1I Demand and Supply

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Gustavo Indart

DEMAND AND SUPPLY Demand is usually downward sloping and Supply upward sloping Intersection of Demand and Supply curves is the equilibrium point Change in quantity demanded/quantity supplied are movements along the demand/supply curve and change in the demand/supply is a shift of the demand/supply curve The Demand/Supply Curve is the sum of Individual demand/supply of the product Factors that Shift Demand: 1. Taxes/Subsidies. 2. Change in Prices of related goods (Substitutes/Complementary Goods) 3. Change in Income 4. Change in Preferences Factors That Shift Supply 1. Prices of Inputs (as prices rise, Supply falls) 2. Number of Firms (as firms rise, Supply Rises) 3. Technology (a new breakthrough increases supply) 4. Taxes/Subsidies - Price Floor is a Minimum Price the government sets for a product o Usually causes shortage because Qd>Qs (e.g Minimum Wage) - Price Ceiling is a Maximum Price the government sets for a product. o Usually causes an excess supply as Qs>Qd - Price Controls are economically inefficient Summary of Questions to be Asked: 1. Plot the Demand/Supply of a Good: o Sum up the Individual Demand/Supply at various prices o Plot the new data as the Demand/Supply curve 2. Find Changes in the Equilibrium Quantity and Price: o Locate the original equilibrium point ‘e1’ o Locate the new equilibrium ‘e2’ o Find the difference between the Quantity and Price of the two points (e1-e2) 3. Find New Demand Curve af
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