Posts Tagged ‘Supply And Demand’
Wednesday, July 6th, 2011
Myth #2: Wages rising faster than productivity means cost-pushing inflation is occuring
Does Figure 12-6 prove that cost-push pressures are causing inflation? Most people would say “yes,’ but in fact it does not. It shows that wages are rising quickly enough to generate inflation, but it does not tell us why wages are rising that rapidly. Perhaps a strong labor union is pushing up wage rates, making this indeed a case of cost-push inflation. Or, perhaps the graph shows non-union wages (such as computer programmers) being pulled up by heavy demand for their skills in the face of a shortage of computer programmers.
Myth #3: All wage and price increases have negative economic effects because they generate inflation
This is a commonly held belief, but is not always true. In a market economy, wages and prices are constantly changing in response to changes in supply and demand. For example, in myth #2 above, if businesses need more computer programmers than are currently available, the resultant wage increase will serve a positive purpose: it will increase the supply of programmers by encouraging more people to become programmers. Similarly, if consumers want to buy more steak than is presently on the market, the price of steak will rise, encouraging producers to increase the supply of steak. Thus, changes in prices (including price increases) also play an important role in making the economic system operate effectively, by adjusting supply to demand. If prices could not change, the economic system would be unable to adjust to changes in demand.
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Sunday, October 17th, 2010
This chapter has considered the nature of demand – one-half of the price-determining process of supply and demand.
New Terms:
Demand The entire relationship between the various possible prices of a product or service and the quantity demanded at each price, expressed through either a schedule or a graph.
Elastic Demand The term used to describe demand if a price increase causes a reduction in total sales revenue.
Inelastic Demand The term used to describe demand if a price increase causes an increase in total sales revenue.
Unitary Elasticity The term used to describe demand if no change in total revenue occurs as a result of a price increase.
Coefficient of Elasticity The percentage change in quantity demanded that results from a 1-percent change in price.
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Friday, August 27th, 2010
In this chapter we have considered the nature of the “business sector” of the economy, which produces the supply of goods and services. In Chapters 6 through 10, we will see how supply and demand interact to determine prices. This task is complicated somewhat by the fact that supply – the production of goods and services by businesses – occurs under various conditions, ranging from industries comprised of large numbers of small firms to industries dominated by a few large firms to industries in which there is only one producer (a monopoly). These different conditions – referred to as “market structures” by economists – are of great significance to the supply of goods and services. If there is only one firm in an industry (a monopoly), it is in a position to control the supply of the product, thereby raising the price of the product and increasing its profits. In industries dominated by a few large firms, it is sometimes possible for these firms to get together to avoid competing on prices and thus increase their profits. On the other hand, in industries in which there are a large number of small firms, such collective action is very difficult or impossible to achieve; as a result, competition in such industries tends to be more intense, ad profits lower, than in either of the first two cases. In Chapter 6, we will examine the concept of “demand,” then in Chapter 7, we will begin our examination of “supply” (and its interactions with “demand”) in those industries in which there are a large number of small firms – industries that economists call “competitive”.
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Tuesday, August 17th, 2010
We have now examined both demand and supply under competitive conditions (in this chapter); these concepts are summarized in Figure 7-11. We are now ready to consider how demand and supply interact, by putting them together, as in Figure 7-12.
Figure 7-11 Supply and demand schedules for steak in Cantown, March 1982
Demand
The Relationship between the price of the product and the number of units buyers will offer to buy
Price of steak per kilogram Quantity demanded (kilograms)
$10 20,000
8 30,000
6 50,000
4 80,000
2 120,000
Supply
The Relationship between the price of the product and the number of units producers will offer to sell
Price of steak per kilogram Quantity supplied (kilograms)
$10 100,000
8 80,000
6 50,000
4 20,000
2 0
As the supply and demand schedules in Figure 7-12 show, the price of steak will tend to settle at $6 per kilogram. This is called the equilibrium price. It is not possible for the price to stabilize at any other level, because all other prices lead to either a shortage or a surplus.
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Thursday, August 5th, 2010
- In competitive industries, the nature of supply is such that increases in the price of a product will cause increases in the quantity supplied.
- Increases in supply will shift the supply curve to the right, while decreases in supply will shift the curve to the left.
- If the quantity supplied does not increase significantly in response to a price increase, supply is “inelastic,” while supply is “elastic” if price increases cause large increases in the quantity supplied.
- In competitive markets, supply and demand interact freely to determine the equilibrium price and quantity, which will change as supply and/or demand change.
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Sunday, August 1st, 2010
Supply Schedule – a table depicting the relationship between the price of a product and the quantity supplied (offered for sale).
Supply Curve - a graphical representation of a supply schedule.
Elastic Supply – a situation in which sellers are responsive to price changes; that is, the quantity supplied increases readily when the price rises.
Inelastic Supply – a situation in which quantity supplied does not increase readily when the price rises.
Equilibrium Price – a price determined in the marketplace by the interaction of supply and demand.
Equilibrium Quantity – the quantity sold (bought) at the equilibrium price.
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