PRINCIPLES OF ECONOMICS LAB – SUPPLY AND DEMAND ANALYSIS I to create tables and plots of other common economic relationships. When you are done, the worksheet should look as follows: The reason we choose a scatter plot is because we wish to plot the inverse demand and inverse supply functions. Economists call this inverse relationship between price and quantity slope of the demand curve again illustrates the law of demand—the inverse relationship. The inverse relationship between price of a commodity and its quantity demanded is explained by law of demand. The Law of Demand states that while other.
If the demand curve shifts right, there is a greater quantity demanded at each price, the newly created shortage at the original price will drive the market to a higher equilibrium price and quantity.
As the demand curve shifts the change in the equilibrium price and quantity will be in the same direction, i. If the supply curve shifts left, say due to an increase in the price of the resources used to make the product, there is a lower quantity supplied at each price.
The result will be an increase in the market equilibrium price but a decrease in the market equilibrium quantity. The increase in price, causes a movement along the demand curve to a lower equilibrium quantity demanded.
A rightward shift in the supply curve, say from a new production technology, leads to a lower equilibrium price and a greater quantity. Note that as the supply curve shifts, the change in the equilibrium price and quantity will be in opposite directions. Complex Cases When demand and supply are changing at the same time, the analysis becomes more complex. When the shifts in demand and supply are driving price or quantity in opposite directions, we are unable to say how one of the two will change without further information.
We are able to find the market equilibrium by analyzing a schedule or table, by graphing the data or algebraically. This is clearly the equilibrium point. If we graph the curves, we find that at price of 30 dollars, the quantity supplied would be 10 and the quantity demanded would be 10, that is, where the supply and demand curves intersect. The data can also be represented by equations. We do this by setting the two equations equal to each other and solving. The steps for doing this are illustrated below.
Our first step is to get the Qs together, by adding 2Q to both sides. On the left hand side, the negative 2Q plus 2Q cancel each other out, and on the right side 2 Q plus 2Q gives us 4Q. Our next step is to get the Q by itself. The last step is to divide both sides by 4, which leaves us with an equilibrium Quantity of Either graphically or algebraically, we end up with the same answer. Market Intervention Market Intervention If a competitive market is free of intervention, market forces will always drive the price and quantity towards the equilibrium.
However, there are times when government feels a need to intervene in the market and prevent it from reaching equilibrium. While often done with good intentions, this intervention often brings about undesirable secondary effects.
Market intervention often comes as either a price floor or a price ceiling. Price Floor A price floor sets a minimum price for which the good may be sold. Price floors are designed to benefit the producers providing them a price greater than the original market equilibrium. To be effective, a price floor would need to be above the market equilibrium. At a price above the market equilibrium the quantity supplied will exceed the quantity demanded resulting in a surplus in the market. For example, the government imposed price floors for certain agricultural commodities, such as wheat and corn.
At a price floor, greater than the market equilibrium price, producers increase the quantity supplied of the good. However, consumers now face a higher price and reduce the quantity demanded.
The result of the price floor is a surplus in the market. Since producers are unable to sell all of their product at the imposed price floor, they have an incentive to lower the price but cannot.
To maintain the price floor, governments are often forced to step in and purchase the excess product, which adds an additional costs to the consumers who are also taxpayers.
Thus the consumers suffer from both higher prices but also higher taxes to dispose of the product. The decision to intervene in the market is a normative decision of policy makers, is the benefit to those receiving a higher wage greater than the added cost to society? Is the benefit of having excess food production greater than the additional costs that are incurred due to the market intervention?
Another example of a price floor is a minimum wage. In the labor market, the workers supply the labor and the businesses demand the labor. If a minimum wage is implemented that is above the market equilibrium, some of the individuals who were not willing to work at the original market equilibrium wage are now willing to work at the higher wage, i.
Businesses must now pay their workers more and consequently reduce the quantity of labor demanded. The result is a surplus of labor available at the minimum wage. Price Ceilings Price ceilings are intended to benefit the consumer and set a maximum price for which the product may be sold.
To be effective, the ceiling price must be below the market equilibrium. Label the axes or number lines properly, so that the reader knows what you are trying to measure. Most of the graphs used in economics have, a horizontal number line or x-axis, with negative numbers on the left of the point of origin or 0, and positive numbers on the right of the origin.
Figure 2 presents a typical horizontal number line or x-axis. In economics graphs, you will also find a vertical number line or y-axis. Here numbers above the point of origin 0 will have a positive value; while numbers below 0 will have a negative value.
Figure 3 demonstrates a typical vertical number line or y-axis. When constructing a graph, be careful in developing your scale, the difference between the numbers on the axes, and the relative numbers on each axis. The scale needs to be graduated or drawn properly on both axes, meaning that the distance between units has to be identical on both, though the numbers represented on the lines may vary. You may want to use single digits, for example, on the y-axis, while using hundreds of billions on the x-axis.
Using a misleading scale by squeezing or stretching the scale unfairly, rather than creating identical distances for spaces along the axes, and using a successive series of numbers will create an erroneous impression of relationship for your reader.
If you are asked to construct graphs, and to show a knowledge of graphing by choosing variables yourself, choose carefully what you decide to study. Here is a good example of a difficulty to avoid. Could you, for example, show a graphical relationship between good looks and high intelligence? I don't think so. First of all, you would have a tough time quantifying good looks though some social science researchers have tried!How to visually identify proportional relationships using graphs - 7th grade - Khan Academy
Intelligence is even harder to quantify, especially given the possible cultural bias to most of our exams and tests. Finally, I doubt if you could ever find a connection between the two variables; there may not be any. Choose variables that are quantifiable. Height and weight, caloric intake and weight, weight and blood pressure, are excellent personal examples.
The supply and demand for oil in Canada, the Canadian interest rate and planned aggregate expenditure, and the Canadian inflation rate during the past forty years are all quantifiable economic variables. You also need to understand how to plot sets of coordinate points on the plane of the graph in order to show relationships between two variables. One set of coordinates specify a point on the plane of a graph which is the space above the x-axis, and to the right of the y-axis.
For example, when we put together the x and y axes with a common origin, we have a series of x,y values for any set of data which can be plotted by a line which connects the coordinate points all the x,y points on the plane. Such a point can be expressed inside brackets with x first and y second, or 10,1. A set of such paired observation points on a line or curve which slopes from the lower left of the plane to the upper right would be a positive, direct relationship.
A set of paired observation or coordinate points on a line that slopes from the upper left of the plane to the lower right is a negative or indirect relationship.
Working from a Table to a Graph Figures 5 and 6 present us with a table, or a list of related numbers, for two variables, the price of a T-shirt, and the quantity purchased per week in a store. Note the series of paired observation points I through N, which specify the quantity demanded x-axis, reflecting the second column of data in relation to the price y-axis, reflecting first column of data. See that by plotting each of the paired observation points I through N, and then connecting them with a line or curve, we have a downward sloping line from upper left of the plane to the lower right, a negative or inverse relationship.
We have now illustrated that as price declines, the number of T-shirts demanded or sought increases. Or, we could say reading from the bottom, as the price of T-shirts increases, the quantity demanded decreases. We have stated here, and illustrated graphically, the Law of Demand in economics. Now we can turn to the Law of Supply. The positive relationship of supply is aptly illustrated in the table and graph of Figure 7. Note from the first two columns of the table that as the price of shoes increases, shoe producers are prepared to provide more and more goods to this market.
The converse also applies, as the price that consumers are willing to pay for a pair of shoes declines, the less interested are shoe producers in providing shoes to this market. The x,y points are specified as A through to E. When the five points are transferred to the graph, we have a curve that slopes from the lower left of the plane to the upper right.
We have illustrated that supply involves a positive relationship between price and quantity supplied, and we have elaborated the Law of Supply. Now, you should have a good grasp of the fundamental graphing operations necessary to understand the basics of microeconomics, and certain topics in macroeconomics. Many other macroeconomics variables can be expressed in graph form such as the price level and real GDP demanded, average wage rates and real GDP, inflation rates and real GDP, and the price of oil and the demand for, or supply of, the product.
Don't worry if at first you don't understand a graph when you look at it in your text; some involve more complicated relationships. You will understand a relationship more fully when you study the tabular data that often accompanies the graph as shown in Figures 5 and 7or the material in which the author elaborates on the variables and relationships being studied.
Gentle Slopes When you have been out running or jogging, have you ever tried, at your starting pace, to run up a steep hill? If so, you will have a good intuitive grasp of the meaning of a slope of a line. You probably noticed your lungs starting to work much harder to provide you with extra oxygen for the blood.
If you stopped to take your pulse, you would have found that your heart is pumping blood far faster through the body, probably at least twice as fast as your regular, resting rate.
The greater the steepness of the slope, the greater the sensitivity and reaction of your body's heart and lungs to the extra work. Slope has a lot to do with the sensitivity of variables to each other, since slope measures the response of one variable when there is a change in the other. The slope of a line is measured by units of rise on the vertical y-axis over units of run on the horizontal x-axis.
A typical slope calculation is needed if you want to measure the reaction of consumers or producers to a change in the price of a product.
Using Systems of Equations with Supply and Demand Application
For example, let's look at what happens in Figure 7 when we move from points E to D, and then from points B to A. The run or horizontal movement is 80, calculated from the difference between and 80, which is Let's look at the change between B and A.
The vertical difference is again 20 - 80while the horizontal difference is 80 - We can generalize to say that where the curve is a straight line, the slope will be a constant at all points on the curve.
Figure 8 shows that where right-angled triangles are drawn to the curve, the slopes are all constant, and positive. Now, let's take a look at Figure 9, which shows the curve of a negative relationship. All slopes in a negative relationship have a negative value. We can generalize to say that for negative relationships, increases in one variable are associated with decreases in the other, and slope calculations will, therefore, be of a negative value.
A final word on non-linear slopes. Not all positive nor negative curves are straight lines, and some curves are parabolic, that is, they take the shape of a U or an inverted U, as is demonstrated in Figure 10, shown below.