1. Supply and Demand Chapter 3 Slides created by Dr. Amy Scott
©2010  Worth Publishers 1

2. WAKE UP AND DON’T SMELL THE COFFEE
Who decided to raise the prices of coffee beans?
Nobody: prices went up because of events outside anyone’s control.
The main cause of rising bean prices was a significant decline in the supply of coffee beans from the world’s two leading coffee exporters: Brazil and Vietnam.
In this chapter, we lay out the pieces that make up the supply and demand model,, and show how this model can be used to understand how many markets behave.

3. Chapter Objectives Competitive Market Supply and demand model
Demand curve
The difference between movements along a curve and shifts of a curve
Supply curve
Equilibrium price and quantity as determined by supply and demand curves
Shortage or surplus and how price moves the market back to equilibrium
New equilibrium after shifts of the curves 3

4. Competitive Market A competitive market is:
Has many buyers and sellers
Offers same good or service
No individual’s actions have a noticeable effect on the price at which the good or service is sold.
In other words: no one party can influence price
Behavior of this type of market is well described by Supply and Demand

5. Supply and Demand Model
The supply and demand model is a model of how a competitive market works.
It has five key elements:
Demand curve
Supply curve
Demand and supply curve shifts
Market equilibrium
Changes in the market equilibrium

6. Demand Curve
A demand curve is the graphical representation of the demand schedule;
it shows how much of a good or service consumers want to buy at any given price.
Law of Demand: A higher a price for a good, other things equal, leads people to demand smaller quantities of that good.

7. Demand Schedule
A demand schedule shows how much of a good or service consumers will want to buy at different prices.
7.1
7.5
8.1
8.9
10.0
11.5
14.2
Price of coffee beans (per pound)
Quantity of coffee beans demanded (billions of pounds)
1.75
1.50
1.25
1.00
0.75
0.50
$2.00
Demand Schedule for Coffee Beans

8. Demand Curve
A demand curve is the graphical representation of the demand schedule; it shows how much of a good or service consumers want to buy at any given price.
Price of coffee bean (per gallon)
$2.00
Demand curve, D
1.75
1.50
1.25
1.00
Figure Caption:
Figure 3-1: The Demand Schedule and the Demand Curve
The demand schedule for coffee beans yields the corresponding demand curve, which shows how much of a good or service consumers want to buy at any given price. The demand curve and the demand schedule reflect the law of demand: As price rises, the quantity demanded falls. Similarly, a decrease in price raises the quantity demanded. As a result, the demand curve is downward sloping.
0.75
As price rises, the quantity demanded falls
0.50 7 9 11 13 15 17
Quantity of coffee beans (billions of pounds)

9. Pay More, Pump Less
Because of high taxes, gasoline and diesel fuel are more than twice as expensive in most European countries as in the United States.
According to the law of demand, Europeans should buy less gasoline than Americans, and they do: Europeans consume less than half as much fuel as Americans, mainly because they drive smaller cars with better mileage.

10. An Increase in Demand
An increase in the population and other factors generate an increase in demand – a rise in the quantity demanded at any given price.
This is represented by the two demand schedules - one showing demand in 2002, before the rise in population, the other showing demand in 2009, after the rise in population.
Demand Schedules for Coffee Beans
Quantity of coffee beans demanded (billions of pounds)
Price of coffee beans (per pound)
in 2002
in 2009
$2.00
7.1
8.5
1.75
7.5
9.0
1.50
8.1
9.7
1.25
8.9
10.7
1.00
10.0
12.0
0.75
11.5
13.8
0.50
14.2
17.0

11. An Increase in Demand Increase in population  more coffee drinkers
Price of coffee beans (per gallon)
$2.00 2
Increase in population 
more coffee drinkers
1.75
Demand curve in 2009
1.50
1.25
1.00
0.75
Figure Caption:
Figure 3-2: An increase in demand
An increase in the population and other factors generate an increase in demand—a rise in the quantity demanded
at any given price. This is represented by the two demand schedules—one showing demand in 2002, before the rise in population, the other showing demand in 2009, after the rise in population—and their corresponding demand curves. The increase in demand shifts the demand curve to the right.
Demand curve in 2002
0.50 D D 1 7 9 11 13 15 17
Quantity of coffee beans (billions of pounds)
A shift of the demand curve is a change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position, denoted by a new demand curve.

12. Movement Along the Demand Curve
A movement along the demand curve is a change in the quantity demanded of a good that is the result of a change in that good’s price.
A shift of the demand curve…
Price of coffee beans (per gallon)
$2.00
1.75
… is not the same thing as a movement along the demand curve A C
1.50
1.25 B
1.00
0.75
Figure Caption:
Figure 3-3: Movement Along the Demand Curve Versus Shift of the Demand Curve
The rise in quantity demanded when going from point A to point B reflects a movement along the demand curve: it is the result of a
fall in the price of the good. The rise in quantity demanded when going from point A to point C reflects a shift of the demand curve:
it is the result of a rise in the quantity demanded at any given price.
Notes to the Instructor: It is very important that the students can distinguish between a “shift” and a “movement along” a curve.
I also give the students the general rule: any change in the value of the variables on the vertical and horizontal axis causes a “movement along” the curve. To generate a shift, we need an outside shock (change in the value of outside - exogenous – variables, which we were assuming to be constant (Ceteris Paribus)), such as population, tastes, etc…
This is also a good opportunity to underline the difference between “demand” and “quantity demanded”.
In ordinary speech most people, including professional economists, use the word demand casually. For example, an economist might say “the demand for air travel has doubled over the past 15 years, partly because of falling air fares” when he or she really means that the quantity demanded has doubled. It’s OK to be a bit sloppy in ordinary conversation. But when you’re doing economic analysis, it’s important to make the distinction between changes in the quantity demanded, which involve movements along a demand curve, and shifts of the demand curve.
0.50 D D 1 2 7
8.1
9.7 10 13 15 17
Quantity of coffee beans (billions of pounds)

13. Shifts of the Demand Curve
A “decrease in demand”, means a leftward shift of the demand curve: at any given price, consumers demand a smaller quantity than before. (D1D3)
Shifts of the Demand Curve
Price
Increase in demand
An “increase in demand” means a rightward shift of the demand curve: at any given price, consumers demand a larger quantity than before. (D1D2)
Figure Caption:
Figure 3-4: Shifts of the Demand Curve
Any event that increases demand shifts the demand curve to the right, reflecting a rise in the quantity demanded at any given price. Any event that decreases demand shifts the demand curve to the left, reflecting a fall in the quantity demanded at any given price.
Decrease in demand D D D 3 1 2
Quantity

14. Demand versus Quantity Demanded
A shift of the demand curve is a change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position, denoted by a new demand curve.
A movement along the demand curve is a change in the quantity demanded of a good that is the result of a change in that good’s price.

15. What Causes a Demand Curve to Shift?
Changes in the Prices of Related Goods
Substitutes: Two goods are substitutes if a fall in the price of one of the goods makes consumers less willing to buy the other good.
Ex., Coke vs. Pepsi
Complements: Two goods are complements if a fall in the price of one good makes people more willing to buy the other good.
Ex., Hot dogs and Hot Dog buns
Notes to the Instructor:
Substitutes: Ex.: muffins and donuts, cereal and oatmeal, ….
Complements: Ex: squash balls and squash racquets, iPod and earphones,…
Class exercise questions:
- What would be the effect of a sharp increase in the price of squash balls on the demand for squash racquets? Why?
- What would be the effect of a sharp increase in the price of Pepsi on the demand for Coke? Why?
An interesting example from current events is the debate on building casinos in Massachusetts. Opponents argue that building casinos in Massachusetts would cause a decline in state lottery revenues. This constitutes an example of substitutes. (Although the expected revenue decrease is only about 6%).

16. What Causes a Demand Curve to Shift?
2. Changes in Income
Normal Goods: When a rise in income increases the demand for a good – that good is a normal good.
Inferior Goods: When a rise in income decreases the demand for a good, it is an inferior good.
3. Changes in Tastes
4. Changes in Expectations
5. Changes in number of consumers
Notes to the Instructor:
Class exercise questions:
-As Talya’s income goes up, she buys less “instant noodles”. What kind of a good is “instant noodles” for Talya?
- Following David Beckham and Sting, more men start to follow the fashion of wearing skirts. What would the effect of this change in tastes be on the demand for skirts?
-Scientists announce that there will be no fish left in the oceans in 5 years. What would be the effect of this announcement on demand for sushi?

17. Individual Demand Curve and the Market Demand Curve
The market demand curve is the horizontal sum of the individual demand curves of all consumers in that market.
(a)
Darla’s Individual Demand Curve
(b)
Dino’s Individual Demand Curve
(c)
Market Demand Curve
Price of coffee beans (per pound)
Price of coffee beans (per pound)
Price of coffee beans (per pound) $2 $2 $2
Figure Caption:
Figure 3-5: Individual Demand Curves and the Market Demand Curve
Darla and Dino are the only two consumers of coffee beans in the market. Panel (a) shows Darla’s individual demand curve: the number of pounds of coffee beans she will buy per year at any given price. Panel (b) shows Dino’s individual demand curve. Given that Darla and Dino are the only two consumers, the market demand curve, which shows the quantity of coffee demanded by all consumers at any given price, is shown in panel (c). The market demand curve is the horizontal sum of the individual demand curves of all consumers. In this case, at any given price, the quantity demanded by the market is the sum of the quantities demanded by Darla and Dino. D
Market 1 1 1 D D
Darla
Dino 20 30 10 20 30 40 50
Quantity of coffee beans (pounds)
Quantity of coffee beans (pounds)
Quantity of coffee beans (pounds)

18. Beating the Traffic
All cities have traffic problems and many local authorities try to discourage driving to the city.
In 2003, London imposed a ‘congestion charge’ of £8 (about $13) on all cars entering the city during business hours. If people pay the day after they have driven then the charge increases to £10 (about $16). If they don’t pay and get caught the fine is £120 (about $195).
The result of this new policy confirms the law of demand: three years after the charge was put in place, traffic in central London was about 10 percent lower than before the charge.

19. Explain whether each of the following events represents (i) a shift of the demand curve or (ii) a movement along the demand curve
C. People buy more long-stem roses the week of Valentine’s Day, even though the prices are higher than at other times during the year.
This represents a shift of the demand curve.
This represents a movement along the demand curve.
D. The sharp rise in the price of gasoline leads many commuters to join carpools in order to reduce their gasoline purchases.
c. The demand for roses increases the week of Valentine’s Day. This is a rightward shift of the demand curve.
d. The quantity of gasoline demanded falls in response to a rise in price. This is a movement along the demand curve.
This represents a shift of the demand curve.
This represents a movement along the demand curve.

20. Supply Curve
A supply curve is the graphical representation of the supply schedule;
it shows how much of a good or service producers are willing to sell at any given price.
Law of Supply: A higher price for a good, other things equal, the greater the quantities of that good is produced.

21. Supply Schedule for Coffee Beans
A supply schedule shows how much of a good or service would be supplied at different prices.
Supply Schedule
Supply Schedule for Coffee Beans
Price of
coffee beans
(per pound)
Quantity of
supplied
(billions of pounds)
$2.00
11.6
1.75
11.5
1.50
11.2
1.25
10.7
1.00
10.0
0.75
9.1
0.50
8.0
Figure Caption:
Figure 3-6: The Supply Schedule and the Supply Curve
The supply schedule for coffee beans is plotted to yield the corresponding supply curve, which shows how much of a good producers are willing to sell at any given price. Just as the quantity of coffee beans that consumers want to buy depends on the price they have to pay, the quantity that producers are willing to produce and sell—the quantity supplied—depends on the price they are offered.
The Coffee Song Written By:  Bob Hilliard / Richard Miles Way down among Brazilians Coffee beans grow by the billions So they’ve got to find those extra cups to fill They’ve got an awful lot of coffee in Brazil You can’t get cherry soda Cause they’ve gotta sell their quota And the way things are I guess they never will They’ve got an awful lot of coffee in Brazil No tea or tomato juice You’ll see no potato juice Cause the planters down in Santos All say no, no, no A politican’s daughter Was accused of drinkin’ water And was fined a great big fifty dollar bill They’ve got an awful lot of coffee in Brazil When Brazilian ham and eggs need savor Coffee ketchup gives ‘em flavor Coffee pickles way outsell the dill Why they put coffee in their coffee in Brazil You date a man and find out later He smells like a percolator His cologne was made right on the grill Hey they could percolate the ocean in Brazil Don’t ask for hot cocoa there They’ll say you’ve gone loco there But say caffeine or coffee bean and they’ll say ay ay ay So you’ll add to the local color Serve some coffee with a cruller Dunkin doesn’t take alot of skill They’ve got an awful lot of coffee A great big pot of coffee They’ve got an awful lot of coffee In Brazil, Brazil, Brazil Cafe ole Yeah

22. Supply Curve
Price of coffee beans (per pound)
Supply curve, S
A supply curve shows graphically how much of a good or service people are willing to sell at any given price.
$2.00
1.75
As price rises, the quantity supplied rises.
1.50
1.25
1.00
0.75
Figure Caption:
Figure 3-6: The Supply Schedule and the Supply Curve
The supply curve and the supply schedule reflect the fact that supply curves are usually upward sloping: the quantity supplied rises when the price rises.
0.50 7 9 11 13 15 17
Quantity of coffee beans (billions of pounds)

23. Supply Schedule for Coffee Beans
An Increase in Supply
Supply Schedule for Coffee Beans
Price of coffee beans
(per pound)
Quantity of beans supplied
(billions of pounds)
Before entry
After entry
$2.00
11.6
13.9
1.75
11.5
13.8
1.50
11.2
13.4
1.25
10.7
12.8
1.00
10.0
12.0
0.75
9.1
10.9
0.50
8.0
9.6
The entry of Vietnam into the coffee bean business generated an increase in supply—a rise in the quantity supplied at any given price.
This event is represented by the two supply schedules—one showing supply before Vietnam’s entry, the other showing supply after Vietnam came in.
Figure Caption:
Figure 3-7: An increase in supply
The entry of Vietnam into the coffee bean business generated an increase in supply—a rise in the quantity supplied at any given price. This event is represented by the two supply schedules—one showing supply before Vietnam’s entry, the other showing supply after Vietnam came in—and their corresponding supply curves. The increase in supply shifts the supply curve to the right.

24. An Increase in Supply Vietnam enters coffee bean business 2 S 1
$2.00
Price of coffee beans (per pound)
A movement along the supply curve…
1.75
1.50
Vietnam enters coffee bean business 
more coffee producers
1.25
1.00
… is not the same thing as a shift of the supply curve
0.75
Figure Caption:
Figure 3-7: An increase in supply
The entry of Vietnam into the coffee bean business generated an increase in supply—a rise in the quantity supplied at any given price. This event is represented by the two supply schedules—one showing supply before Vietnam’s entry, the other showing supply after Vietnam came in—and their corresponding supply curves. The increase in supply shifts the supply curve to the right.
0.50 7 9 11 13 15 17
Quantity of coffee beans (billions of pounds)
A shift of the supply curve is a change in the quantity supplied of a good at any given price.

25. Movement Along the Supply Curve Versus Shift of the Supply Curve
Price of coffee beans (per pound)
A movement along the supply curve… 1 2
$2.00
1.75
1.50 B
1.25 A
1.00 C
… is not the same thing as a shift of the supply curve
0.75
0.50
Figure Caption:
Figure 3-8: Movement Along the Supply Curve Versus Shift of the Supply Curve
The increase in quantity supplied when going from point A to point B reflects a movement along the supply curve: it is the result of a rise in the price of the good. The increase in quantity supplied when going from point A to point C reflects a shift of the supply curve: it is the result of an increase in the quantity supplied at any given price. 7 10
11.2 12 15 17
Quantity of coffee beans (billions of pounds)
A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that good’s price.

26. Shifts of the Supply Curve
Any “decrease in supply” means a leftward shift of the supply curve: at any given price, there is a decrease in the quantity supplied. (S1 S3)
Any “increase in supply” means a rightward shift of the supply curve: at any given price, there is an increase in the quantity supplied. (S1 S2)
Price S S S 3 1 2
Increase in supply
Figure Caption:
Figure 3-9: Shifts of the Supply Curve
Any event that increases supply shifts the supply curve to the right, reflecting a rise in the quantity supplied at any given price. Any event that decreases supply shifts the supply curve to the left, reflecting a fall in the quantity supplied at any given price.
Decrease in supply
Quantity

27. What Causes a Supply Curve to Shift?
Changes in input prices
An input is a good that is used to produce another good.
Changes in the prices of related goods and services
Changes in technology
Changes in expectations
Changes in the number of producers

28. Individual Supply Curve and the Market Supply Curve
The market supply curve is the horizontal sum of the individual supply curves of all firms in that market.
(a)
Mr. Figueroa’s Individual Supply Curve
(b)
Mr. Bien Pho’s Individual Supply Curve
(c)
Market Supply Curve
Price of coffee beans (per pound)
Price of coffee beans (per pound)
Price of coffee beans (per pound) S S S
Figueroa
Market $2 $2
Bien Pho $2
Figure Caption:
Figure 3-10: Individual Supply Curves and the Market Supply Curve
Panel (a) shows the individual supply curve for Mr. Figueroa, SFigueroa, the quantity of coffee beans he will sell at any given price. Panel (b) shows the individual supply curve for Mr. Bien Pho, SBien Pho. The market supply curve, which shows the quantity of coffee beans supplied by all producers at any given price, is shown in panel (c). The market supply curve is the horizontal sum of the individual supply curves of all producers.
At any given price, the quantity supplied to the market is the sum of the quantities supplied by Mr. Figueroa and Mr. Bien Pho. For example, at a price of $2 per pound, Mr. Figueroa supplies 3,000 pounds of coffee beans per year and Mr. Bien Pho supplies 2,000 pounds per year, making the quantity supplied to the market 5,000 pounds.
Clearly, the quantity supplied to the market at any given price is larger with Mr. Bien Pho present than it would be if Mr. Figueroa was the only supplier. The quantity supplied at a given price would be even larger if we added a third producer, then a fourth, and so on. So an increase in the number of producers leads to an increase in supply and a rightward shift of the supply curve. 1 1 1 1 2 3 1 2 1 2 3 4 5
Quantity of coffee beans (pounds)
Quantity of coffee beans (pounds)
Quantity of coffee beans (pounds)

29. Only creatures small and pampered
During the 1970s there was a popular British television show entitled All Creatures Great and Small that chronicled the life of a country veterinarian.
Today, veterinarians make more money tending to small animals than to farm animals. Consequently there has been a large drop off in the number of farm veterinarians and an increase in the number of veterinarians tending to pets.

30. Explain whether each of the following events represents (i) a shift of the supply curve or (ii) a movement along the supply curve
A. More homeowners put their houses up for sale during a real estate boom that causes prices to rise.
This represents a shift of the supply curve.
This represents a movement along the supply curve.
B. Many strawberry farmers open temporary roadside stands during harvest season, even though prices are usually low at that time.
This represents a shift of the supply curve.
This represents a movement along the supply curve.

31. Explain whether each of the following events represents (i) a shift of the supply curve or (ii) a movement along the supply curve
C. Immediately after the school year begins, fast-food chains must raise wages to attract workers.
This represents a shift of the supply curve.
This represents a movement along the supply curve.
D. Many construction workers temporarily move to areas that have suffered hurricane damage, lured by higher wages offered.
c. The quantity of labor supplied is lower at any given wage. This is a leftward shift of the supply curve compared to the supply curve during school vacation. So, in order to attract workers, fast-food chains have to offer higher wages.
d. The quantity of labor supplied rises in response to a rise in wages. This is a movement along the supply curve.
This represents a shift of the supply curve.
This represents a movement along the supply curve.

32. Explain whether each of the following events represents (i) a shift of the supply curve or (ii) a movement along the supply curve
E. Since new technologies have made it possible to build larger ships (which are cheaper to run per passenger), Caribbean cruise lines have offered more berths, at lower prices, than before.
This represents a shift of the supply curve.
This represents a movement along the supply curve.

33. Supply, Demand and Equilibrium
Equilibrium in a competitive market is when
quantity demanded = quantity supplied
The price at which this takes place is the equilibrium price (a.k.a. market-clearing price):
Every buyer finds a seller and vice versa.
The quantity of the good bought and sold at that price is the equilibrium quantity.

34. Market Equilibrium
Market equilibrium occurs at point E, where the supply curve and the demand curve intersect.
Price of coffee beans (per pound)
Supply
$2.00
1.75
1.50
1.25
Equilibrium price E
Equilibrium
1.00
0.75
Figure Caption:
Figure 3-11: Market Equilibrium
Market equilibrium occurs at point E, where the supply curve and the demand curve intersect. In equilibrium, the quantity demanded is equal to the quantity supplied. In this market, the equilibrium price is $1 per pound and the equilibrium quantity is 10 billion pounds per year.
Discussion:
Why do all sales and purchases in a market take place at the same price?
Suppose that a seller offered a potential buyer a price noticeably above what she knew other people to be paying. The buyer would clearly be better off walking away from this particular seller and trying someone else – unless the seller was prepared to offer a better deal. Conversely, a seller would not be willing to sell for significantly less than the amount he knew most buyers were paying; he would be better off waiting to get a more reasonable customer. Thus in any well-established, ongoing market, all sellers receive and all buyers pay approximately the same price. This is what we call the “market price”.
0.50
Demand 7 10 13 15 17
Quantity of coffee beans (billions of pounds)
Equilibrium quantity

35. Bought and Sold PITFALLS
Sometimes the bought and sold price are not the same because there is a middleman
A middleman brings buyers and sellers together by buying from buyers, marking it up and selling to sellers.

36. Surplus and Shortage Surplus of a good is when
quantity supplied > quantity demanded.
Surpluses occur when the price is above its equilibrium level.
Shortage of a good is when
quantity demanded > quantity supplied
Shortages occur when the price is below its equilibrium level.

37. Surplus
There is a surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level.
Price of coffee beans (per pound)
Supply
$2.00
1.75
Surplus
1.50
1.25
1.00 E
0.75
Figure Caption:
Figure 3-12: Price Above Its Equilibrium Level Creates a Surplus
The market price of $1.50 is above the equilibrium price of $1. This creates a surplus: at a price of $1.50, producers would like to sell 11.2 billion pounds but consumers want to buy only 8.1 billion pounds, so there is a surplus of 3.1 billion pounds. This surplus will push the price down until it reaches the equilibrium price of $1.
Discussion:
Why do all sales and purchases in a market take place at the same price?
Suppose that a seller offered a potential buyer a price noticeably above what she knew other people to be paying. The buyer would clearly be better off walking away from this particular seller and trying someone else – unless the seller was prepared to offer a better deal. Conversely, a seller would not be willing to sell for significantly less than the amount he knew most buyers were paying; he would be better off waiting to get a more reasonable customer. Thus in any well-established, ongoing market, all sellers receive and all buyers pay approximately the same price. This is what we call the “market price”.
0.50
Demand 7
8.1 10
11.2 13 15 17
Quantity of coffee beans (billions of pounds)
Quantity demanded
Quantity supplied

38. Shortage
There is a shortage of a good when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.
Price of coffee beans (per pound)
Supply
$2.00
1.75
1.50
1.25
1.00 E
0.75
Figure Caption:
Figure 3-13: Price Below Its Equilibrium Level Creates a Shortage
The market price of $0.75 is below the equilibrium price of $1. This creates a shortage: consumers want to buy 11.5 billion pounds, but only 9.1 billion pounds are for sale, so there is a shortage of 2.4 billion pounds. This shortage will push the price up until it reaches the equilibrium price of $1.
Shortage
0.50
Demand 7
9.1 10
11.5 13 15 17
Quantity of coffee beans (billions of pounds)
Quantity supplied
Quantity demanded

39. The Price of Admission:
Compare the box office price for a recent Justin Timberlake concert in Miami, Florida, to the StubHub.com price for seats in the same location: $88.50 versus $155.
Why is there such a big difference in prices? For major events, buying tickets from the box office means waiting in very long lines. Ticket buyers who use Internet resellers have decided that the opportunity cost of their time is too high to spend waiting in line. For those major events with online box offices selling tickets at face value, tickets often sell out within minutes.
In this case, some people who want to go to the concert badly but have missed out on the opportunity to buy cheaper tickets from the online box office are willing to pay the higher Internet reseller price.

40. In the following situation, the market is initially in equilibrium.
A) 2005 was a very good year for California wine-grape growers, who produced a bumper-sized crop. This causes:
a shortage of grapes and prices rise.
a shortage of grapes and prices fall.
a surplus of grapes and prices rise.
a surplus of grapes and prices fall.

41. In the following situation, the market is initially in equilibrium.
B) After a hurricane, Florida hoteliers often find that people cancel their upcoming vacations, leaving them with empty hotel rooms. This causes:
a shortage of hotel rooms and prices rise.
a shortage of hotel rooms and prices fall.
a surplus of hotel rooms and prices rise.
a surplus of hotel rooms and prices fall.

42. In the following situation, the market is initially in equilibrium.
C) After a heavy snowfall, many people want to buy secondhand snow blowers at the local tool shop. This causes:
a shortage of secondhand snow blowers and prices rise.
a shortage of secondhand snow blowers and prices fall.
a surplus of secondhand snow blowers and prices rise.
a surplus of secondhand snow blowers and prices fall.

43. Equilibrium and Shifts of the Demand Curve
An increase in demand…
Supply
Price of coffee beans
… leads to a movement along the supply curve due to a higher equilibrium price and higher equilibrium quantity E 2 P 2
Price rises E 1 P 1 D 2
Figure Caption:
Figure 3-14: Equilibrium and Shifts of the Demand Curve
The original equilibrium in the market for coffee is at E1, at the intersection of the supply curve and the original demand curve, D1. A rise in the price of tea, a substitute, shifts the demand curve rightward to D2. A shortage exists at the original price, P1, causing both the price and quantity supplied to rise, a movement along the supply curve. A new equilibrium is reached at E2, with a higher equilibrium price, P2, and a higher equilibrium quantity, Q2. When demand for a good or service increases, the equilibrium price and the equilibrium quantity of the good or service both rise. D 1 Q Q 1 2
Quantity of coffee beans
Quantity rises

44. Equilibrium and Shifts of the Supply Curve2
A decrease in supply… 1
Price of coffee beans E P 2 2
… leads to a movement along the demand curve due to a higher equilibrium price and lower equilibrium quantity
Price rises P E
A drought causes a fall in the supply of coffee beans. How does this negative supply shock affect the market for coffee?
Figure Caption:
Figure 3-15: Equilibrium and Shifts of the Demand Curve
The original equilibrium in the market for coffee beans is at E1. A drought causes a fall in the supply of coffee beans and shifts the supply curve leftward from S1 to S2. A new equilibrium is established at E2, with a higher equilibrium price, P2, and a lower equilibrium quantity, Q2. 1 1
Demand Q Q
Quantity of coffee beans 2 1
Quantity falls

45. Technology Shifts of the Supply Curve
An increase in supply … S1
… leads to a movement along the demand curve to a lower equilibrium price and higher equilibrium quantity. S2
Price E1
Technological innovation: In the early 1970s, engineers learned how to put microscopic electronic components onto a silicon chip; progress in the technique has allowed ever more components to be put on each chip. P1
Price falls P2 E2
Note to the instructor:
This is a different example than the one used in the textbook (it is from the previous version). You may want to use it as another example or you can hide the slide and choose to exclude it from the lecture presentation.
Demand
Quantity Q1 Q2
Quantity increases

46. Simultaneous Shifts of Supply and Demand
(a) One possible outcome: Price Rises, Quantity Rises
New equilibrium depends on the magnitude of the shifts
Small decrease in supply
Price of coffee S S 2 1 E
Two opposing forces determining the equilibrium quantity.
The increase in demand dominates the decrease in supply. 2 P 2
Figure Caption:
Figure 3-16 (a) There is a simultaneous rightward shift of the demand curve and leftward shift of the supply curve. Here the increase in demand is relatively larger than the decrease in supply, so the equilibrium price and equilibrium quantity both rise. E 1 P 1 D 2 D 1
Large increase in demand Q
Quantity of coffee 1 Q 2

47. Simultaneous Shifts of Supply and Demand
(b) Another Possibility Outcome: Price Rises, Quantity Falls
Large decrease in supply S
Price of coffee 2
Two opposing forces determining the equilibrium quantity. S 1 E 2 P 2 E
Small increase in demand
Figure Caption:
Figure 3-16 (b) There is also a simultaneous rightward shift of the demand curve and leftward shift of the supply curve. Here the decrease in supply is relatively larger than the increase in demand, so the equilibrium price rises and the equilibrium quantity falls. 1 P 1 D 2 D 1 Q Q
Quantity of coffee 2 1

48. Simultaneous Shifts of Supply and Demand
We can make the following predictions about the outcome when the supply and demand curves shift simultaneously:
Simultaneous Shifts of Supply and Demand
Supply Increases
Supply Decreases
Demand Increases
Price: ambiguous
Quantity: up
Price: up
Quantity: ambiguous
Demand Decreases
Price: down
Quantity: down

49. Which Curve is it Anyway?
PITFALLS
Which Curve is it Anyway?
When the price of a good changes, in general this reflects a change in either supply or demand.
But which curve? A hint is to look at the quantity.
If the quantity changes in the same direction as price then this suggests the demand curve has shifted.
If quantity changes in the opposite direction as price, the likely cause is a shift in the supply curve.

50. Tribulations on the Runway
The ease of transmitting photos over the Internet and the relatively low cost of international travel  beautiful young women from all over the world, eagerly trying to make it as models = influx of aspiring models from around the world
In addition the tastes of many of those who hire models have changed  they prefer celebrities
What happened to the equilibrium price of a young (not a celebrity) fashion model? Use your supply and demand curves to determine the salaries of “America’s Next Best Models”…

51. Another Example: Supply, Demand and Controlled Substances
The “war on drugs” shifts the supply curve to the left. S2
Price S1
The equilibrium price has risen from P1 to P2, and this induces suppliers to provide drugs despite the risks. E2 P2
Price rises
However, we can see by comparing the original equilibrium E1 with the new equilibrium E2 that the actual reduction in the quantity of drugs supplied is much smaller than the shift of the supply curve. E1 P1
Demand
Quantity Q2 Q1
Quantity falls

52. The Great Tortilla Crisis
There was a sharp rise in the price of tortillas, a staple food of Mexico’s poor, which had gone from 25 cents a pound to between 35 and 45 cents a pound in just a few months in early 2007.
Why were tortilla prices soaring?
It was a classic example of what happens to equilibrium prices when supply falls. Tortillas are made from corn; much of Mexico’s corn is imported from the United States, with the price of corn in both countries basically set in the U.S. corn market. U.S. corn prices were rising rapidly thanks to surging demand in a new market: the market for ethanol.

53. Demand and Supply Shifts at Work in the Global Economy
A recent drought in Australia reduced the amount of grass on which Australian dairy cows could feed, thus limiting the amount of milk these cows produced for export.
At the same time, a new tax levied by the government of Argentina raised the price of the milk the country exported, thereby decreasing Argentine milk sales worldwide.
These two developments produced a supply shortage in the world market, which dairy farmers in Europe couldn’t fill because of strict production quotas set by the European Union.

54. Demand and Supply Shifts at Work in the Global Economy
In China, meanwhile, demand for milk and milk products increased, as rising income levels drove higher per-capita consumption.
All these occurrences resulted in a strong upward pressure on the price of milk everywhere in 2007. 54

55. As the price of gasoline fell in the United States during the 1990s, more people bought large cars. What is the market in question in this scenario?
gasoline
cars

56. As the price of gasoline fell in the United States during the 1990s, more people bought large cars. Did supply or demand shift, and which way?
1. supply shifted left
2. supply shifted right
3. demand shifted left
4. demand shifted right

57. As the price of gasoline fell in the United States during the 1990s, more people bought large cars. What is the effect on prices and quantity?
1. quantity and price fell
2. quantity and price rose
3. quantity fell and price rose
4. quantity rose and price fell

58. 2. fresh paper made from recycled paper
As technological innovation has lowered the cost of recycling used paper, fresh paper made from recycled stock is used more frequently. What is the market in question in this scenario?
1. recycled paper
2. fresh paper made from recycled paper 58

59. 1. supply shifts left 2. supply shifts right 3. demand shifts left
As technological innovation has lowered the cost of recycling used paper, fresh paper made from recycled stock is used more frequently. Does supply or demand shift, and which way?
1. supply shifts left
2. supply shifts right
3. demand shifts left
4. demand shifts right 59

60. 1. quantity and price fell 2. quantity and price rose
As technological innovation has lowered the cost of recycling used paper, fresh paper made from recycled stock is used more frequently. What is the effect on price and quantity?
1. quantity and price fell
2. quantity and price rose
3. quantity fell and price rose
4. quantity rose and price fell 60

61. movies at a local movie theater
As a local cable company offers cheaper pay-per-view films, local movie theaters have more unfilled seats. What is the market in question in this scenario?
pay-per-view movies
movies at a local movie theater 61

62. As a local cable company offers cheaper pay-per-view films, local movie theaters have more unfilled seats. Does supply or demand shift, and which way?
supply shifts left
supply shifts right
demand shifts left
demand shifts right 62

63. quantity and price fall quantity and price rise
As a local cable company offers cheaper pay-per-view films, local movie theaters have more unfilled seats. What is the effect on prices and quantity?
quantity and price fall
quantity and price rise
quantity falls and price rises
quantity rises and price falls 63

64. Periodically, a computer chip maker like Intel introduces a new chip that is faster than the previous one.
In response, demand for computers using the earlier chip decreases as customers put off purchases in anticipation of machines containing the new chip.
Simultaneously, computer makers increase their production of computers containing the earlier chip in order to clear out their stocks of those chips.

65. What happens to the supply curve for computers using the earlier chip?
1. it shifts left
2. it shift right

66. What happens to the demand curve for computers using the earlier chip?
1. it shifts left
2. it shift right

67. The equilibrium quantity for computers using the earlier chip must fall.
1. True
2. False

68. The equilibrium price for computers using the earlier chip must fall.
1. True
2. False

69. Summary
1 of 4
The supply and demand model illustrates how a competitive market works.
The demand schedule shows the quantity demanded at each price and is represented graphically by a demand curve. The law of demand says that demand curves slope downward.
A movement along the demand curve occurs when a price change leads to a change in the quantity demanded. When economists talk of increasing or decreasing demand, they mean shifts of the demand curve—a change in the quantity demanded at any given price.

70. Summary There are five main factors that shift the demand curve:
2 of 4
There are five main factors that shift the demand curve:
1. A change in the prices of related goods or services
2. A change in income
3. A change in tastes
4. A change in expectations
5. A change in the number of consumers
The market demand curve for a good or service is the horizontal sum of the individual demand curves of all consumers in the market.
The supply schedule shows the quantity supplied at each price and is represented graphically by a supply curve. Supply curves usually slope upward.

71. Summary
3 of 4
A movement along the supply curve occurs when a price change leads to a change in the quantity supplied. When economists discuss increasing or decreasing supply, they mean shifts of the supply curve—a change in the quantity supplied at any given price.
There are five main factors that shift the supply curve:
A change in input prices
A change in the prices of related goods and services
A change in technology
A change in expectations
A change in the number of producers
The market supply curve for a good or service is the horizontal sum of the individual supply curves of all producers in the market.

72. Summary
4 of 4
The supply and demand model is based on the principle that the price in a market moves to its equilibrium price, (market-clearing price), the price at which the quantity demanded = quantity supplied. This quantity is the equilibrium quantity. When the price is above its market-clearing level, there is a surplus that pushes the price down. When the price is below its market-clearing level, there is a shortage that pushes the price up.
An increase in demand increases both the equilibrium price and the equilibrium quantity; a decrease in demand has the opposite effect. An increase in supply reduces the equilibrium price and increases the equilibrium quantity; a decrease in supply has the opposite effect.
Shifts of the demand curve and the supply curve can happen simultaneously.