Monday, February 9, 2009

Changes in Demand and Supply

In class we look at how changes in demand, or changes in supply affect market prices. Here are a few brief examples of changes in demand or supply and the effect it has on market prices.

Changes in Demand

Rare Metals
The demand for more efficient jets is increasing the demand for rare metals, which are used as an input in the production of more efficient jets. If the supply curve for these rare metals is not changing, then an increase in demand (shifting demand to the right) will result in an increase in the price of rare metals.

H1N1 Flu Vaccines
An increase in the demand for "swine" flu is resulting in a huge increase in pharmeceutical drug revenues. Thus a shift in the demand to the left, increases both price and quantity, and since total revenue is price times quantity, this must increase the firms revenues.

Changes in Supply

The flood last summer - especially felt over much of the state of Iowa - had a dramatic effect on the amount of crops produced last year. The flood reduced farmers ability to plant, fertilize, and harvest and this shift in the supply curve for crops like corn shifted the supply curve for corn to the left, sharply increasing agricultural prices - such as corn.

The price of oil dropped last summer in part due to demand conditions, but also in part due to changes in the expected future price of oil, with speculation that Saudi Arabia would increase production, and thus result in a decline in the price of crude oil.

Art prices have been dropping dramatically in part due to the increased supply of art for sale as owners hit by the economic crisis are selling art pieces in some cases for a loss.

A decrease in the supply of tea is resulting in higher prices for tea.

Changes in Demand & Supply

The price of oilseed has been increasing recently due to a decrease in supply (Argentine drought) and an increase in demand for oilseed in China. Both of these effects have increased the price of oilseed.

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