Figure 3.14 “The determination of the equilibrium price and the equilibrium quantity” combines the supply and demand data presented in Figure 3.1 “A demand plan and a demand curve” and Figure 3.8 “A delivery schedule and a supply curve”. Note that the two curves intersect at a price of $6 per pound – at this price, the quantities requested and delivered are the same. Buyers want to buy, and sellers are ready to put 25 million pounds of coffee on sale per month. The coffee market is in balance. If the supply or demand curve does not change, there will be no tendency to change the price. The equilibrium price in a market is the price at which the quantity demanded corresponds to the quantity supplied. The equilibrium price on the coffee market is therefore $6 per pound. The equilibrium quantity is the quantity requested and delivered at the equilibrium price. The same inverse relationship applies to the demand for goods and services. However, if demand increases and supply remains the same, higher demand leads to a higher equilibrium price and vice versa. In both cases, the supply and demand model is one of the most widely used instruments of economic analysis. This widespread use is no coincidence.
The model provides results that are actually broadly in line with what we see in the market. Your mastery of this model will pay off in your economics studies. In the United States, the Federal Reserve is increasing the money supply if it wants to stimulate the economy, prevent deflation, stimulate asset prices and increase employment. If it wants to reduce inflationary pressures, it raises interest rates and lowers the money supply. When he expects a recession, he essentially starts lowering interest rates and raising interest rates when the economy overheats. Giffen products represent a scenario in which demand increases even as prices rise. The name comes from Sir Robert Giffen, who made his remarks. He observed that in the early 19th century, low-wage British workers were buying more bread despite rising prices. This event directly contradicts the law of demand. However, several factors can affect both supply and demand, causing them to increase or decrease in various ways. Possible supply processors that could increase supply include a reduction in the price of an input such as labour, a decrease in available yields from alternative uses of inputs that produce coffee, an improvement in coffee production technology, good weather, and an increase in the number of coffee-producing enterprises.
After learning about the laws of supply and demand in detail, we come to discuss the exception to the rules in both cases. Let`s start with the exceptions to the right to ask. Artistic goods: Even if prices rise, artistic goods cannot be produced on demand. Therefore, these goods invalidate the right of delivery. If the demand curve moves further to the left than the supply curve, as shown in Figure (a) of Figure 3.19 “Simultaneous Decline in Supply and Demand”, the equilibrium price is lower than before the curve shift. In this case, the new equilibrium price increases from $6 per pound to $5 per pound. If the leftshift of the supply curve is greater than that of the demand curve, the equilibrium price will be higher than before, as shown in panel (b). In this case, the new equilibrium price increases to $7 per pound.
Since the two curves of panel (c) move to the left of the same amount, the equilibrium price does not change; There is $6 left per pound. Historically, there has been considerable controversy over the prices of goods whose supply is fixed in the short term. Critics of market prices have argued that raising the prices of these types of goods serves no economic purpose because they cannot produce additional supply and therefore only serve to enrich the owners of the goods at the expense of the rest of society. This was the main argument in favor of price fixing, as the United States did with the price of domestic oil in the 1970s and as New York City has done with apartment rents since World War II (see Rent Control). A change in supply or demand changes the equilibrium solution in the model. Tables (a) and (b) show an increase or decrease in demand; Tables (c) and (d) show an increase or decrease in supply. Market control: In other words, a monopoly can cause a seller to control the market supply despite the increase in prices. This destroys the law once again. The theory is based on two distinct “laws”, the law of demand and the law of supply. The two laws interact to determine the real market price and the volume of goods in the market. When consumer information on available supply is distorted, the resulting demand is also affected.
An example occurred immediately after the terrorist attacks of 11 September 2001 in New York. The public immediately became concerned about the future availability of oil. Some companies have taken advantage of this and have temporarily increased their gasoline prices. There was no real shortage, but the perception of such a shortage artificially increased the demand for gasoline, forcing stations to suddenly charge up to $5 a gallon for gasoline when the price had been less than $2 the day before. Price controls can also distort the impact of supply and demand on a market. Governments sometimes set a maximum or minimum price for a product or service, resulting in artificial swelling or deflatation of supply or demand. This was evident in the 1970s, when the U.S. temporarily capped the price of gasoline by less than $1 per gallon. Demand increased because the price was artificially low, making it more difficult to maintain supply. This has resulted in much longer wait times and people doing parallel business with stations to get gas.
For the economy, “movements” and “shifts” in relation to supply and demand curves represent very different market phenomena.