Explain the shape of a regular demand curve and the shape of a regular supply cu

Question

Explain the shape of a regular demand curve and the shape of a regular supply curve. Using a diagram, explain how supply and demand interact to determine market equilibrium, interpreting the meaning of equilibrium. Using any consumer good as an illustration, outline four circumstances which would cause the demand curve to shift to the right. Using that, or any other consumer good as an illustration, outline four circumstances which would cause the supply curve to shift to the right. Consider the domestic rental market. Following pressure, the government has decided to control rents by introducing a price ceiling (maximum rent) below the current market equilibrium price. With the aid of diagram(s), analyse the impact of this policy on the rental market. What are the implications of this policy for landlords and for tenants?

Explanation / Answer

Market Equilibrium: It is a situation in a market when the price is such that the quantity demanded by consumers is correctly balanced by the quantity that firms wish to supply. Consumers are willing to pay as it is offered by the suppliers.

Four factors which cause shift in the demand curve:

1) Income: If income increases (decreases) then demand for goods will increase (decrease). A rise in incomes increases the demand for normal goods such as restaurant meals, sports tickets, and necklaces while reducing the demand for inferior goods such as cabbage, turnips, and inexpensive wine.

2) Taste and preferences: if a consumer has developed a taste for sushi then he will demand more sushi. This will shift the demand curve for shushi outside.

3) Employment: Rising or falling employment rates can affect the demand curve. For example, if you offer a discretionary product and the unemployment rate rises in the United States, there may be less demand for your goods, which would cause the demand curve for your product to shift. If the unemployment rate drops and more people have disposable income, the general population may be more likely to spend on discretionary items, which may include vacation packages or expensive clothing.

4) Market Size: Market size can especially cause a demand curve to shift if the product or service in question is a "need" and not just a "want." For example, a necessity such as soap may experience heightened demand during population increases simply because more people are buying the non-discretionary item.

5) Decrease in price of a substitute and Increase in price of a complement will shift the demand curve outside. A reduction in airfares reduces the demand for bus transport (substitute goods); a decline in the price of DVD players increases the demand for DVD movies (complementary goods).

6) change in consumer expectations : Inclement weather in South America creates an expectation of higher future price of coffee beans, thereby increasing today's demand for coffee beans.

Factors cause shift in supply curve:

1) prices of input: higher input prices will shift the supply curve upward (implied reduction in supply). A decrease in the price of microchips increases the supply of computers (inputs get cheaper thus increase the supply); an increase in the price of crude oil reduces the supply of gasoline.

2)Technology - technological advances that increase production efficiency and shift the supply curve to the right. The development of more effective wireless technology increases the supply of cell phones.

3) Changes in taxes and subsidies: an increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in subsidies to state universities reduce the supply of higher education.

4) Change in prices of other goods: An increase in the price of cucumbers decreases the supply of watermelons.

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