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.
2.
3.
4.
5.

State the assumptions needed to construct the model.

Begin by assuming the model is in equilibrium.
Introduce a change in the model. In so doing, a condition of disequilibrium is created.
Find the new point at which equilibrium is restored.
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. (Figure 1c)
A decrease in supply causes equilibrium price to rise and quantity to fall. (Figure 1d)
The shift in demand or supply has in effect created either a shortage or a surplus at the
original price. Thus, the equilibrium price has to rise or fall to clear the market. When the
market price changes to eliminate the imbalance between quantities supplied and demanded, it
is serving what economists call the rationing function of price. The term rationing is often
associated with shortages, but we define it to also include a surplus situation.

Figure 1 Changes in Supply and Demand and Their Short-Run Impact on Market Equilibrium (The
Rationing Function of Price)

Long-Run Market Analysis: The Guiding or Allocating Function of Price

Long-Run itself is a period time in which new sellers may enter a market or the original
sellers may exit from a market. This period is long enough for existing sellers to either
increase or decrease their fixed factors of production. Examples of fixed factors include
property, plant, and equipment. A long-run adjustment by sellers can be seen graphically as a
shift in a given supply curve. Not only that, Long-Run is also a period of time in which buyers
may react to a change in equilibrium price by changing their tastes and preferences or buying
patterns. (The Wall Street Journal and other sources of business news may refer to this as a
"structural change" in demand.) A long-run adjustment by buyers can be seen graphically as a
shift in a given demand curve.
Long-run market analysis pretty much describe price changes serve as a guiding
function signaling producers or consumers to put more or less of their resources in the
affected markets. The analysis is as follows:

 Supply increases as new sellers enter the market and original sellers increase production
capacity.
Supply decreases as less profitable firms or those experiencing losses exit the market or
decrease production capacity.
Demand increases as tastes and preferences of consumers eventually change in favor of
the product relative to substitutes.
Demand decreases as tastes and preferences of consumers eventually change away from
the product and toward the substitutes

Supply, Demand, and Price: The Managerial Challenge

A critical factor that managers must consider when making decisions such as the pricing
of products and the allocation of a company's scarce resource is the market environment in which
their company is competing. In the extreme case, the forces of supply and demand are the sole
determinants of market price. This type of market is called "perfect competition." Managers
operating in perfectly competitive markets are simply price takers" trying to earn a profit by
making decisions about the allocation of resources based on their short- and long-run assessment
of the movements of supply, demand, and prices.
There are other types of competitive markets in which firms act as "price makers" by
exercising varying degrees of control over the price of their product. We refer to this type of
market as "imperfectly competitive" and the control of market price as Market Power. This
power to strongly influence market price may stem from these firms' ability to differentiate their
product through advertising, brand name, or special features or add-on services. Also, many
oligopolistic firms hold extremely large shares of the market, and their sheer size enables them to
dictate prices. Nonetheless, supply and demand do establish the overall framework in which
prices are set. For example, regardless of how strong the market power of a firm, it would be
extremely difficult for it to raise prices in the face of falling or sluggish market demand.