MB MC Supply and Demand Part II Copyright

Predicting and Explaining Changes in Prices and Quantities MB MC Distinguishing Between A change in the quantity demanded A movement along the demand curve that occurs in response to a change in price A change in demand A shift of the entire demand curve Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 2

MB MC An Increase in Quantity Demanded vs. an Increase in Demand Units of cheap plastic crap Price ($/unit) 6 D More is demanded in response to lower price 5 4 3 2 1 0 Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. D 2 4 12 Quantity (1000 s of units/day) Chapter 3 - Supply and Demand: An Introduction Slide 3

MB MC An Increase in Quantity Demanded vs. an Increase in Demand Price ($/unit) 6 D D’ Units of cheap plastic crap 5 4 3 More is demanded at any price 2 1 0 Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. D’ D 12 Quantity (1000 s of units/day) Chapter 3 - Supply and Demand: An Introduction Slide 4

Predicting and Explaining Changes in Prices and Quantities MB MC Change in the quantity supplied A movement along the supply curve that occurs in response to a change in price Change in supply A shift of the entire supply curve Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 5

MB MC An Increase in Quantity Supplied vs. an Increase in Supply Price ($/can) S 6 5 Increase in quantity supplied as a result of change in price 4 3 2 S 1 0 Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 2 4 6 8 10 Quantity (1000 s of cans/day) Chapter 3 - Supply and Demand: An Introduction Slide 6

MB MC An Increase in Quantity Supplied vs. an Increase in Supply Price ($/can) 6 S S’ 5 4 3 Increase in supply at any price 2 1 S 0 Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 2 S’ 4 6 8 10 Quantity (1000 s of cans/day) Chapter 3 - Supply and Demand: An Introduction Slide 7

MB MC Shifts in demand Copyright c 2004 by The Mc. Graw-Hill Companies, Inc.

MB MC The Effect on the Demand for Electricity of this Summer’s heat wave Price ($/kwh) S 0. 10 0. 08 D’ D 40 Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 58 Chapter 3 - Supply and Demand: An Introduction Quantity (million kilowatts/day) Slide 9

MB MC Effect of the collapse of oceanic fisheries on the demand for fishing boats Price ($/unit) S P P’ D D’ Q’ Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Q Chapter 3 - Supply and Demand: An Introduction Quantity (units/year) Slide 10

MB MC Shifts in Demand Complements Two goods are complements in consumption if: an increase (decrease) in the price of one causes a decrease (increase) in the demand for the other; or if a decrease (increase) in supply of an unpriced good leads to a decrease (increase) in demand for a market good, or vice versa. Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 11

MB MC Shifts in Demand Substitutes Two goods are substitutes in consumption if an increase (decrease) in the price of one causes an increase (decrease) in the demand for the other Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 12

MB MC Effect on the Market for Brazilian Coffee of Low priced imports from Vietnam Price ($/lb) S P P’ D D’ Q’ Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Q Chapter 3 - Supply and Demand: An Introduction Quantity (lbs/year) Slide 13

MB MC Predicting and Explaining Changes in Prices and Quantities Shifts in Demand= Changes In Demand (NOT the same as change in quantity demanded) An increase (decrease) in the demand for a good will shift the demand curve to the right (left) What might cause a change in demand? Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 14

MB MC Predicting and Explaining Changes in Prices and Quantities A Change In Income Normal Good One whose demand increases (decreases) when the incomes of buyers increase (decrease) Inferior Good One whose demand decreases (increases) when the incomes of buyers increase (decrease) Think Slums Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 15

MB MC Factors That Cause an Increase (rightward or upward shift) in Demand 1. A decrease in the price (or increase in supply) of complements to the good or service 2. An increase in the price (or decrease in supply) of substitutes for the good or service 3. An increase in income (for a normal good) 4. ADVERTISING Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 16

MB MC Factors That Cause an Increase in Demand 5. An increased preference by demanders for the good or service 6. An increase in the population of potential buyers 7. An expectation of higher prices in the future SPECULATIVE DEMAND STOCKS 8. Devaluation of the national currency ANY OF THESE WILL CHANGE PRICE, AND CAUSE A CHANGE IN QUANTITY SUPPLIED OF A MARKET GOOD, BUT NOT A NONMARKET GOOD Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 17

MB MC The Effect of an advertising campaign for unhealthy food targeted at children Price D’ = demand after advertising campaign S P’ P D Q Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. D’ Q’ Chapter 3 - Supply and Demand: An Introduction Unhealthy food (meals/snacks per month) Slide 18

MB MC The Effect of a Credible Rumor on depreciation of the dollar D’ = demand after rumor of depreciation Price in Euros S P P’ D’ Q’ Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. D Q Chapter 3 - Supply and Demand: An Introduction Dollars purchased/day Slide 19

MB MC Shifts in supply Copyright c 2004 by The Mc. Graw-Hill Companies, Inc.

MB MC Determinants of supply International markets Weather (especially for ag) Expectations Number of sellers Subsidies, Cartels and other problems left for later Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 21

MB MC What determines supply of natural resources? Non-renewables New discoveries Rate of extraction Renewables Rate of replenishment Rate of extraction Pollution, etc. Ecosystem services Provided Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. by ecosystem structure Chapter 3 - Supply and Demand: An Introduction Slide 22

MB MC Factors That Cause an Increase (rightward or upward shift) in Supply 1. A decrease in the cost of materials, labor, or other inputs used in the production of the good or service 2. An improvement in technology that reduces the cost of producing the good or service 3. New Subsidies 4. An improvement in the weather, especially for agricultural products Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 23

MB MC Factors That Cause an Increase in Supply 5. An increase in the number of suppliers (e. g. foreign countries) 6. An expectation of lower prices in the future 7. Devaluation in the currency of an exporting country 8. ANY OF THESE WILL CAUSE A CHANGE IN PRICE, AND A CHANGE IN QUANTITY DEMANDED Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 24

MB MC What factors will cause a shift in supply of natural resoruces? What happens when the price of fish, timber or oil goes up? To the supply on today’s market (or near future)? To total supply? To supply in the distant future? Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction Slide 25

MB MC Four Rules Governing the Effects of Supply and Demand Shifts: I An increase in demand will lead to an increase in both the equilibrium price and quantity Price S P’ P D Q Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. D’ Q’ Chapter 3 - Supply and Demand: An Introduction Quantity Slide 26

MB MC Four Rules Governing the Effects of Supply and Demand Shifts: II A decrease in demand will lead to a decrease in both the equilibrium price and quantity Price S P P’ D’ Q’ Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. D Q Chapter 3 - Supply and Demand: An Introduction Quantity Slide 27

MB MC Four Rules Governing the Effects of Supply and Demand Shifts: III An increase in supply will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity Price S S’ P P’ D Q Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Q’ Chapter 3 - Supply and Demand: An Introduction Quantity Slide 28

MB MC Four Rules Governing the Effects of Supply and Demand Shifts: IV An decrease in supply will lead to an increase in the equilibrium price and a decrease in the equilibrium quantity Price S’ S P’ P D Q’ Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Q Chapter 3 - Supply and Demand: An Introduction Quantity Slide 29

MB MC The Effects of Simultaneous Shifts in Supply and Demand The Market for Corn Tortilla Chips Price ($/bag) S S’ S’ after introduction of GMOs P D’ after discovery that allergenic GMOs entered the food supply P’ D D’ Q’ Copyright c 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Q Chapter 3 - Supply and Demand: An Introduction Millions of bags per month Slide 30