MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Supply and Demand, Part II

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 2 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

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 3 An Increase in Quantity Demanded vs. an Increase in Demand Price ($/unit) Quantity (1000s of units/day) D D Units of cheap plastic crap More is demanded in response to lower price

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 4 An Increase in Quantity Demanded vs. an Increase in Demand Price ($/unit) Quantity (1000s of units/day) More is demanded at any price D D D’D’ D’D’ Units of cheap plastic crap

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 5 Predicting and Explaining Changes in Prices and Quantities 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

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 6 An Increase in Quantity Supplied vs. an Increase in Supply Price ($/can) Quantity (1000s of cans/day) S S Increase in quantity supplied as a result of change in price

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 7 An Increase in Quantity Supplied vs. an Increase in Supply Price ($/can) Quantity (1000s of cans/day) S 068 S S’S’ S’S’ Increase in supply at any price

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 8 Shifts in demand

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 9 The Effect on the Demand for Electricity of this Summer’s heat wave Price ($/kwh) Quantity (million kilowatts/day) 0.08 S D 40 D’D’

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

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 11 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.

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 12 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

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

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 14 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?

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 15 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

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 16 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

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 17 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 NON- MARKET GOOD

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

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

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 20 Shifts in supply

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

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 22 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

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 23 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

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 24 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

MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 25 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?

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

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

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

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

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