2015-08-12
374
When supply and demand both change, the direction of the changeof either equilibrium price or quantity can be known but the effecton the other is indeterminate. An increase in supply will push themarket price down and quantity up while an increase in demand willpush both market price and quantity up. The effect on quantity of anincrease in both supply and demand will increase the equilibriumquantity while the effect on price is dependent on the magnitude of theshifts and relative structure (slopes) of supply and demand.
The effectof an increase in both supply and demand is shown in Figure.
Рх D1 D2 Рх D2 D1 Рх Рх
E1 E2 E2 E1 P*2 E2 P*1 E1
↑ S2 D2 ↓ S1 D1
P*1 E1 P*2 E2
S1 S2 S2 S1 S1 D1 S2 D2
0 Q*1 → Q*2 Qx 0 Q*2 ← Q*1 Qx 0 Qx 0 Qx
а) б) в) г)
Should demand decrease and supply increase, both push the equilibrium price down. However, the decrease in demand reduces the equilibrium quantity while the increase in supply pushes the equilibrium quantity up. The price must fall, the quantity may rise, fall or remain the same. Again it depends on the relative magnitudes of the shifts in supply and demand and their slopes.
When supply and demand both shift, the direction of change in either equilibrium price or quantity can be known but direction of change in the value of the other is indeterminate.
Equilibrium and the Market
Whether equilibrium is a stable condition from which there “is noendogenous tendency to change,” or and outcome which the“economic process is tending toward,” equilibrium represents acoordination of objectives among buyers and sellers.
The demandfunction represents a set of equilibrium conditions of buyers given theincomes, relative prices and preferences. Each individual buyer acts tomaximize his or her utility, ceteris paribus.
|
|
|
The supply functionrepresents a set of equilibrium conditions given the objectives ofsellers, the prices of inputs, prices of outputs, technology, theproduction function and other factors.
T he condition of equilibrium in a market, where supply and demandfunctions intersect (“quantity supplied is equal to the quantitydemanded”) implies equilibrium conditions for both buyers and sellers.
-5-
