Economics and Statistics

  You are given the following demand and supply schedules for the U.S foreign exchange market for Mexican pesos: Identify the equilibrium exchange rate and quantity, and draw the demand and supply curves. Then, what would happen to the value of the pesos if the demand for American goods increases? What should we expect to happen to the U.S current account? Assuming the trade balance is by far the biggest variable and the U.S 's current account was equal to 0 before this sudden increase. The equilibrium must be the point that is shared by both the demand and supply schedules. Thus, one pesos is worth about 0.5 U.S dollars (the exchange rate) and there are 6,250,000 pesos supplied at this point, assuming that one p is worth 10 million pesos. Let's graph the demand and supply curves: If the consumers in Mexico want to consume more American goods, then we should expect the supply curve for pesos to shift to the right. This will cause an appreciation of the dollar and depreciation o

We recently talked about the factors that cause a shift in the demand. It is now time to discuss the factors that shift the supply curve which cause the equilibrium price and demand to change. Determinants of Supply: changes in supply are caused by changes in the price of inputs, the number of firms in the market, technology, changes in the price of related goods and services, and changes in expected prices. An increase (decrease) in the price of an input results in less (more) supply as per unit production costs rise (fall). More competition increases supply, and less competition leads to less supply. If a new firm enters the market for good X, then the supply of good X increases. Improvement in technology can result in an increase in the ability of producers to supply their products. For example, the invention of the printing press increased the supply of books. An increase (decrease) in the price of a related good leads to an increase (decrease) in the supply of the other

Whenever there is a shift in the demand or supply curve, the equilibrium price and quantity change. In this post we will explore the impact of a change in the market demand, and the factors that cause these shifts. Determinants of Demand: changes in demand are caused by changes in consumers' tastes, consumers' incomes, and the price of related goods. Consumers' tastes: if the preference for a particular good increases then the demand curve shifts to the right to represent the increase in demand. If there is a decrease in the preference of a good, then the demand decreases which is presented by the shift of the demand curve to the left. Consumers' incomes: the amount of money available to buy goods and services. For normal goods , an increase (decrease) in income results in an increase (decrease) in demand. Change in the price of related goods: Complementary goods: goods that are consumed together, for example buns and hot dogs. If the price of a good decrea

Finding the equilibrium price and quantity is perhaps one of the most common problems in an introduction to Microeconomics  course, which is exactly what we are going to do in this post! Consider the following problem, you are tasked with finding the equilibrium price and quantity for a particular good X.  You are told that the producers are willing and able to sell 2 units for the  price of 16 U.S dollars a unit, and if the price increases, they are able to make 10 units for a price of 20 U.S dollars per unit. Assuming that the supply curve is linear, then it can be modeled by the following equation:   The same process can be used to determine the market demand (assuming linearity and that we are given information about the market demand schedule). At a price of 30 U.S dollars consumers are willing to buy 10 units, if the price decreases to 12 U.S dollars, consumers want to buy 20 units. Thus the demand curve corresponds to this equation: Finally, all we need to d

Since we now know what the demand and supply are in an economic model, we can combine both curves to determine the equilibrium price in the market. A market is in equilibrium at the point where the demand curve intersects the supply curve. In other words, where the supplied quantity is equal to the quantity demanded. The equilibrium price is the point in the market where there is no shortage or surplus. Markets do not automatically reach equilibrium. Instead, it is achieved after a number of trials and errors. The more information both the buyers and suppliers have, the faster the process. If a price is higher than the market equilibrium price, then the quantity supplied is higher than the quantity demanded, this results in a surplus. These excess units of goods produced incentives the producers to reduce the price and thereby reduces the quantity produced until the market reaches equilibrium. If a price is less than the market equilibrium price, then the quantity suppli