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August 13, 2020 

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WTO: The abbreviation for World Trade Organization, which is an international organization that oversees multilateral trade among nations. The WTO was established in 1995 by the Uruguay round of trade negotiations to replace the General Agreement on Tariffs and Trade (GATT) that had been in place for the preceding five decades. The WTO administers multilateral trade agreements, provides a forum for trade negotiations, handles trade disputes, monitors national trade policies, and provides technical assistance and training for developing countries. The WTO has about 150 member countries.

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DEMAND SHOCK:

A disruption of market equilibrium caused by a change in a demand determinant and a shift of the demand curve. A demand shock can take one of two forms--a demand increase or a demand decrease. This is one of two disruptions of the market. The other is a supply shock.
A demand shock to the market results when the demand curve is shifted due to a change in one of the five demand determinants--buyers' income, buyers' preferences, other prices, buyers' expectations, and number of buyers.

The demand shock comes in two varieties.

  • Increase in Demand: This is a rightward shift of the demand curve. It generates an increase in the equilibrium price and an increase in the equilibrium quantity.

  • Decrease in Demand: This is a leftward shift of the demand curve. It generates a decrease in the equilibrium price and a decrease in the equilibrium quantity.

Demand Increase

An increase in demand can result from a change in any of the five demand determinants.
  • Buyers' Income: An increase in buyers' income for a normal good or a decrease in buyers' income for an inferior good.
  • Buyers' Preferences: An increase in buyers' preferences for the good.
  • Buyers' Preferences: An increase in the price of a substitute-in-consumption or a decrease in the price of a complement-in-consumption.
  • Buyers' Expectations: Expectations by buyers of an increase in the price in the future.
  • Number of Buyers: An increase in the number of buyers in the market.
Increase in Demand


The comparative static analysis of an increase in demand is illustrated in the exhibit at the right. The market is disrupted when one of the five demand determinants listed above causes an increase in demand and a rightward shift of the demand curve. This can be seen by clicking the "demand increase" button. The result of this disruption, given the original equilibrium price, is a temporary shortage (click the [Shortage] button).

The shortage then induces an increase in the price (click the [Price Increase] button). The price increase causes an increase in quantity supplied and a decrease in quantity demanded. The result of these quantity changes is a new equilibrium at a higher price and a larger quantity. Click the [New Equilibrium] button to display this outcome. The comparative static analysis reveals an increase in the equilibrium price and an increase in the equilibrium quantity.

An increase in demand results in an increase in the equilibrium quantity. The demand shift means that buyers want to buy more. Sellers are willing to accommodate buyers. However, to appease their increased demand, sellers must charge a higher price to cover their increasing production cost in accordance with the law of supply.

Demand Decrease

An decrease in demand can result from a change in any of the five demand determinants.
  • Buyers' Income: A decrease in buyers' income for a normal good or an increase in buyers' income for an inferior good.
  • Buyers' Preferences: A decrease in buyers' preferences for the good.
  • Buyers' Preferences: A decrease in the price of a substitute-in-consumption or an increase in the price of a complement-in-consumption.
  • Buyers' Expectations: Expectations by buyers of a decrease in the price in the future.
  • Number of Buyers: A decrease in the number of buyers in the market.
Decrease in Demand


The comparative static analysis of a decrease in demand is illustrated in the exhibit at the right. The market is disrupted when one of the five demand determinants listed above causes a decrease in demand and a leftward shift of the demand curve. This can be seen by clicking the [Demand Decrease] button. The result of this disruption, given the original equilibrium price, is a temporary surplus (click the [Surplus] button).

The surplus then induces a decrease in the price (click the [Price Decrease] button). The price decrease causes a decrease in quantity supplied and an increase in quantity demanded. The result of these quantity changes is a new equilibrium at a lower price and a smaller quantity. Click the [New Equilibrium] button to display this outcome. The comparative static analysis reveals a decrease in the equilibrium price and a decrease in the equilibrium quantity.

A decrease in demand results in a decrease in the equilibrium quantity. The demand shift means that buyers want to buy less. Sellers are willing to accommodate buyers. However, to appease their decreased demand, sellers are able to charge a lower price to cover their decreasing production cost in accordance with the law of supply.

Summarizing the Changes

ShiftQuantity
Change
Price
Change
Demand IncreaseIncreaseIncrease
Demand DecreaseDecreaseDecrease
Comparative static results of the two demand shocks are summarized in the table at the right. A key observation is that equilibrium quantity moves in the SAME direction as the change in demand. If demand increases, then equilibrium quantity increases. If demand decreases and quantity demanded decreases.

However, because the supply curve does NOT shift, the market is constrained to move ALONG the supply curve and follow the law of supply. If the quantity increases, then the price also increases. If the quantity decreases, then so too does the price.

<= DEMAND SCHEDULEDEMAND SPACE =>


Recommended Citation:

DEMAND SHOCK, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: August 13, 2020].


Check Out These Related Terms...

     | demand increase | demand decrease | supply shock | supply increase | supply decrease |


Or For A Little Background...

     | demand determinants | comparative statics | ceteris paribus | economic analysis | graphical analysis | demand curve | equilibrium | equilibrium price | equilibrium quantity | market equilibrium | change in demand | change in supply |


And For Further Study...

     | demand and supply increase | demand and supply decrease | demand increase and supply decrease | demand decrease and supply increase | price ceiling | price floor | supply determinants |


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