Page 38 - Introduction to Business

12 PART 1 The Nature of Contemporary Business

EXHIBIT 1.3 be willing to sell more when
prices rise and less when
The Demand and Supply Curves
prices fall. In the gasoline case
(a) (b) that we just discussed, if the
The Demand Curve Is Always The Supply Curve Is Always price of gasoline doubled, gas
Downward Sloping Upward Sloping
stations would be willing to
3.50 3.50
sell more gasoline so that they
3.00 3.00 D
could earn greater profits.
Price per gallon ($) 2.00 Demand Price per gallon ($) 2.00 C Supply discourage gas stations from
Low gasoline prices would
2.50
2.50
A
selling gasoline and instead
curve
curve
encourage them to sell more
1.50
1.50
items from the convenience
1.00
.50 B 1.00 stores that are generally
.50
attached to the gas stations
these days. The producer’s
5 10 15 20 25 5 10 15 20 25
behavior can also be
Quantity of gasoline demanded Quantity of gasoline supplied
per month (1,000 gallons) per month (1,000 gallons) explained with the help of the
same diagram.
Exhibit 1.3(b) shows what happens when the price of gasoline rises, say, from
$1.50 to $2.00 per gallon. The quantity of gasoline that your local gas station will be
willing to supply may increase from 5000 to 7000 gallons per month. The upward-
supply curve The curve that shows the sloping supply curve CD clearly shows that as prices rise the producer is willing to
relationship between the quantity sell more of the product (gasoline in our case). Again, the steepness of the supply
supplied and the price of a product or
service (It is upward sloping.) curve carries important meaning. If the supply curve is steep, the implication is that
large changes in the price will have little impact on the quantity of goods supplied
price inelastic supply The supply where by the producer. For example, electricity has a price inelastic supply. On the other
a large change in the price will have little hand, when the supply curve slopes gently upward, a relatively small increase in
impact on the quantity of a good or
price will bring about significant increases in supply. For example, a product like
service supplied by the producer
beef has a price elastic supply. One point to remember is that the producer does
not just supply one consumer but a whole bunch of consumers in a given market
price elastic supply The supply where a
small change in the price will bring or region. Also, there may be several producers for a single product, in which case
about significant increases in the an aggregate (total) supply curve can be developed. The aggregate supply curve is
quantity of a product or service supplied
also called the market supply curve.
by the producer
In countries that follow the free market system, the prices that consumers pay
for goods and service are determined by the collective interaction of total consumer
demand and cumulative producer supply. The intersection of the market demand
market clearing, or equilibrium, price and supply curves provides us with the market clearing, or equilibrium, price, the
The price at which supply will equal price at which supply will equal demand and there will be no unsold goods or serv-
demand
ices. This situation can also be shown with the help of a diagram.
In a free market system, price will always tend to move toward the equilibrium
price so that the market clears—that is, everything that is produced is sold. From
Exhibit 1.4 it is clear that if price falls below the equilibrium level, the quantity
demanded (represented by the demand curve) will be greater than the quantity
supplied by producers (represented by the supply curve). When price is such that
shortage The amount of a good or demand exceeds supply, then we have a shortage. When there is a shortage, price
service that will not be available when
will keep rising, so demand will shrink, and the shortage will become smaller and
the price of the good or service is set
smaller until it vanishes. You will notice that the shortage vanishes when the price
below the equilibrium price (Demand
will exceed supply.) reaches the equilibrium or market clearing price. In the opposite case, when mar-
surplus The amount of a good or service ket supply exceeds market demand, we have a surplus.
that will not be sold when the price of
the good or service is set above the
equilibrium price (Supply will exceed Private Property and Property Rights. Capitalism has been defined as that
demand.) form of private property economy in which innovations are carried out with the help
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