. If you look at the graph below you will see that the new equilibrium has a higher price and smaller quantity. A decrease in supply results in an increase in price and a decrease in quantity.

Example 3: Now let’s combine examples 1 and 2 so that the demand for pizza increases AND the supply of pizza decreases. What happens to the market for pizza?

• We know an increase in demand will increase equilibrium price and increase quantity.
• We know a decrease in supply will increase equilibrium price and decrease quantity.
• Put both together the equilibrium price will increase but the effect on quantity is uncertain, and depends on whether the shift in demand is smaller or larger than the shift in supply. As I have drawn the graph below, there is no change in quantity.

This the link to my article = http://www.latimes.com/classified/realestate/news/la-fi-lew6-2009sep06,0,1876550.story 

Housing market is also known as real estate. Real estate is “Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water. Immovable property of this nature, an interest vested in this, also an item of real property, more generally buildings or housing in general. The business of real estate is all about of buying, selling, or renting land, buildings or housing.

From the article above I understand that the owner/user, owner, and renter comprise the demand side of the market, while the developers and renovators comprise the supply side. The supply and demand curves intersect at the point where quantity supplied = quantity demanded. This intersection is what we call an equilibrium price. This is the price where the intentions of both the buyer (owner/user, owner, and renter) and seller (developers and renovators) are compatible Buyers want to buy or rent the property, the sellers want to sell or rent the property.

In the article, the first given information is “the average sales price nationally actually rose 2.4%.” My first assumption for house market price to increase is the increase of level of income. An increase in level of income causes the demand curve to shift to the right and this cause a shortage at original price. To eliminate the shortage, price will increase 2.4% more than the original price. If you are a developers or real sates companies, your product is always out of stock. Will you raise the price to make more profit? Most for-profit firms will say yes. Once you raise the price of your product, your product’s quantity demanded will drop until equilibrium is reached. The diagram below will show you why.

In the article, the price decline 5.2% in the year 2008. My assumption is maybe due to depreciation. The diagram below shows the effects of depreciation. If the supply of existing housing deteriorates due to wear, then the stock of housing supply depreciates. Because of this, the supply of housing (S1) will shift to the left (to S2) resulting in a new equilibrium demand of R1 (since the amount of homes decreased, but demand still exists). The increase of demand from R1 to R2 will shift the value function up (from V1 to V2). As a result, more houses can be produced profitably and housing starts will increase (from HS1 to HS2). Then the supply of housing will shift back to its initial position (S1 to S2).

House market price will increase is also cause by the increase price of construction cost. The diagram below shows the effects of an increase in costs in the short-run. If construction costs increase (say from CC2 to CC2), developers will find their business less profitable and will be more selective in their ventures. In addition some developers may leave the industry. The quantity of housing starts will decrease (HS1 to HS2). This will eventually reduce the level of supply (from S1 to S2) as the existing stock of housing depreciates. Prices will tend to rise (from R1 to R2).

Reference

• Hal R. Varian, Microeconomic Analysis, Third edn. Norton, New York 1992
• Dixon, H. Equilibrium and Explanation, in Creedy (ed) The Foundations of Economic Thought, Blackwells, 1990, chapter 13, pp.356-394. (reprinted in Surfing Economics).
•  Augustin Cournot (1838), Theorie mathematique de la richesse sociale and of recherches sur les principles mathematiques de la theorie des richesses, Paris Dixon (1990), page 369.
• Paul A. Samuelson (1947; Expanded ed. 1983), Foundations of Economic Analysis, Harvard University Press. 
  

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