# Karina Consumption Theory Summary

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Name: Karina Permata Sari (29115447) Program: GM 2

!onsum"tion #\$eor

!om"arati%e Statics &na'sis

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.

. !e"in by assumin" the model is in equilibrium.#. \$ntroduce a chan"e in the model. \$n so doin", a condition of disequilibrium is created.

%. &ind the new point at which equilibrium is restored.'. (ompare the new equilibrium point with the ori"inal one.

S\$ortun Mar*et !\$anges: #\$e +ationing ,unction- o. Price

The short)run itself is a period time in which sellers already in the market respond to a

chan"e in equilibrium price by ad*ustin" the amount of certain, resources which economists

call variable inputs. +amples of such inputs are labor hours and raw materials. - short)run

ad*ustment by sellers can be envisioned as a movement alon" a particular supply curve. \$t also

a period of time in which buyers already in the market respond to chan"es in equilibrium price

by ad*ustin" the quantity demanded for a particular "ood or service. - short)run ad*ustment by

buyers can be envisioned as a movement alon" a particular demand curve.

Short)run market chan"es formed a new market equilibrium price from the old one. The

analysis is as follows: -n increase in demand causes equilibrium price and quantity to rise. &i"ure 1a/

- decrease in demand causes equilibrium price and quantity to fall. &i"ure 1b/

-n increase in supply causes equilibrium price to fall and quantity to rise. &i"ure 1c/

- decrease in supply causes equilibrium price to rise and quantity to fall. &i"ure 1d/

The shift in demand or supply has in effect created either a shorta"e or a surplus at the

ori"inal price. Thus, the equilibrium price has to rise or fall to clear the market. When themarket price chan"es to eliminate the imbalance between quantities supplied and demanded, it

is servin" what economists call the rationin" function of price. The term rationin" is often

associated with shorta"es, but we define it to also include a surplus situation.

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Figure 1 Changes in Supply and Demand and Their Short-Run Impact on Market Equilirium !TheRationing Function o" #rice\$

/ongun Mar*et &na'sis: #\$e +Gui0ing- or +&''ocating ,unction o. Price

0on")un itself is a period time in which new sellers may enter a market or the ori"inal

sellers may eit from a market. This period is lon" enou"h for eistin" sellers to either

increase or decrease their fied factors of production. +amples of fied factors include

property, plant, and equipment. - lon")run ad*ustment by sellers can be seen "raphically as a

shift in a "iven supply curve. 2ot only that, 0on")un is also a period of time in which buyers

may react to a chan"e in equilibrium price by chan"in" their tastes and preferences or buyin"

patterns. The Wall Street 3ournal and other sources of business news may refer to this as a

4structural chan"e4 in demand./ - lon")run ad*ustment by buyers can be seen "raphically as a

shift in a "iven demand curve.

0on")run market analysis pretty much describe price chan"es serve as a "uidin"

function si"nalin" producers or consumers to put more or less of their resources in the

affected markets. The analysis is as follows:

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Supply increases as new sellers enter the market and ori"inal sellers increase production

capacity. Supply decreases as less profitable firms or those eperiencin" losses eit the market or

decrease production capacity. 5emand increases as tastes and preferences of consumers eventually chan"e in favor of

the product relative to substitutes. 5emand decreases as tastes and preferences of consumers eventually chan"e away from

the product and toward the substitutes

Su""' eman0 an0 Price: #\$e Manageria' !\$a''enge

- critical factor that mana"ers must consider when makin" decisions such as the pricin"

of products and the allocation of a company6s scarce resource is the market environment in which

their company is competin". \$n the etreme case, the forces of supply and demand are the sole

determinants of market price. This type of market is called 4perfect competition.4 7ana"ers

operatin" in perfectly competitive markets are simply price takers4 tryin" to earn a profit bymakin" decisions about the allocation of resources based on their short) and lon")run assessment

of the movements of supply, demand, and prices.

There are other types of competitive markets in which firms act as 4price makers4 by

eercisin" varyin" de"rees of control over the price of their product. We refer to this type of

market as 4imperfectly competitive4 and the control of market price as 7arket 8ower. This

power to stron"ly influence market price may stem from these firms6 ability to differentiate their

product throu"h advertisin", brand name, or special features or add)on services. -lso, many

oli"opolistic firms hold etremely lar"e shares of the market, and their sheer size enables them to

dictate prices. 2onetheless, supply and demand do establish the overall framework in which

prices are set. &or eample, re"ardless of how stron" the market power of a firm, it would be

etremely difficult for it to raise prices in the face of fallin" or slu""ish market demand.