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REvenue Profit and Cost Functions examples
When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity.
Putting the supply and demand curves from the previous sections together. These two curves will intersect at Price = $6, and Quantity = 20. In this market, the equilibrium price is $6 per unit, and equilibrium quantity is 20 units. At this price level, market is in equilibrium. Quantity supplied is equal to quantity demanded ( Qs = Qd). Market is clear.
Surplus and shortage: If the market price is above the equilibrium price, quantity supplied is greater than quantity demanded, creating a surplus. Market price will fall.
If the market price (P) is higher than $6 (where Qd = Qs). price must fall in order to entice additional quantity demanded and reduce quantity supplied until the surplus is eliminated. P=8. there will be a surplus. there are excess quantity supplied in the market. Once you raise the price of your product. Since Qs>Qd. The market is not clear. There are excess quanitty demanded in the market. Price Floor: is legally imposed minimum price on the market. for example. If a surplus exist. P=4. creating a shortage. your product¶s quantity demanded will drop until equilibrium is reached. for example. Market is in shortage. $6. Market is in surplus. Policy makers set floor price above the market equilibrium price which they believed is too low. there will be a shortage. Since Qs<Qd. Government regulations will create surpluses and shortages in the market. Transactions below this price is prohibited. Will you put them on sale? It is most likely yes. Price floors are most often placed on markets for goods that are an important source . Once you lower the price of your product. Therefore. Qs=30. price must rise in order to entice additional supply and reduce quantity demanded until the shortage is eliminated. If a shortage exists. Therefore. and Qd=30. Market price will rise because of this shortage.Example: if you are the producer. When there is a price floor. If the market price is below the equilibrium price. It is in shortage. shortage drives price up. Market is not clear. your product¶s quantity demanded will rise until equilibrium is reached. quantity supplied is less than quantity demanded. surplus drives price down. Example: if you are the producer. Will you raise the price to make more profit? Most for-profit firms will say yes. you have a lot of excess inventory that cannot sell. Qs=10. THE PRICE WILL DROP BECAUSE OF THIS SURPLUS If the market price is lower than equilibrium price. THE PRICE WILL RISE DUE TO THIS SHORTAGE. the market is not clear. your product is always out of stock. and Qd=10. When a price ceiling is set.
he will increase the demand for Florida¶s oranges. Price ceiling generates shortages on the market. Intention of price ceiling is keeping stuff affordable for poor people. An increase in demand will create a shortage.of income for the sellers. will necessarily change the equilibrium price. Example: minimum wage. Changes in equilibrium price and quantity: Equilibrium price and quantity are determined by the intersection of supply and demand. such as labor market. Policy makers set ceiling price below the market equilibrium price which they believed is too high. he will increase the supply for Florida¶s oranges. the change in equilibrium price cannot be determined unless more details are provided. which increases the equilibrium price and equilibrium quantity. or demand. Therefore. an example of demand and supply increase is illustrated. we can tell that equilibrium quantity will be higher. By comparing the quantity between importer and exporter. . Example: This example is based on the assumption of Ceteris Paribus. 3) What will happen if the exporter and importer enter the Florida¶s orange market at the same time? From the above analysis. we can determine who has more impact on the market. Price Ceiling: is legally imposed maximum price on the market. or both. 2) If there is an importer who is willing to import oranges from Mexico to Florida. which lowers the equilibrium price and increase the equilibrium quantity. Example: Rent control. Price floor generate surpluses on the market. Detail information should include the exact quantity the exporter and importer is engaged in. 1) If there is an exporter who is willing to export oranges from Florida to Asia. An increase in supply will create a surplus. In the following table. It is highly unlikely that the change in supply and demand perfectly offset one another so that equilibrium remains the same. A change in supply. quantity or both. But the import and exporter¶s impact on price is opposite. Transactions above this price is prohibited.
the new curve is located on the right side of the original supply curve. The equilibrium price is also higher. In this graph. At this point. As the new supply curve (SUPPLY 2) has shown. This new equilibrium point indicated an equilibrium quantity which is higher than the original equilibrium quantity. demand increases. As the new demand curve (Demand 2) has shown. the increased demand curve and increased supply were drawn together. the equilibrium price (market price) is higher. the new curve is located on the right hand side of the original demand curve. and supply increases. This supply and demand factor exercises may help you better apply these concepts. The new intersection point is located on the right hand side of the original intersection point. and the equilibrium quantity is higher. In this graph. The new curve intersects the original demand curve at a new point. supply is constant. the equilibrium price (market price) is lower. and equilibrium quantity is higher also. demand is constant. At this point. The new curve intersects the original supply curve at a new point. It is because demand has increased relatively more than supply in this case.In this graph. .
org/03oct/00921/supplyanddemand.html .arizona.html http://www.com/RealWorld/tutorialsf0/framesF2A.zweigmedia.edu/main_site/review_topics/economics.washburn.net/economics/revision-notes/as-markets-equilibrium-price.htm http://www.htm http://tutor2u.google.edu/fchan/Micro/1MKTEQUIL.ph/url?sa=t&rct=j&q=revenue%20profit%20and%20cost%20functions%20exam ples&source=web&cd=4&ved=0CDkQFjAD&url=http%3A%2F%2Fmath.fullcoll.html http://www.investopedia.pdf http://library.edu%2F~kerimar%2FDem and%2C%2520Revenue%2C%2520Cost%2C%2520%26%2520Profit.com.oswego.edu/~edunne/200ch3_3.MARKET EQUILIBRIUM http://staffwww.asp#axzz1jjW4H9QD http://www.com/how-to/content/how-to-determine-marginal-cost-marginal-revenue-an.kennesaw.htm http://www.dummies.html http://earthmath.ppt&ei=KaYVT7FJ6qjiQLyqfHWDQ&usg=AFQjCNFByTDBiJ9jO871f-tc0z0MKrsenQ&sig2=cRIb_GaTu9tdkd8lTmyqCw http://www.com/university/economics/economics3.thinkquest.edu/sobu/rwalker/EC200/Notes/Chapter_3.
we get the following illustration of the pizza market: . Market Equilibrium Recall the demand and supply schedules for pizza delivered in Oswego in a week: Price of pizza $25 $20 $15 $10 $5 Quantity of pizza demanded (per week in Oswego) 100 210 300 500 650 Quantity of pizza supplied (per week in Oswego) 800 700 625 500 300 Note that at a price of $10.Chapter 3 Supply and Demand III. Market Equilibrium Now we put together the behavior of buyers (part one) and the behavior of sellers (part two) to have a model of the whole market for pizza. the quantity supplied = the quantity demanded = 500. If we plot the supply and demand curves on the same set of axes.
This surplus would force prices to fall. let's think about what would happen if the price was greater than or less than $10. So an equilibrium point is a point of rest. $10) an equilibrium? To understand why. Why is (500. the quantity demanded = 210 and the quantity supplied = 700. say $20. with no one willing to buy them for $20. The result would be a shortage of 350 pizzas. This is the price where the intentions of both the buyer and seller are compatible: Buyers want to buy the exact amount the sellers want to sell. This shortage would force prices up. However. If the price is less than $10. y y If the price is greater than $10. This intersection is what we call an equilibrium price. until the price reaches $10. where there is no incentive for buyers or sellers to change their decisions. The result would be a huge surplus of 490 pizzas produced. say $5.The supply and demand curves intersect at the point where quantity supplied = quantity demanded. until the price reaches $10. causing pizza suppliers to produce more and consumers to buy less. if one of the other factors affecting . causing pizza supplies to cut back production and pizza buyers would be willing to buy more pizzas as the price falls. the quantity demanded = 650 and the quantity supplied = 300.
An increase in demand results in an increase in price and quantity. and a new equilibrium will result. then the demand and/or supply curves will shift. or the demand curve shifts right. Let's consider a few examples Changes in Equilibrium Let's consider a few examples. so the demand for pizza INCREASES. a substitute. Step 3: What is the resulting impact on the equilibrium price and quantity? This is easiest to answer with a graph. INCREASES. so the price of chinese food affects the demand curve Step 2: In what direction will the affected curve move? The price of chinese food. Example 1: Suppose that the price of Chinese food delivery rises.demand and supply change. If you look at the graph below you will see that the new equilibrium has a higher price and larger quantity. . What happens to the market for pizza? Let's figure this out with a 3 step approach: y y y Step 1: Will this affect the demand or supply curve? Chinese food is a substitute for pizza.
Example 3: Now lets combine examples 1 and 2 so that the demand for pizza increases AND the supply of pizza decreases. . If you look at the graph below you will see that the new equilibrium has a higher price and smaller quantity. we know a decrease in supply will increase equilibrium price and decrease quantity. we use the same three step approach: y y y Step 1: Will this affect the demand or supply curve? The chinese food business is an alternative to the pizza business. An decrease in supply results in an increase in price and a decrease in quantity. so the supply of pizza DECREASES. affecting the supply curve Step 2: In what direction will the affected curve move? The profitability of chinese food means that some pizza places will switch to chinese food places. What happens to the market for pizza? Again. or the supply curve shifts left. What happens to the market for pizza? y y we know an increase in demand will increase equilibrium price and increase quantity. Step 3: What is the resulting impact on the equilibrium price and quantity? This is easiest to answer with a graph.Example 2: Suppose instead that the Chinese food business is incredibly popular and profitable.
Your CD ROM also has self-quizzes on chapter 3. there is no change in quantity. The table below summarizes how changes in demand and supply affect equilibrium price (P) and quantity (Q). and depends on whether the shift in demand is smaller or larger than the shift in supply. . As I have draw the graph below. no change in supply (no shift) increase in supply (shift right) decrease in supply (shift left) no change in demand (no shift) no change in P no change in Q P decreases Q increases P increases Q decreases increase in demand (shift right) P increases Q increases P? Q increases P increases Q? decrease in demand (shift left) P decreases Q decreases P decreases Q? P? Q decreases Want to test your understanding? The links below will allow you to test your understanding of supply and demand.y put both together the equilibrium price will increase but the affect on quantity is uncertain.
An online quiz on supply and demand by Kim Sosin . Exploring Supply and Demand-.A chapter 3 quiz on your textbook's web site.Check Your Head -.