Supply and Demand Curve Essay

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Supply and Demand Curve: Shifts and Movements

Demand is, in basic terms, that quantity of a certain product/good that consumers are able and willing to buy/purchase at the prevailing price (Hirschey, 2008). A product's market demand function relates its aggregate quantity demanded to the various parameters, including price, that influence the said quantity (Hirschey, 2008). The demand curve is an expression of "the relation between the price charged for a product and the quantity demanded, holding constant the effects of all other variables" (Hirschey, 2008, p. 137). When it comes to supply, the term according to Hirschey refers to the quantity of a product that sellers are able and willing to bring to the market, under the prevailing economic conditions (Hirschey, 2008). A supply curve, therefore, is an expression of the relation between the quantity supplied and the price charged, ceteris paribus (Taylor & Weerapana, 2011). Equilibrium is achieved "when the quantity demanded and the quantity supplied is in perfect balance at a given price" (Hirschey, 2008, p. 137).

Shifts and Movements in Demand and Supply Curves

Shifts and movements disrupt market equilibrium, resulting in new equilibrium quantities and prices (Taylor & Weerapana, 2011). A shift in one curve automatically causes a movement in the other. According to Hirschey, "a movement along the demand curve occurs when the quantity demanded changes as a result of a change in price" only (Hirschey, 2008). A movement along the demand curve, therefore, traces out the impacts that different prices have on the quantity demanded (Taylor & Weerapana, 2011). A shift of the demand curve essentially takes place or comes about when the quantity demanded of a product changes as a result of changes in factors other than its price (Hirschey, 2008). Shifts in the demand curve could be caused by changes in consumer incomes, population, consumer tastes and preferences, the prices of substitutes and complements, and future price expectations (Wessels, 2006).

In the words of Wessels, "a movement along the supply curve occurs when the quantity supplied changes, as a result of a price change" (Wessels, 2006).

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A shift of the supply curve, on the other hand, occurs when the quantity supplied changes due to a change in factors other than price (Wessels, 2006). Shifts in the supply curve could result from changes in the levels of technology, input prices, the number of firms, the prices of substitute and joint products, and future price expectations.

Graphical Representations of Movements and Shifts in Demand and Supply Curves

Initial Equilibrium

Fig 1

Price Dd Ss

E

Pe

Ss Dd

0 Qe Quantity

Fig 2 (Shift of the Demand Curve / Movement along the supply curve- Increase in demand)

P Dd1 Ss0

Dd0 E1

P1 E0

P0 Dd1

Ss0 Dd0

0 Q0 Q1 Quantity

Fig 3 (Decrease in Demand)

P Dd0 Ss0

P0 E0

P1 E1

Ss0 Dd1 Dd0

Q1 Q0 Quantity

Factors such as increased consumer incomes, increased population, increased prices of substitutes, and expectations of future inflation have the tendency to increase demand, causing the demand curve to shift outwards (to the right), as illustrated in fig 2. The quantity demanded increases, due to the shift, and so does the price, resulting in the new equilibrium E1. Segment E0-E1 represents the movement along the supply curve. If the aforementioned factors decrease instead, demand falls, and the demand curve shifts to the left (fig 3). E1 becomes the new equilibrium point; and P1 and Q1 the new equilibrium price and quantity respectively.

Fig 4 (Shift of the Supply Curve / Movement along the Demand Curve- Increase in Supply)

Price Dd0 Ss0 Ss1

P0 E0

P1 E1

Ss0 Ss1

Q0 Q1 Quantity

Fig 5 (Decrease in supply)

Price Ss1 Ss0

P1 E1

P0 E0

Ss0 Dd0

Q1 Q0 Quantity

Factors that cause an increase in supply result in an outward shift of the supply curve, according to fig 4. On the other hand, factors that decrease supply shift the curve inwards, as shown in fig 5. The segments E0 E1 represent the movement along the demand curve due to the shift.

The demand.....

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