Chapter 10- Price Changes Flashcards
Effect of Changes in Demand
Price changes when the market conditions of demand and supply change. Changes in demand will cause changes in price and a movement along the supply curve. Increase in price would lead to an extension in supply until a new equilibrium price is reached. If the demand dereases, there will be a fall in price and hence a contraction in supply. Due to the decreased demand there would be a surplus unsold products which would cause the price to fall and make the supply contract until a new equilibrium price is reached.
The Effect of Changes in Supply
Changes in supply cause changes in price and a movement along the demand curve. An increase in supply would initiallly cause a surplus which would drive down the price leading to an extension in demand. A decrease in supply would have the opposite effect by causing a rise in price and therefore a contraction in demand.
Changes in Demand and Supply
It is possible for both the conditions of demand and supply to change at the same time. In this case the market would not only be affected by the direction of the changes, but the size of changes as well. If the change in demand is greater than the change in supply there will be an increase in the quantiity of the product being bought and sold, and there would also be an increase in price. If the change in supply is greater than the change in demand, there will be an increase in the amount of products bought and sold, but there would be a fall in price of the product.
