Predicting market changes
Predicting Market Changes
Discusses the importance of predicting shifts in demand and supply curves
Emphasizes the movement along the curves when prices change
Surpluses and shortages impact the equilibrium price and quantity
Market Demand and Shifts in Demand
Market demand curve summarizes buying plans based on prices
Example: Demand for gasoline changes as price varies from $1 to $6
Shifts in demand caused by various factors:
Income Changes: A rise in income typically increases demand for normal goods, leading to a rightward shift in demand.
Preferences: Changes in consumer preferences, e.g., transition from liking chocolates as a child to a lesser preference as an adult may shift demand.
Prices of Complements and Substitutes:
Complements: Goods that are used together (e.g., phones and chargers). An increase in the demand for one leads to an increase in demand for its complement.
Substitutes: Goods that can replace each other (e.g., Coke and Pepsi). An increase in demand for one often decreases demand for another.
Expectations: Future expectations can influence current demand, such as changes in buying habits during crises like COVID-19.
Types and Numbers of Buyers: More consumers can lead to increased demand.
Shifts in Demand Example
Example: At $3, equilibrium demand for gasoline is 2 billion gallons.
Increase in demand results in a rightward shift of the demand curve, creating a new demand level, resulting in price and quantity adjustments.
Shortages result when demand exceeds supply, prompting producers to raise prices, leading to movement along the curves toward a new equilibrium.
Decrease in Demand
A leftward shift in the demand curve results from a decrease in demand.
Surpluses occur when supply exceeds demand, allowing consumers to bargain for lower prices, ultimately decreasing both equilibrium prices and quantities.
Understanding Supply and Shifts in Supply
Supply represents selling plans that can change due to various factors.
Key Supply Shifters:
Input Prices: Increase in input costs (e.g., coffee beans) decreases supply.
Productivity: Advances in technology can enhance production capabilities, leading to increased supply.
Expectations and Numbers of Sellers: Changes can impact market supply.
Shifts in Supply Example
Increase in supply leads to a rightward shift in the supply curve, resulting in new equilibrium with lower prices and higher quantities sold.
A decrease in supply causes a leftward shift, leading to higher prices and lower quantities due to market shortages.
Predicting Market Changes Using Demand and Supply Framework
Key questions to analyze market shocks:
Is the shock affecting the demand curve or the supply curve?
Will the effect be positive or negative?
Example Scenarios:
Major retailer installs charging stations for electric vehicles, increasing demand for electric cars.
Amazon's new technology affecting local stores' demand negatively.
Government funding for research reduces battery costs, increasing supply of electric cars.
Drought affects almond farmers, reducing supply and increasing prices due to scarcity.
Analyzing Simultaneous Shifts in Demand and Supply
Four cases to consider:
Increase in Demand and Increase in Supply: Price may increase or decrease depending on the shift size; quantity will increase.
Increase in Demand and Decrease in Supply: Price will increase; quantity depends on the shift magnitude.
Decrease in Demand and Increase in Supply: Price will decrease; quantity depends on the shifts.
Decrease in Demand and Decrease in Supply: Price impact unclear; quantity will decrease.
Conclusion
Supply and demand framework is essential for predicting market outcomes based on observed changes in prices and quantities.
Changes in prices and quantities in the same direction indicate shifts in demand, while opposite directions suggest shifts in supply.