1. Today Continue demand –shifts in demand Supply

2. Recall: The Demand Curve What is measured on each axis? 4 3 2 1 0 0 100200300 400 D

3. Shifts in Demand A Change in Average Household Income A Change in the Price of Another Good A Change in Tastes or Preferences A Change in Consumer Expectations A Change in Demographics

4. A Change in Average Household Income The usual case: –An increase in income increases demand –A decrease in income decreases demand –Called a “normal good” –People tend to buy more of most things as they get richer.

5. Inferior Goods The odd case: –An increase in income decreases demand –A decrease in income increases demand –Called an “inferior good” –Ex: rice, beans, potatoes, riding buses, using a laundromat, eating hamburger

6. A Change in the Price of Another Good 2 types of relevant goods: substitutes and complements. Substitute goods: goods one might use instead of cheese. –When the price of the substitute rises, there will be an increase in demand for cheese.

7. Complements Complementary goods: goods one tends to use along with cheese. –When the price of the complement rises, there will be an decrease in demand for cheese.

8. A Change in Tastes or Preferences If consumers like cheese more than before, then demand for cheese will increase. If consumers like cheese less than before, then demand for cheese will fall.

9. A Change in Consumer Expectations Expectations about price: –If expect the price will rise, buy more now, demand rises. –If expect the price will fall, wait to buy, current demand falls. Expectations about income: –If expect income to rise, demand may rise. –If expect income to fall, demand may fall.

10. A Change in Demographics Increased population in Richmond will increase demand for cheese. Other demographics, age, #children, ethnic groups, etc.

11. The Supply of Cheese Quantity Supplied: The number of pounds of cheese that sellers are willing & able to sell each week in Richmond at a given price. Supply: The various amounts of cheese that sellers are willing & able to sell each week in Richmond at all possible prices.

12. Determinants of Quantity Supplied Price of cheese Prices of factors of production (inputs) Technology Price of other goods produced using a similar technology Expected future prices The number of sellers

13. The Supply Curve Supply Curve: The supply curve tells us how much will be supplied at every possible price, ceteris paribus. The supply curve will slope upward, because at a higher price (and the same input prices) they will want to supply more.

14. The Supply Curve Only P changes as we move along this supply curve. Quantity (lb.per week) Price ($/lb.) 4 3 2 1 0 0 100200300 400 S

15. Moving Along the Supply Curve Changes in the price of cheese move us along the supply curve for cheese. Called a “change the quantity supplied”.

16. Shifts in Supply Changes in other factors affecting supply will shift the supply curve. Called a “change in the supply of cheese”.

17. Increase in Supply The quantity supplied Q S is higher at every possible price. Shifts rightward. Price ($/lb.) 4 3 2 1 0 0 100200300 400 S S’ Quantity (lb.per week)

18. Decrease in Supply The Q S is lower at every possible price. Shifts leftward. Price ($/lb.) 4 3 2 1 0 0 100200300 400 S S’ Quantity (lb.per week)

19. Shifts in Supply A change in the price of a factor of production A change in technology A change in the price of other goods produced using a similar technology A change in expected future prices A change in the number of sellers

20. Factor Prices Examples of factor (or input) prices: –labor  wages –capital  interest rate –land  rent –energy  price of oil, electricity, etc. –raw materials  price of the raw material

21. A change factor prices When a factor price rises, supply decreases (shifts left). –Higher factor prices make costs rise. At a given price, it will be less profitable to produce, so firms supply less. When a factor price falls, supply increases (shifts right).

22. A change in technology Improvements in technology increase supply (shift right) Better technology makes it more profitable to produce at a given price, so supply more.

23. A change in the price of other goods Refers to goods produced using similar production techniques. Ex: garden hoses & hula hoops Ex: autos & jeeps Ex: yogurt & cheese When the price of one of these goods rises, the supply of the other will fall.

24. A change in expected future prices Could increase or decrease supply. Expect price to rise, might build factory now, increasing current supply. For storable goods, expect price to rise, might delay selling good, decreasing current supply.

25. A change in the number of sellers A larger number of sellers will increase supply. A smaller number will decrease supply.

26. Coming Up Market Equilibrium How changes in demand and supply affect market equilibrium.

27. Group Work Exercises with supply Exercises with demand

28. Exercises with Supply Draw a properly labeled supply curve and show either a movement along the supply curve, or a shift in the curve for each change. Do not try to combine these exercises with the previous demand ones.

29. Supply of Beef The price of cattle feed rises.

30. Supply of Tomatoes A new, square variety is invented which allows for easier shipment to market. (Fits onto a Wendy’s burger better, too.)

31. Supply of Cabernet Sauvignon The price of merlot (another variety) rises as Americans discover this slightly sweet table wine.

32. Supply of Toilet Paper Falling profits in the TP industry lead firms to exit the market.

33. Exercises with Demand Draw a properly labeled demand curve and show either a movement along the demand curve, or a shift in the curve for each change.

34. Demand for Meat Dr. Atkin’s diet book, proclaiming weight loss through high protein, low carb diet, becomes wildly popular.

35. Demand for Tomatoes Summer abundance leads to a fall in the price of this popular vegetable.

36. Demand for Cabernet Sauvignon (Red Wine) The price of cheese rises.

37. Demand for Toilet Paper A rumor circulates that stores are about to run out of toilet paper—panic ensues.