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Consumption Theory Summary

In: Business and Management

Submitted By karinaps
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Name: Karina Permata Sari (29115447) Program: GM 2
Business Economics’ Summary

Consumption Theory

Comparative Statics Analysis
We could use comparative statics analysis method to analyze the market with model of market demand, supply, and equilibrium price and quantity. The term statics alludes to the theoretically stable point of equilibrium, and, comparative refers to the comparison of the various points of equilibrium. This method of analysis proceeds as follows: 1. State the assumptions needed to construct the model. 2. Begin by assuming the model is in equilibrium. 3. Introduce a change in the model. In so doing, a condition of disequilibrium is created. 4. Find the new point at which equilibrium is restored. 5. Compare the new equilibrium point with the original one.

* Short-Run Market Changes: The “Rationing Function” of Price
The short-run itself is a period time in which sellers already in the market respond to a change in equilibrium price by adjusting the amount of certain, resources which economists call variable inputs. Examples of such inputs are labor hours and raw materials. A short-run adjustment by sellers can be envisioned as a movement along a particular supply curve. It also a period of time in which buyers already in the market respond to changes in equilibrium price by adjusting the quantity demanded for a particular good or service. A short-run adjustment by buyers can be envisioned as a movement along a particular demand curve.
Short-run market changes formed a new market equilibrium price from the old one. The analysis is as follows: * An increase in demand causes equilibrium price and quantity to rise. (Figure 1a) * A decrease in demand causes equilibrium price and quantity to fall. (Figure 1b) * An increase in supply causes equilibrium price to fall and quantity to rise.…...

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