Supply++and+Demand

=Supply and Demand= Fenstermaker, Eric Mehringer, Todd Bittle, Curts

The market price of a good is determined by the interaction of Supply and Demand. The Law of Supply and Demand predicts that Market price will prove to be the equilibrium price, the price at which the demand and supply curves meet. Pricing above the equilibrium will lead to surplus. Pricing below the euilibrium will lead to shortages. These ideas were first emphasized by English economist Alfred Marshall in 1890, in his //Principles of Economics//.



To better understand supply and demand, this wiki entry seeks to explain and identify the effects of simultanous supply and demand shifts on the equilbrium quantity and price. While simultaneous shifts in supply and demand do occur, the outcomes they create are unique to the nature of the change involved. The following chart¹ illustrates the possible combinational outcomes of Price and Quanitity that can occur with a simultaneous change.


 * || **Increase in Demand** || **Decrease in Demand** ||
 * **Increase in Supply** || **Price:** Ambiguous || **Price:** Decrease ||
 * **Quantity:** Increase || **Quantity:** Ambiguous ||
 * **Decrease in Supply** || **Price**: Increase || **Price:** Ambiguous ||
 * **Quantity:** Ambiguous || **Quantity**: Decrease ||

As the chart indicates one of the two varibles is always ambiguous when determining what the new equilbrium will be. This is important to understand and identify when calculating the new equilbrium price and quantity.

Here is a graph of showing a simultaneous shift in supply and demand. This graph shows an increase in demand with an increase in supply. It represents the top left hand corner of the grid listed above. As you can see from the graph below, the effect of this simultaneous shift in supply and demand is an increase in quantity, and the effect on the price is ambiguous.

= =

//Example 1//
There is a real world example of the effect of changes in Supply and Demand on Quantitiy and Price taking place at an organization in Southern Indiana right now. The organization is a 130 bed community hospital, Memorial Hospital and Health Care Center, in Jasper. For the past 40 years there have been 2 hospitals in the Dubois County area. Approximately 1 month ago, the other hospital in the County closed its doors. That closure decreased the supply of available hospital beds. At the same time, a flu bug has spread across the area increasing demand for hospital beds. While this would normally result in an increase in price for hospital beds, pricing of hospital beds can not be increased, because if it was, reimbursement from the government and from private insurance companies would remain constant. Because the price can not increase, quantity demanded has increased significantly, causing shortages of available hospital beds. Memorial Hospital has had to respond by opening an “overflow” unit that was designed for such emergencies, but until now had never been needed.

//Example 2//
Another real world example with a historical flair would be the labor market in World War II. The supply of labor shifted as a vast number of caucasian male United States Citizens were unavailable for work in the labor market, due to military service. Simultaneously, labor demand in the domestic market increased due to the need for products in support of the War effort. The result was a shortage of labor and a resulting opening of the labor market for women and minority citizens, as well as workers imported from Mexico.

//Example 3//
Another example is the supply and demand for the works of an artist after the artist passes away. Demand for existing work increases because it is known there will be no new pieces from the artist. At the same time there can be no increase of supply because the artist has passed away. This causes the price of the artwork to increase significantly because demand increases while supply decreases. An example of this would be post-mortem sales of the works of Andy Warhol.

Exam Questions

 * 1) If an increase in demand simultaneously happens with an increase in supply:**

A.) Price Increases B.) Price is ambiguous C.) Quantity Increases D.) Quantity is ambiguous E.) Both B and C F.) Both A and D

__The correct Answer is E, the quantity will definitely increase, but the effect on price is ambiguous. It depends on which increase is more severe. If the increase in demand is relatively more severe than the increase in supply, the price will increase. However if the increase in supply is more severe than the increase in demand, the price would decrease.__


 * 2.) A decrease in supply simultaneously happens with an increased demand, but because of government regulation there is a price ceiling at the previous market equilibrium, what is the effect on the quantity demanded:**

A.) Quantity demanded is ambiguous B.) Quantity demanded is increased (creating a shortage) C.) Quantity demanded is decreased (creating a surplus) D.) Quantity remains unchanged E.) None of the above

__The correct Answer is B. The quantity demanded will increase, however because of the price ceiling, the price will not be able to move to the new equilibrium point, therefore creating a shortage. Had the price been able to move to the new equilibrium point, the effect on quantity would have been ambiguous.__


 * 3.) Which Historical aspect of World War II was an example of a simoultaneous shift of supply and demand:**

A.) The bombing of Pearl Harbor B.) The need for war related products coupled with the shortage of a male labor force C.) The use of the atomic bomb on 2 Japanese cities D.) The unconditional surrender of the Germans E.) None of the above

__The answer is B. The supply shifted such that a large majority of US males were unavailable to the labor market, labor demand had increased because of the need for War supplies. The result was a shortage of labor and a resulting opening of the labor market for women.__


 * 4.) Which of the following is the best representation of a simoultaneous shift of both supply and demand:**

A.) The popularity of a new piece of technology B.) The destruction of farmland by a flood C.) The death of a popular artist D.) The endorsement of an independent organization of a particular product E.) None of the above

__The answer is C. The demand for the existing work increases because it is known there will be no new pieces from the artist. At the same time there can be no increase of supply because the artist has passed away. This causes the price of the pieces of art to increase significantly because both demand increases and supply decreases simultaneously.__


 * 5.) Which of the following regarding simoultaneous shifts of supply and demand as it relates to a price ceilings:**

A.) A price ceiling will have an affect on a simoultaneous decrease of demand and increase in supply B.) A price ceiling will create a surplus when there is a simoultaneous increase of demand and decrease of supply C.) A price ceiling will create a shortage when there is a simoultaneous increase of demand and decrease of supply D.) A price ceiling will create a shortage whne there is asimoultaneous decrease of demand and increase in supply E.) All of the above

__The answer is C, with a simsimoultaneous increase of demand and decrease of supply, the efect on quantity would be ambiguous but the effect on price would be a clear increase. Because of the price ceiling in effect, this would therefor create a shortage in supply. Please see the above real world example 1 for details.__


 * 6) If an decrease in demand simultaneously happens with an increase in supply:**

A.) Price Increases B.) Price Decreases C.) Quantity Increases D.) Quantity is ambiguous E.) Both A and C F.) Both B and D

__The correct Answer is F, the Price will definitely decrease, but the effect on quantity is ambiguous. It depends on which change is more severe. If the decrease in demand is relatively more severe than the increase in supply, the quantity will decrease. However if the increase in supply is relatively more severe than the decrease in demand, the quantity would increase.__


 * 7) It is known that an increase in demand has happened simultaneously with an increase in supply. It is also known that this has caused an increase in the equilibrium quantity as well as a decrease in the equilibrium price. Given this information which of the following statements is true:**

A.) The increase in demand is relatively more severe than the increase in supply B.) The increase in demand is relatively equal to the increase in supply C.) The increase in supply is relatively more severe than the increase in demand D.) None of the above

__The correct Answer is C, when there is a simoultaneous increase in both demand and supply the quantity will definitely increase, but the effect on the equilibrium price is ambiguous. It depends on which change is more severe. If the increase in demand is relatively more severe than the increase in supply, the equilibrium price will increase. However if the increase in supply is relatively more severe than the increase in demand, the equilibrium price would decrease.__


 * 8) It is known that a decrease in demand has happened simultaneously with an increase in supply. It is also known that this has caused an increase in the equilibrium quantity as well as a decrease in the equilibrium price. Given this information which of the following statements is true:**

A.) The increase in supply is relatively more severe than the decrease in demand B.) The decrease in demand is relatively equal to the increase in supply C.) The decrease in demand is relatively more severe than the increase in supply D.) None of the above

__The correct answer is A, when there is a simoultaneous increase in supply with a decrease in demand the equilibrium price will definitely decrease, but the effect on the equilibrium quantity is ambiguous. It depends on which change is more severe. If the decrease in demand is relatively more severe than the increase in supply, the equilibrium quantity will decrease. However if the increase in supply is relatively more severe than the decrease in demand, the equilibrium quantity would increase.__


 * 9) It is known that a decrease in demand has happened simultaneously with an decrease in supply. The decrease in demand is relatively equal to the decrease in supply. Given this information which of the following statements is true about the equilibrium price and quantity:**

A.) Price Increases B.) Price Decreases C.) Price Stays the same D.) Quantity is ambiguous E.) Quantity Decreases F.) Quantity Increases G.) Both A and D H.) Both B and F I. ) Both C and E

__The correct Answer is I, when there is a simoultaneous decrease in both demand and supply the quantity will definitely decrease, but the effect on the equilibrium price is ambiguous. It depends on which change is more severe. If the decrease in demand is relatively more severe than the decrease in supply, the equilibrium price will decrease. However if the decrease in supply is relatively more severe than the decrease in demand, the equilibrium price would increase. In the unlikely event that the decrease in supply is equal to the decrease in demand, the equilibrium price would remain the same and the quantity would decrease.__


 * 10. A decrease in the demand of a product happens at the same time that suppliers decrease the cost of a product. Which of the following statements is true:**

A.) This represents a simoultaneous decrease in demand with an increase in supply B.) The represents a simoultaneous decrease in supply with an increase in demand C.) This represents a simoultaneous decrease in demand with a decrease in supply D.) None of the above

__The answer is D, none of the above. It is clearly stated that the demand of the product has decreased, but there has been no simoultaneous shift in the supply curve. The suppliers simply moved down the existing supply curve to charge a lower price, there was no shift in the supply curve.__