1. Movement along the Supply Curve

A movement in the supply curve is changing in the supply because of the change in the price (McEachern, 2013). As such, a change in the quantity supplied at different prices is what is referred to as the movement along the supply curve. This can be illustrated below where a price increase is reflected by the movement along the supply curve that causes more quantity to be supplied:

1. Shift in the Supply Curve

A shift in the supply curve is the change in the supply for other reasons than price change (McEachern, 2013). This is illustrated in the graph below in which supply curve can shift either to the right or left:

This implies that when the supply curve shifts to the right, more quantity is supplied at each price; while a shift to the left means that less is supplied at each price. Therefore, if the initial price was \$10 the amount supplied will increase from 5 to 10 or decrease from 5 to 2. There are a number of causes for the supply curve to shift to the right, for instance; a decrease in the average production costs, subsidy on the raw materials or labor, and improvement in technology, among others (McEachern, 2013). On the other hand, when the supply curve shifts to the left, less quantity will be actually supplied at each price and this may be caused by an increase in the average production costs, taxation of the raw materials of a change in the production to a greater lucrative option.

1. Movement along the Demand Curve

A movement along the demand curve takes place when the price is the only factor which changes. This can be illustrated in the diagram below:

From the diagram, if the price increases form P2 to P1, the movement will be to left, implying that the quantity supplied will decrease from Q2 to Q1. A decrease in the quantity supplied is referred to as contraction (McEachern, 2013). On the other hand, if the price decreases from P1 to P2, the movement will be to right, which means the quantity supplied will increase from Q1 to Q2. An increase in the quantity supplied is referred to as expansion.

1. Shift in the Demand Curve

A shift in the demand curve happens when the entire demand curve has moved to the left or right (McEachern, 2013). For instance, when income increases, this would imply people are able to afford to purchase more goods even at an unchanged price. A shift in the demand curve can be illustrated in the diagram below:

In the diagram, a shift from either D1 to D2 or from D2 to D1 is represented by a real translation. As such, the diagram features both an outward shift to the right, which is an increase in the demand, and an inward shift to left, or shrinks in the demand. These shifts are caused by the real changes in determinants of the demand.

Price Floors and Price Ceilings

1. Price Floors

Price floors may be defined as the lowest lawful price that a good may be sold. In addition, price floors are mainly used by government in order to prevent the prices from becoming too low (Taylor & Weerapana, 2012).  A good example of the most widespread price floor is minimum wag, which refers to minimum price which nay be paid for labor. For price floors to be more effective there is need to set them above equilibrium price and if it is not set above equilibrium, the market will not be able to sell below the equilibrium, making the price floor irrelevant. Price floors create a surplus in the demand of a product or service. The diagram below provides an illustration of a price floor:

1. Price Ceilings

Price ceilings occur when government sets legal limits on the price of a particular product. For price ceilings to be effective, they should be below the normal market equilibrium (Taylor & Weerapana, 2012). Price ceiling create shortages and less supplied quantities than at equilibrium price, therefore more quantity is demanded than the quantity supplied. Inefficiency also occurs because at price ceiling the quantity supplied marginal benefit is more than marginal cost and this inefficiency is equivalent to deadweight welfare loss. The graph below illustrates the price ceiling:

P* shows legal price set by the government, but MB represents the price a marginal buyer is ready to pay for at Q* that is quantity that an industry is ready to supply. MB is less than P* (MC), which results in a deadweight welfare loss. P’ and Q’ are equilibrium price. Moreover, at P*, quantity demanded becomes greater than quantity supplied and this causes shortage. Price ceilings also tend to provide gains for the buyers and loss for the sellers.

References

McEachern, W. A. (2013). Contemporary economics. Mason, Ohio: South-Western Cengage Learning.

Taylor, J. B., & Weerapana, A. (2012). Principles of economics. Mason, OH: South-Western Cengage Learning.

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