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Economics Lecture Two (view source)
Revision as of 20:40, September 6, 2009
, 20:40, September 6, 2009→Changes in Supply and Demand: fixed footnote
An increase in demand causes the price to rise from P<sub>1</sub> to P<sub>2</sub>. The new equilibrium is at a point with higher price and greater quantity than before. What could cause an increase in demand? For gasoline, more people driving would cause an increase in demand. For heating oil, a colder winter would cause an increase in demand. For sports entertainment, a close rivalry (as in a close pennant race between the Yankees and Red Sox) can cause an increase in demand (spectators). In all these cases, price and quantity tend to rise. Conversely, if there is a decrease in demand by the public, then the opposite is generally true: prices and quantity decrease.
An increase in demand causes the price to rise from P<sub>1</sub> to P<sub>2</sub>. The new equilibrium is at a point with higher price and greater quantity than before. What could cause an increase in demand? For gasoline, more people driving would cause an increase in demand. For heating oil, a colder winter would cause an increase in demand. For sports entertainment, a close rivalry (as in a close pennant race between the Yankees and Red Sox) can cause an increase in demand (spectators). In all these cases, price and quantity tend to rise. Conversely, if there is a decrease in demand by the public, then the opposite is generally true: prices and quantity decrease.
Next consider an increase in supply by the producers. Suppose farmers have better weather, for example, causing more crops at the harvest. Or suppose there is discovery of huge new oil reserves underground. Or suppose a new invention, such as Eli Whitney’s cotton gin, increases the production of a good (cotton). This curve shows what happens when there is an increase in supply, from supply curve S<ref>1</ref> to supply curve S<ref>2</ref>:
Next consider an increase in supply by the producers. Suppose farmers have better weather, for example, causing more crops at the harvest. Or suppose there is discovery of huge new oil reserves underground. Or suppose a new invention, such as Eli Whitney’s cotton gin, increases the production of a good (cotton). This curve shows what happens when there is an increase in supply, from supply curve S<sub>1</sub> to supply curve S<sub>2</sub>:
[[Image:Supply_curve_shift.gif]]
[[Image:Supply_curve_shift.gif]]