MB MC
Supply and Demand, Part II
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
MB MC

Predicting and Explaining
Changes in Prices and Quantities
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 McGraw-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
($/unit)
6
D
More is demanded in response
to lower price
5
4
3
2
1
0
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
D
2
4
12
Quantity
(1000s of units/day)
Chapter 3 - Supply and Demand: An Introduction
Slide 3
MB MC
An Increase in Quantity
Demanded vs. an Increase in Demand
Price
($/unit)
6
D
D’
Units of cheap plastic crap
5
4
3
More is demanded
at any price
2
D’
1
0
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
D
12
Quantity
(1000s of units/day)
Chapter 3 - Supply and Demand: An Introduction
Slide 4
MB MC

Change in the quantity supplied


Predicting and Explaining
Changes in Prices and Quantities
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 McGraw-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
($/can)
S
6
5
Increase in
quantity supplied
as a result of
change in price
4
3
2
S
1
0
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
2
4
6
8
10
Quantity
(1000s of cans/day)
Chapter 3 - Supply and Demand: An Introduction
Slide 6
MB MC
An Increase in Quantity
Supplied vs. an Increase in Supply
Price
($/can)
6
S
S’
5
4
3
Increase in supply
at any price
2
1
S
0
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
2
S’
4
6
8
10
Quantity
(1000s of cans/day)
Chapter 3 - Supply and Demand: An Introduction
Slide 7
MB MC
Shifts in demand
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 8
MB MC
The Effect on the Demand for Electricity
of this Summer’s heat wave
Price
($/kwh)
S
0.10
0.08
D
D
40
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
’
58
Chapter 3 - Supply and Demand: An Introduction
Quantity
(million kilowatts/day)
Slide 9
MB MC
Effect of the collapse of oceanic fisheries on
the demand for fishing boats
Price
($/unit)
S
P
P’
D
D
Q’
Copyright c 2004 by The McGraw-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 McGraw-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 McGraw-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 McGraw-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 McGraw-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 McGraw-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 McGraw-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 AND 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 McGraw-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
D’ = demand after advertising
campaign
Price
S
P’
P
D
D
Q
’
Q
’
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
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
Q
D
’
Dollars
purchased/day
’
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 19
MB MC
Shifts in supply
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 20
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 McGraw-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 by ecosystem structure
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
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 McGraw-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 McGraw-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 McGraw-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
D’
Quantity
Q
Q
’
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
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
D
’
Q’
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Quantity
Q
Chapter 3 - Supply and Demand: An Introduction
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 McGraw-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 McGraw-Hill
Companies, Inc. All rights reserved.
Quantity
Q
Chapter 3 - Supply and Demand: An Introduction
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 McGraw-Hill
Companies, Inc. All rights reserved.
Q
Chapter 3 - Supply and Demand: An Introduction
Millions of bags
per month
Slide 30