Market Equilibrium
Sample Solution
Distinguishing Between a Change in Demand vs. a Change in Quantity Demanded
A change in demand refers to a shift in the entire demand curve. This occurs when factors other than price, such as income, tastes, or the price of related goods, change. For example, if cupcakes become more popular due to a trend on social media, the demand curve for cupcakes will shift to the right.
A change in quantity demanded refers to a movement along the existing demand curve. This occurs when the price of the good changes. If the price of cupcakes increases, the quantity demanded will decrease, and vice versa.
Factors Affecting Demand for Cupcakes
Besides price, several factors can shift the demand curve for cupcakes:
- Income levels: As income levels rise, consumers may be willing to spend more on luxury items like gourmet cupcakes.
- Tastes and preferences: A change in fashion or a popular TV show featuring cupcakes can significantly impact demand.
- Price of related goods: The price of complementary goods (like coffee or tea) or substitute goods (like donuts or cookies) can affect cupcake demand.
- Population: An increase in population can lead to increased demand for cupcakes.
- Consumer expectations: If consumers expect a future shortage or price increase, they may buy more cupcakes now, shifting the demand curve to the right.
Full Answer Section
Impact on Supply
If the demand for cupcakes increases, existing bakeries may respond by:
- Increasing production: They may hire more workers, purchase additional equipment, or extend their operating hours.
- Raising prices: To capitalize on the increased demand, bakeries may raise prices, which could reduce the quantity demanded.
New entrants may be attracted to the cupcake market if they see a profitable opportunity. This would increase the supply of cupcakes, shifting the supply curve to the right.
Market Equilibrium
At the new equilibrium price point, the quantity demanded will equal the quantity supplied. This is the point where the supply and demand curves intersect. At this point, there is no shortage or surplus of cupcakes. Both buyers and sellers are satisfied with the price and quantity.
Government Intervention: Price Ceiling
If the government sets a price ceiling below the equilibrium price, the quantity demanded will exceed the quantity supplied at that price. This creates a shortage of cupcakes.
Who Benefits and Who Suffers?
- Consumers who can buy cupcakes at the lower price benefit from the price ceiling.
- Producers suffer because they are forced to sell cupcakes at a price below their production costs.
- Consumers who cannot buy cupcakes due to the shortage also suffer.
Unintended Consequences
- Shortages: The most significant unintended consequence is a shortage of cupcakes.
- Lower quality: To reduce costs, producers may use lower-quality ingredients or cut corners in production.
- Black markets: The shortage may lead to the emergence of black markets, where cupcakes are sold at higher prices.
- Inefficient allocation: The price ceiling may prevent the market from efficiently allocating resources.