Application of Supply and Demand Analysis


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short discussion on the application of supply and demand analysis.

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Application of Supply and Demand Analysis

  1. 1. Assumptions of Supply and Demand AnalysisAppropriate to use when competition exists among buyers and sellers.The interaction of buyers and sellers covers all types of prices and goods for which a market exists.Interaction of supply and demand solves two major economic problems simultaneously- the quantity sold and the price.Forces affecting supply and demand could come from any number of influences.
  2. 2. Effects of a Change In Demand During an Immediate Period EmergencyFigure 5-1 (a) shows what happens Price Sin the immediate period (during thetyphoon), as consumers brace foremergency. Supplies are fixed anddemand is fairly inelastic. Anincrease in demand could lead to ashift of the demand schedule –more goods are bought as long asthese are available. The ensuing P1--------------------------price increase could be steep asshelves are emptied.The initial equilibrium price is P0 P0 --------------------------and quantity is Q0 . After theincrease in demand, when allsupplies are being bought, theprice shifts to P1, but quantity staysthe same (in the immediate period D D’the supplies are fixed.) 0 Q0 Quantity Figure 5-1(a)
  3. 3. Supply and Demand for Fish during Typhoon PriceFigure 5-1(b) indicates the S’short-run setting of a typhoonperiod for a particular Scommodity-fish.Fish catch will fall becausefishermen will not go to the P1---------------------------- --------------------------------------sea. The decline in fish supplywill cause the new equilibrium P0 -------------------------------- -------------------------------at P1 and Q1. The price of fishwill rise and quantity boughtwill fall. D 0 Q1 Q0 Quantity Figure 5-1(b)
  4. 4. Interplay of Demand and SupplyWill the Price of Bangus Rise orFall After a Typhoon?Normal equilibrium is P0 and Q0. Price Sduring a typhoon, fish pondowners attempt to harvest bangus S’for fear of losing fish if the pondsoverflooded and the fish got out. Ifflooding occurs, there will be freebangus harvests in main estuariescaught by people in the area. P0 --------------------------- --------------------------------------On the other hand, people who P2 --------------------------------------- --------------------------------normally eat other types of fish will P1 ---------------------------------- ----------------------------experience a short period rise offish prices. Other fishes will havefewer harvests because fishermengo back to safety during a typhoonand they have no catch. These D D’people will likely cause thedemand for bangus to increase(shift D to the right). 0 Q0 Q1 Q2 Quantity
  5. 5. Prize Stabilization of Basic CommoditiesPrice stabilization is best undertaken through indirect approaches by managing the supply of the commodity.It could mean influencing only the market conditions, mainly through the supply side, to avoid extreme swings of prices.Includes setting the prices of commodities that are being stabilized.
  6. 6. Stabilizing Rice Prices S’’ Price S Situation A:Price stabilization Market supplies getting depleted. S’Price of grain could rise andfall during the year withoutprice stabilization. Duringnormal times, P0 an Q0 areequilibrium price and PP -------------------------- -----------------------------------------quantity. The price of grain P0 ------------------------------ Situation B: -----------------------------------could go to PP during times Market supplies PH ---------------------------------- increasingwhen supply is getting -----------------------------depleted(situation A). Butduring harvest time whensupply is increasing, the pricecould go to PH(situation B).The objective of stabilization Dis to set the price towards P0. 0 QP Q0 QH Quantity
  7. 7. Labor Supply, Population Growth and WageThe wage rate, which represents the incomes of workers, provides some indication of the standard of living.High wages result from the interaction of the demand and supply of labor.In countries where the supply of labor is very abundant, many workers are willing to accept low wages in exchange for their services.
  8. 8. The Wage rate and the Supply and Demand for Labor Wage rate The wage rate is determined by the balance of supply and demand for labor. The supply Supply of Labor of labor could be available at a given wage rate, W*, if the supply of labor is infinitely a elastic at that wage rate. But W* beyond a given point such as point a, when the labor available at that wage is fully employed, at point L*, the Demand for Labor supply schedule of labor could rise as shown in the L* Labor figure.
  9. 9. Unequal Population GrowthPopulation GrowthAssume two countries identicalin all aspects including theirinitial level of population. But Ahas a 1.0% per annum growthof population; B has 2.0%.What happens 10 years later?In country A, with a lowerpopulation growth, the supplycurve of labor turns up morequickly than SB. 10 years later Ahas higher wages than Bbecause the labor supply isgreater in B where thepopulation growth is higher.
  10. 10. Unequal Output GrowthGrowth in Demand for LaborThe two countries are identical in allaspects, except that country T has astronger demand for labor than countryP 10 yrs. later. Policies in T encourage agrowth demand for labor that is fasterthan in P.Initially the two countries have anidentical demand for labor. 10 yrs. later,because of sound economic policiesand growth of business investment andproductivity, the demand for labor ishigher in T than in P.The result, T is securely on a risingportion of the S schedule for labor. Also,amount of new employment is morethan in P. L10 Years Later in T is higher thanin P. as important, W10 Years Later in T ismuch higher than in P.
  11. 11. Labor Migration Within a CountryLabor Migration and WagesAt equilibrium before in-migration, Urbanya has a a higherwage than Probinsya which willinduce labor to move to Urbanya.Suppose this movement is about100 thousand man-years for a givenyear, the labor supply in Probinsyafalls from SP to S’P by the amountequal to 100 thousand man-years.But the labor supply schedule forUrbanya rises from SU to S’U . Inprobinsya, equilibrium wage goesup from WP to W’P while inUrbanya, wage goes down from WUto W’U.
  12. 12. Commodity Taxation: Price and Quantity After TaxEffects of a Commodity Tax Price STAXThe supply schedule before tax is Sand after tax is STAX. A commodity tax Shas the effect of raising the price ofthe good and reducing the quantitysold. The extent of the changes inprice and quantity depends on theelasticity of supply and demand. PTax ---------------------------- --------------------------------------Equilibrium before tax is P0 and Q0. P0 ---------------------------------- --------------------------the supply schedule aftertax, STAX, intersect the demand curveat a ne equilibrium price, PTAX. Thenew equilibrium quantity after tax isQTAX. It is clear from this that the new Dprice is higher than the old price andthe quantity after tax is smaller than 0 QTAX Q0 Quantitythe quantity before tax.
  13. 13. Exchange Rate of the Peso: The Value of Foreign Money  Foreign exchange is the term used to denote the value of foreign money in terms of local money.  The exchange rate for the US dollar is the peso cost of buying a US dollar.  The peso appreciates in value when the amount of pesos to acquire a US dollar becomes smaller which makes peso more valuable.  Peso depreciates when the price of the US dollar increases in terms of pesos.  It is important to value foreign currency because the country earns dollars when it imports and spends dollars when it buys foreign goods.
  14. 14. Exchange Rate of the Peso: The Value of Foreign Money Devaluation indicates an official action of the government to reduce the value of the currency. Foreign Exchange Market consists of the interaction of countries to buy or to sell foreign currencies. Principal currencies are US dollar, Japanese yen and Europe’s Euro.
  15. 15. Exchange Rate of the Peso: The Value of Foreign MoneySupply of Foreign Exchange  Consists of the receipts of dollars that the country earns or receives.  The following activities contribute to supply of dollars. Export earnings Foreign tourism in the country Use of services sold by Philippine companies: transport, telecommunications and others. Remittances of OFW Proceeds from foreign loans Short-term inflows of foreign capital for investment in the country or deposit of foreign money in any Philippine-based bank.
  16. 16. Exchange Rate of the Peso: The Value of Foreign MoneyDemand for Foreign Exchange  Consists of the payments for the volume of imports that the country buys to support the needs of businesses and citizens during a given period.  These payments include: Imports of goods for consumption and for investment. Filipinos travel abroad for tourism or for business. Filipinos and Philippine institutions use the service of foreign companies.
  17. 17. Interaction of Supply and DemandForeign Exchange Market and Effects ofCapital FlowAt a, the supply schedule is positively slopedwhich is a typical supply schedule. When thepeso price of the dollar is low, suppliers arenot willing to sell their dollars for they getfewer pesos for their dollars. But when thepeso price of the dollar is high, then supplierswill receive more pesos for every dollar theysell.In b, “good” developments dominate amongthe transitory factors, capital inflow increaseso an upward shift of the supply schedule fordollars happens.In c, “bad” developments dominate capitalinflows decrease, so a downward shift of thesupply schedule for dollars happens.