Additional Examples of Supply and Demand Chapter 3A This appendix provides additional examples of demand and supply analysis using real-world economic occurrences. This is helpful for those trying to understand or explain current events. Additional Examples of Supply and Demand Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Lettuce Supply shifts left for lettuce Weather destroys part of the crop Demand doesn’t change Consumers still want as much lettuce as before Equilibrium price rises which will reduce the quantity demanded As a result of bad weather, the supply of lettuce decreases and shifts to the left, but demand has not changed because there haven’t been any changes in any of the determinants of demand. When supply decreases, equilibrium price increases and quantity falls. LO7

Lettuce S2 S1 P2 Price (per pound) P1 D1 Q2 Q1 Quantity (pounds) LO7 This market represents the demand and supply of lettuce. Freezing weather decreases the supply of lettuce reflecting lower quantities supplied at every price. The demand for lettuce remains the same after the freeze. The price of lettuce rises and the quantity available in the market is reduced. D1 Q2 Q1 Quantity (pounds) LO7

Exchange Rates Exchange rates are the price of one country’s currency in terms of another country’s currency Currency appreciation Currency depreciation Currency appreciation means the value of one of the currencies, in terms of the other, has increased. Currency depreciation means the value of one of the currencies, in terms of the other, has decreased. LO7

Exchange Rates S1 $1.50 Dollar price of 1 euro $1.25 D2 D1 Q1 Q2 Currency appreciation can occur as the demand for a country’s product increases around the world, the demand for that country’s currency will increase. This increases the value of that country’s currency. Currency depreciation can occur as the home country sells more of the home country’s currency to buy the other currency; this has increased the supply of the home currency which decreases the value of the home currency. In this graph, the demand for euros is increasing causing the euro to appreciate and the US dollar is depreciate. D2 D1 Q1 Q2 Quantity of euros LO7

Pink Salmon Supply shifts right for pink salmon New technology New fishers enter the industry Demand shifts left for pink salmon Increases in consumers’ income Reductions in the price of substitutes Supply shifts due to new technology which increases the catch and lowers the cost of fishing. High profits encourage new fishers to enter the industry. Demand shifts due to increases in consumers’ income causing them to shift away from canned fish such as pink salmon. Reductions in the price of substitutes for pink salmon, such as fresh salmon from the Atlantic, cause the demand for pink salmon to fall. LO7

Pink Salmon S1 S2 P1 Price (per pound) P2 D1 D2 Q1 Q2 As a result of the changes in the pink salmon market, supply shifts to the right and demand shifts to the left. In this example, the supply shift was greater than the shift in demand therefore the result is a lower price and higher quantity. D1 D2 Q1 Q2 Quantity (in pounds) LO7

Gasoline Supply of gasoline decreases Refinery breakdowns Mideast politics and warfare Rising price of oil Demand for gasoline increases Consumers’ incomes increased Low mileage SUVs popular The supply curve for gasoline shifts left due to a decrease in the number of producers, and increases in input costs (oil). The demand curve shifts to the right due to increases in consumers’ income which causes an increase in the demand for the normal good (gasoline) and increased use of automobiles that do not get very good gasoline mileage. LO7

Gasoline S2 S1 P2 Price (per gallon) P1 D2 D1 Q1 Q2 An increase in the demand for gasoline, as shown by the shift from D1 to D2, coupled with a decrease in supply, as shown by the shift from S1 to S2, boosts equilibrium price (here from P1 to P2). In this case, equilibrium quantity increases from Q1 to Q2 because the increase in demand outweighs the decrease in supply. D2 D1 Q1 Q2 Quantity (in gallons) LO7

Sushi Supply shifts right Increase in the number of sushi bars Demand shifts right Consumers’ tastes for sushi increases With the increase in the number of sushi bars, there is an increase in the number of sellers; this increases the supply of sushi and shifts the supply curve to the right. A preferable change in tastes for sushi causes demand to increase and the demand curve to shift to the right. LO7

Sushi S1 S2 Price (per pound) P1 D2 D1 Q1 Q2 Quantity (pounds) LO7 Equal increases in the demand for sushi, as from D1 to D2, and in the supply of sushi, as from S1 to S2, expand the equilibrium quantity of sushi (here from Q1 to Q2) while leaving the price of sushi unchanged at P1. D2 D1 Q1 Q2 Quantity (pounds) LO7

Land in San Francisco Vertical supply curve Quantity supplied fixed and unresponsive to price changes Demand increase causes price to rise but quantity stays the same Demand decrease causes price to fall but quantity stays the same Explains high real estate prices in cities When a supply curve is upsloping, any change in demand is tempered by a change in quantity supplied. However, when the supply curve is vertical and fixed, any change in demand only results in changes in price; the quantity supplied stays the same no matter what the price is. There is only so much land available in major cities, like San Francisco, therefore when demand increases, the only market response is an increase in price. LO7

Land in San Francisco S1 P2 Price (per acre) P1 D2 D1 Q0 Because the quantity of land in San Francisco is fixed, the supply curve is vertical and parallel to the vertical axis. Therefore, when demand changes the only market response is a change in price. In this graph, the demand for land in San Francisco increases from D1 to D2 and causing price to rise from P1 to P2. The supply is the same no matter what the price is. D2 D1 Q0 Quantity of land (acres) LO7

Preset Prices Preset prices can cause market imbalances Olympics figure skating finals Preset price results in a shortage of tickets Olympics curling preliminaries Preset prices result in a surplus of tickets Due to the shortage of tickets in the formal market, a secondary market develops and tickets sell for higher prices. It is safe to assume that the shortage was caused by the original price being set too low. Contrast this to the surplus of tickets to the curling preliminaries. Demand is low for this event and tickets were priced too high causing the stands to be relatively empty. Event officials should lower the price to sell more tickets. LO7

Preset Prices Price (per ticket) Price (per ticket) Figure Skating P Figure Skating Quantity (tickets) Price (per ticket) P Curling Quantity (tickets) Price (per ticket) S S Surplus a b P2 P2 P1 b a P1 In the market for tickets to the Olympic women’s figure skating finals the demand curve, D, and supply curve, S, produce an equilibrium price that is above the P1 price printed on the ticket. At price P1 the quantity of tickets demanded, Q2, greatly exceeds the quantity of tickets available (Q1). The resulting shortage of ab (= Q2-Q1) gives rise to a legal, or illegal, secondary market. In the market for tickets to the Olympic curling preliminaries the demand curve, D, and supply curve, S, produce an equilibrium price below the P1 price printed on the ticket. At price P1 the quantity of tickets demanded is less than the quantity of tickets available. The resulting surplus of ba (= Q1-Q2) means the event is not sold out. Shortage D D Q1 Q2 Q2 Q1 LO7