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Crystal Thompson

Assignment No. 4: Changes in Supply and Demand

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The Supply and Demand of Widgets

P
35
S
30 1

25

20

15

10

5
D1
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Q

The equilibrium price is $12 and the quantity supplied and demanded is 12. At price $12,

the producers are willing to sell the product while the consumers are willing to purchase the

product and the quantity supplied and demanded are equal.

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Increase in demand by 3 units while supply decrease by 3 units

P
35 S3 S1
30

25

20

15

10

5 D2
D1
0
Q
0 1 2 3 4 5 6 7 8 9 10111213141516171819202122232425262728

As from the graph above increasing the demand by 3 units and decreasing the supply by

equal units will cause the equilibrium price to increase from $12, to $20. However, the impact on

the equilibrium quantity cannot be determined. For a given quantity, consumers will now place a

higher value on the widget, and producers must have a higher price to enable them supply the

widgets, thus increasing the price (Pepall, Antonioni & Rashid, 2020). The impact in the output

will be based on the relative size of the two changes.

Supply is the ability and willingness to a sell a product or service. Producers are willing

to sell their goods for a given price provided the price is at least above the cost to produce

additional unit of product (Pepall, Antonioni & Rashid, 2020). Therefore, the supply function is

based on the price at which a product can be sold and the production cost for an additional unit

of the product. The greater the difference between the two values the greater the willingness for

producers to supply the product.

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One of the factors that might cause the demand of the product above to increase and supply to

reduce is expectations. If consumers expect future price of the product to be rising, they will tend

to buy more before the increase in price. On the other hand, the producers will tend to reduce

their supplies with an expectation to sell more when the prices go up.

Another factor that could increase demand is an increase in income level. Increase in

income implies people purchasing power is increased and maybe willing to spend more (Sloman,

Norris & Garratt, 2020). Net income is the total amount of earnings and transfers within a

particular period (Sloman, Norris & Garratt, 2020). Economics believe that most people’s

expenditures for consumptions depend on their wealth and their current income (Pepall,

Antonioni & Rashid, 2020). With the increase of net income, people tend to increase the

consumption of certain products. On the other side, due to increase in cost of inputs because of

government taxes or other factors, the reservation prices will increase thus reducing supply.

The demand of the product must have also increased due to the increase of price of the

substitute product. This will compel consumers to go for products due to its lower price

compared to its substitute (Sloman, Norris & Garratt, 2020). Besides the demand might have

increased due to preferences, consumers increasing to prefer the product to other related goods,

because of perhaps starting to develop strong brand (Sloman, Norris & Garratt, 2020). On the

other hand, the supply might have also reduced due to reduced numbers of sellers of the product

as well decrease in productivity. Reduction in productivity will reduce the quantity supplied in

the market.
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References
Pepall L. Antonioni P. & Rashid M. (2020). Microeconomics for dummies (U.S.). Wiley.
Sloman J. Norris K. & Garratt D. (2020). Principles of economics (4th ed.). Pearson Education.