Economics: Changes in Demand and Supply

Changes in Demand

• When supply is constant, an increase in demand causes a shift to the right in the Demand curve, resulting in an increase in both equilibrium price and quantity.
• Conversely, a decrease in demand shifts the Demand curve to the left, leading to a decrease in both equilibrium price and quantity.

Changes in Supply

• Assuming demand remains unchanged, an increase in supply shifts the Supply curve to the right, resulting in a decrease in equilibrium price and an increase in equilibrium quantity.
• A decrease in supply shifts the Supply curve to the left, leading to an increase in equilibrium price and a decrease in equilibrium quantity.

Changes in Both Demand and Supply

• When both demand and supply increase simultaneously, the effect on equilibrium price depends on the relative magnitude of the shifts.
• If the magnitude of the increase is the same for both demand and supply, equilibrium price remains constant while equilibrium quantity increases.
• If the increase in demand is greater than the increase in supply, equilibrium price increases and equilibrium quantity also increases.

Government Intervention in Markets

• A maximum price or ceiling price is a government-imposed regulation that prevents prices from rising above a specific maximum level.
• Maximum prices can lead to shortages as suppliers reduce the amount offered while demand increases. This can result in the emergence of black markets and illegal payments.

Incidence of Tax

• The incidence of a tax refers to who ultimately bears the burden of the tax, whether it is the consumer or the producer.
• When demand is less elastic than supply, the tax burden falls more heavily on consumers.
• When demand is more elastic than supply, the tax burden falls more heavily on producers.

Effect of Price Elasticity on Subsidies

• A subsidy is a government payment to producers to encourage production.
• When demand is more elastic than supply, consumers benefit more from a subsidy.
• When demand is less elastic than supply, producers benefit more from a subsidy.

Market Failure

• Market Failure occurs when a free market cannot efficiently allocate resources, leading to a loss of economic efficiency.
• Causes of market failure include externalities, monopoly power, public goods, and incomplete information.

This quiz explores the impacts of changes in demand and supply on equilibrium price and quantity. It covers scenarios where demand or supply shifts and examines the implications of simultaneous changes in both. Test your understanding of these key economic concepts!