Micro topic 2: Shifts in supply and demand (2016)Apunte Inglés
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Introduction to microeconomics
Topic 2: Shifts in supply and demand
Shifts in the supply curve
When factors different from price and quantity change, the supply curve has to be
shifted to represent this change it has suffered. These factors are:
Input (raw materials) prices: if input prices of a product decrease, the supply of
that good will increase and therefore, we will have to shift the supply curve to
the right because at the same price than before, more people are willing to offer
• Technology: technological innovations cause reductions in production costs.
• Expectations: if a seller expects that the price of a good will increase, he will not sell anything or will sell less.
• Number of sellers: the more sellers there are, the higher the supply will be.
Irrecoverable costs: Fix costs that cannot be reduced by reducing the production.
Variable costs: Costs that vary when the number of units sold varies.
this differentiation is important since it influences in the sellers’ reservation price (or minimum price willing to accept): the reservation price is the same as the variable costs, but the reservation price is NOT the same as irrecoverable costs. This happens because, if there are fix costs, sellers will always make more profits by selling at any positive price than not doing so, reducing this way the losses.
Long-term decisions are taken when irrecoverable costs are not, and short-term decisions are taken when there are fix costs.
1 Topic 2 Introduction to microeconomics Shifts in the demand curve When factors different from price and quantity change, the demand curve has to be shifted to represent this change it has suffered. These factors are: • Income: If demanders’ income increases, the demand of the good will also increase. Therefore, we will have to shift the curve to the right, since at the same price, there will be more people willing to buy the good than before.
-Normal goods: 𝛿 income ⇒ 𝛿 demand (if you lose your job one summer, most likely you will consume less ice cream).
-Inferior goods: 𝛿 income ⇒ 𝛥 demand (if your income falls, you are less likely to buy a car, so you will take the bus).
• Prices of related goods: there are two kinds of related goods: -Substitutes: 𝛿 price of related good ⇒ 𝛿 demand (if price of frozen yoghurt falls, frozen yoghurt demand will increase. At the same time, ice cream demand will decrease, because frozen yoghurt and ice cream have similar characteristics).
-Complements: 𝛿 price of related good ⇒ 𝛥 demand (if hot fudge price falls, its demand will increase. In addition, ice cream demand will also increase, as hot fudge and ice cream are often used together).
• Personal consumers’ tastes • Number of buyers Comparative statics Comparative statics is the comparison between two or more situations of competitive equilibrium. To do this comparison, 3 steps must be followed: 1. Supply and demand curves before the variation are drawn in a graph and equilibrium price (P1) and quantity (Q1) are calculated.
2. Supply and demand curves after the variation are drawn in a graph and equilibrium price (P2) and quantity (Q2) are calculated.
2 Topic 2 Introduction to microeconomics 3. Equilibrium values are compared before (P1 and Q1) and after (P2 and Q2) the variation Variations can be summarised in this table: No variations in supply Increase in supply Decrease in supply No variations in demand P and Q don’t vary 𝛿P and 𝛥Q 𝛥P and 𝛿Q Increase in demand 𝛥P and 𝛥Q P varies and 𝛥Q 𝛥P and Q varies Decrease in demand 𝛿P and 𝛿Q 𝛿P and Q varies P varies and 𝛿Q It is necessary to calculate both buyers’ and sellers’ surplus, not only the equilibrium price and quantity.
Difference between movement along the curve and shift of the curve We move along the curve if one of the factors of the graph’s axis (price or quantity) changes.
However, if unexpectedly a good can be produced in a much cheaper way due to a technological improvement, supply curve shifts to the right, since this innovation wasn’t taken into account in the previous supply curve. Therefore, it’s because of an external factor or not reflected in the axis system.