1. Draw a demand and supply diagram of a commodity you buy every day for your ow
ID: 1093286 • Letter: 1
Question
1. Draw a demand and supply diagram of a commodity you buy every day for your own consumption or a hypothetical commodity, say X, and show the equilibrium price and quantity demanded and supplied in the diagram. What assumptions have you made? Under what conditions these demand and supply curve changes (shift) and what happens then to the equilibrium price and quantity you have just identified (determined)? What is the conceptual difference between changes in quantity demanded or supplied as compared to changes in demand and/or supply?
Explanation / Answer
A supply schedule is a table that shows the relationship between the price of a good and the quantity supplied.
Under the assumption of perfect competition, supply is determined by marginal cost. Firms will produce additional output while the cost of producing an extra unit of output is less than the price they would receive.
A hike in the cost of raw goods would decrease supply, shifting costs up, while a discount would increase supply, shifting costs down and hurting producers as producer surplus decreases.
By its very nature, conceptualizing a supply curve requires the firm to be a perfect competitor, namely requires the firm to have no influence over the market price. This is true because each point on the supply curve is the answer to the question "If this firm is faced with this potential price, how much output will it be able to and willing to sell?" If a firm has market power, its decision of how much output to provide to the market influences the market price, then the firm is not "faced with" any price, and the question becomes less relevant.
Economists distinguish between the supply curve of an individual firm and between the market supply curve. The market supply curve is obtained by summing the quantities supplied by all suppliers at each potential price. Thus, in the graph of the supply curve, individual firms' supply curves are added horizontally to obtain the market supply curve.
Economists also distinguish the short-run market supply curve from the long-run market supply curve. In this context, two things are assumed constant by definition of the short run: the availability of one or more fixed inputs (typically physical capital), and the number of firms in the industry. In the long run, firms have a chance to adjust their holdings of physical capital, enabling them to better adjust their quantity supplied at any given price. Furthermore, in the long run potential competitors can enter or exit the industry in response to market conditions. For both of these reasons, long-run market supply curves are flatter than their short-run counterparts.
It is aforementioned, that the demand curve is generally downward-sloping, there may be rare examples of goods that have upward-sloping demand curves. Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods (an inferior but staple good) and Veblen goods (goods made more fashionable by a higher price).
By its very nature, conceptualizing a demand curve requires that the purchaser be a perfect competitor
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