Double Shifts and Consumer Surplus
Double Shifts Suppose the demand for sports cars fell at the same time as production technology improved. Use S&D Analysis to show what will happen to PRICE and QUANTITY. If TWO curves shift at the same time, EITHER price or quantity will be indeterminate.
Shifting both Supply and Demand Suppose the demand for sports cars fell at the same time as production technology improved. Demand Falls Tech. Improves Final Result Price Quantity Price Price S S S1 P1 ? P1 P2 P2 D D D1 Qty. Qty. Q2 Q1 Q1 Q2 Result: Price Quantity Result: Price Quantity X X
Shifting both Supply and Demand #2 Suppose the demand for the Nintendo Wii U increased at the same time as a nuclear meltdown happened in Japan. Demand Increases Nuclear Meltdown Final Result Price Quantity Price Price S S1 S P2 P2 P1 ? P1 D1 D D Qty. Qty. Q1 Q2 Q2 Q1 Result: Price Quantity Result: Price Quantity X X
Practice
Double Shift Supply and Demand Factors Practice 6
Discussion Question Think of at least 3 items you got a great deal on (you would have paid more $ for these items than you had to).
Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.
Voluntary Exchange Terms Consumer Surplus is the difference between what you are willing to pay and what you actually pay. CS = Buyer’s Maximum – Price Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for. PS = Price – Seller’s Minimum
Example of Consumer & Producer Surplus Ex: You want to buy a truck so you go to the local dealership. You are willing to spend up to $20,000 for a new 4x4. The seller is willing to sell this truck for no less than $15,000. After some negotiation you buy the truck for $18,000. Analysis: Buyer’ Maximum- Sellers Minimum- Price- Consumer’s Surplus- Producer’s Surplus- $20,000 $15,000 $18,000 $2,000 $3,000
Consumer and Producer’s Surplus Calculate the area of: Consumer Surplus Producer Surplus Total Surplus P $10 8 6 $5 4 2 1 S CS CS= $25 PS= $20 Total= $45 PS D 2 4 6 8 10 Q
Practice