ECONOMIC SUPPLY & DEMAND

28 D-43881 : invent ory400.00200.0011110.000.00 50.00 100.00 150.00 200.00WeeksFigure 11: Step in DemandInventory decreases at first due to increased demand. It then overshoots and oscillates toa new equilibrium.#3: The increase in demand causes the desired inventory to immediately shoot up by40 articles of clothing (10 articles per week * 4 weeks of coverage). At the same time,inventory begins to drop because shipments are higher than supply. These cause theinventory ratio to drop, resulting in an increase in price. The price increase causes thedemand to fall and supply to increase allowing the inventory to catch up to the desiredinventory. However, the price continues to rise until the inventory has overshot itsequilibrium value. At this point the inventory ratio becomes positive, causing the price tobegin falling. Although the price is falling, it remains above its equilibrium valuecausing the inventory to continue increasing beyond its equilibrium. Eventually, theprice falls below the equilbrium price and causes the inventory to begin decreasing, butthe inventory again overshoots and the system oscillates to its new equilibrium withinventory equal to about 248. A graph of this behavior is shown in Figure 11.