I am happy that most of you are able to follow the topic on Supply, Demand and Price Determination. Most of you manage to draw the Supply/Demand diagram correctly by shifting the curves accordingly to changes in factors.
You guys have excellent thinking! Keep it up!
However, I am concerned of how you guys explain your illustrations in words. In fact, many of you have voiced concern on how to explain what have been illustrated on your graphs for essays and short structured questions. Some of you are also caught off guard by the use of technical terms such as “shifts”, “movement”, “quantity demanded”, “quantity supplied”, “downwards/upwards pressure” and so on. To address such concern, I have decided to give you some guidelines to make your explanation clearer and more “sophisticated”.
However, I must stress that the guidelines are not the best. You can always try to explain in your own way. Remember, they are just guidelines. For simplicity, I will be using the example below in my entire demonstration:
Eg: Oil price is expected to go up next week
Step 1: Always state the effect of the change and which curve should shift
As people expect oil price to go up next week, this will increase their willingness to buy oil now so that they would be able to avoid paying a higher price later. This will increase their demand for oil now and shift demand curve to the right.
Step 2 (And Very Impt!!!):
Always hold price at “old price” and describe how the price mechanism works to achieve a new equilibrium
At the old price of Pold, the market is in disequilibrium. At Pold, Qss is less than QDD, hence there is a shortage. Consumers would be unable to obtain all they wanted would be willing to pay a higher price. Producer, unable or unwilling to supply enough will be happy to accept a higher price. This creates an upwards pressure on price. As price rises quantity demanded falls and quantity supplied rises. The rise in price will stop at P1 where Qss eventually equal QDD. Shortage is eliminated at Q1.
Step 3:
Simply state the equilibrium price and equilibrium quantity
Henceforth equilibrium price is P1 and equilibrium quantity is Q1
Always hold price at “old price” and describe how the price mechanism works to achieve a new equilibrium
At the old price of Pold, the market is in disequilibrium. At Pold, Qss is less than QDD, hence there is a shortage. Consumers would be unable to obtain all they wanted would be willing to pay a higher price. Producer, unable or unwilling to supply enough will be happy to accept a higher price. This creates an upwards pressure on price. As price rises quantity demanded falls and quantity supplied rises. The rise in price will stop at P1 where Qss eventually equal QDD. Shortage is eliminated at Q1.Step 3:
Simply state the equilibrium price and equilibrium quantity
Henceforth equilibrium price is P1 and equilibrium quantity is Q1
1 comment:
Great! this is more useful than going to the lectures in the JC i am currently in now.....
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