Question

  7. What IS a drop in Supply, exactly?  

8. What happens to price and quantity when the Supply curve drops? Why

Answer 1

7. A decline in sellers' willingness and ability to sell a good at the current price, demonstrated by a change in the supply curve towards the left. A decrease in supply is caused by a change in the determinant of supply and results in a decrease in the quantity of the equilibrium and an increase in the price of the balance. A decrease in supply is one of two market shocks. The other is a surge in supply. A supply decrease results from a change in one of the supply determinants. The leftward shift of the supply curve disrupts the market equilibrium and creates a temporary shortage. The shortage is eliminated with a higher price. The comparative static analysis of the supply decrease is that equilibrium quantity decreases and equilibrium price increases.

8. The curves of supply and demand assume all other items are unchanged. If not, an upward or downward shift occurs, meaning that the entire curve moves up or down. Reasons for a shift in demand curve include the availability of alternative products, and changes in consumer preferences, levels of unemployment and interest rates. The reasons for a shift in the supply curve include changes in consumer expectations as well as new technologies. Upward shifts in the supply and demand curves imply declining supply and rising demand, respectively, while downward shifts are the opposite true.

The price of a balance is the intersection of the curves of supply and demand. Markets strike a balance because prices above and below the equilibrium price result in surpluses and shortages, respectively. A surplus typically means that vendors are going to reduce prices to clear up inventories, while a shortage means they are going to lift prices to take advantage of the increased demand. In both cases , the price may converge toward a price of equilibrium, which may be higher or lower than the price of the original balance.