Economics: Shift in Supply Curve

domyy

Hello guys,

I have a quick question:

Would a leftward shift of the supply curve result in a shortage?

Pyrrhus

There are important differences.

If the supply is being reduced because of rationing, or because of prices (or generalized costs)?

Typically these "shortages" are measured in terms of welfare losses or gains.

domyy

Take a firm selling very few of a particular product and because of it, it´s price is high.
So we´re talking about a deliberate reduction in supply which causes price to increase, in a sense. That results in a leftward shift of the supply curve. Now, can I say there´s a shortage after this shift?

Pyrrhus

That is the supply side, What do we know about the demand side?

Are the consumers able to substitute this particular product? Do they must necessarily consume a limited amount of this product? (is it water? or XBOX?).

Depending on the demand, and supply, you will get different welfare gains or losses.

If the product is not essential, then prices are likely to lead to less consumption, and you could Consumer's Surplus to get an idea of the utility loss.

Also, what do you mean by "shortage"?

It seems to imply that consumers must meet a quota in their consumption with regards to the good. I think this is reasonable for water, food, and other similar goods. However, for XBOXs, and such likely not.

domyy

Well, let´s say the company relies on the brand. People buy because of the name.

domyy

And people can afford it.

delanis

Hello,

A shortage occurs when the quantity demanded exceeds the quantity supplied.

If there's a shift of the supply curve to the left, and there are no price controls to impede adjustment, the market will move toward the equilibrium.


ETA: No shortage would occur in this particular circumstance

domyy

Take stores selling very expensive handmade gala dresses. Because it´s handmade, there are very few of those around. Its scarcity causes the price of the dresses to rise.

domyy

With a leftward shift of the supply curve, demand will then be greater than supply, and that will cause price to rise. Would that be correct?

Pyrrhus

The issue is what the author wants to accomplish from his/hers economic model.

Yes the definition of shortage is demand exceeds supply. However, you must understand that this static models can only show what happens from one equilibrium point to another. Thus, if you change the price or you ration the product, you will get a new equilibrium point. Given those two equilibrium points you can "measure" the welfare gains or losses. That is what I am trying to get at. However, your welfare results will vary depending on the policy that changes the equilibrium points.

If you care about the dynamics (how consumers change to between equilibrium points), then you should consider a dynamic form of the problem.

There are other issues that may be of interest depending whether strategic behavior should be considered.

domyy

Oh I guess I understand. So you´re saying the new equilibrium is set at the the high price and which is established in this new equilibrium point now.

domyy

What I am trying to understand is what happens to the overall view of the graph.

delanis

There is a new intersection of the supply and demand curves.
That becomes the new equilibrium.
http://www.colorado.edu/Economics/co...gifs/fig62.gif

Increase in price, decrease in quantity

Pyrrhus is not incorrect, but I believe he may be delving too deep into the question.
I'm assuming a simple comparative statics model that one would analyze in a principles class.

Pyrrhus

Yes. I am trying to ascertain domyy's purpose. I guess an easier way would have been to ask is this just your standard textbook problem?.

The problem is like I said from the beginning depends on what you think moving the supply function will affect the consumers. Thus, yes if you move it to the left, you get the classical result, and you can calculate the consumer surplus because of the change of price, and there is your answer.

More interesting problem will be to consider a case where the Consumer MUST meet a certain quota, and then the result varies.

domyy

Thanks!

domyy

Thank both of you. You guys were a great help :)