Part IV: Supply & DemandSupply & Demand Shifts in Supply & DemandShifts in Supply &...

Part IV:Part IV:•Supply & DemandSupply & Demand•Shifts in Supply & DemandShifts in Supply & Demand•Linked MarketsLinked Markets•Complementary GoodsComplementary Goods•Substitute GoodsSubstitute Goods•Change in Quantity DemandedChange in Quantity Demanded•Change in Quantity SuppliedChange in Quantity Supplied

ECONOMICSECONOMICSWhat does it mean to me?

LAW of SUPPLYLAW of SUPPLY

LAW of DEMANDLAW of DEMAND

The LAW of SUPPLYLAW of SUPPLY states that producers are willing and able to produce more of a good as its price rises.

(Food, (Food, sleep, date, sleep, date, study, etc.)study, etc.)

QUANTITYQUANTITY

S S (supply)(supply)$8

100 200 300 400 500 600

….or produce less of a good as its

price decreases.

(Food, (Food, sleep, date, sleep, date, study, etc.)study, etc.)

QUANTITYQUANTITY

S (supply)S (supply)$80

100 200 300 400 500 600

The Ps and Qs have an inverse relationship.Math: Y = mX + b

Economics: P = mQ + b

The LAW of DEMAND LAW of DEMAND states that consumers are willing and able to consume less of a good as its price rises.

(Food, (Food, sleep, date, sleep, date, study, etc.) study, etc.)

QUANTITYQUANTITY

D (demand)D (demand)

100 200 300 400 500 600

…..or consume more of a good as its price

decreases.

QUANTITYQUANTITY

100 200 300 400 500 600

Math: Y = -mX + b

Economics: P = -mQ + b

The Ps and Qs have an inverse relationship.

Table A-1 Novels Purchased by Emma

*Mankiw

Figure A-3 Demand Curve

*Mankiw

Figure A-4 Shifting Demand Curves

*Mankiw

Figure A-5 Calculating the Slope of a Line

*Mankiw

Putting these two curves together gives us the point ofPutting these two curves together gives us the point of EQUILIBRIUM…equilibrium gives us the optimum point

of production at the price people are willing to pay.

QUANTITYQUANTITY

S (supply)S (supply)

E (equilibrium)E (equilibrium)

0100 200 300 400 500 600

In a market economy, In a market economy, the price of a good the price of a good

signals to consumers signals to consumers the cost of producing a the cost of producing a good. good. MARKET PRICEMARKET PRICE

also signals to also signals to producers the value producers the value

that consumers place that consumers place on a good. Market on a good. Market

price coordinates the price coordinates the actions of actions of consumersconsumers

(demand) and (demand) and producers producers (supply).(supply).

What happens when What happens when changes occur in the changes occur in the

economy?economy?

How do these How do these changes affect changes affect

supply and demand?supply and demand?

The Chicago Cubs have a

winning season. What happens to

the price of World Series

tickets?

Does this affect the supply or demand curve?

Chart I: Demand increase (P ; Q )Chart I: Demand increase (P ; Q )

QUANTITYQUANTITY

The Chicago Cubs have a winning season. What happens to the price of World Series tickets?

goes up

Quantity goes up

Gas prices increase

dramatically. What happens to the market

for big automobiles?

Chart II: Demand decrease (P ; Q )Chart II: Demand decrease (P ; Q )

QUANTITYQUANTITY

Gas prices increase dramatically. What happens to the market for big automobiles?

DD0 0 DD1 1

goes down

Quantity goes down

Plentiful oil fields are Plentiful oil fields are discovered in Nevada. discovered in Nevada. What happens to the What happens to the

market for oil?market for oil?

Chart III: Supply Increase (P Chart III: Supply Increase (P

; Q ) ; Q )

QUANTITYQUANTITY

Plentiful oil fields are discovered in Plentiful oil fields are discovered in Nevada. What happens to the market for oil?Nevada. What happens to the market for oil?

goes down

Quantity goes up

A drought has depleted A drought has depleted the corn crop. What the corn crop. What

happens to the market happens to the market for corn?for corn?

Chart IV: Supply Decrease (P ; Q )Chart IV: Supply Decrease (P ; Q )

QUANTITYQUANTITY

A drought has depleted the corn crop. What happens A drought has depleted the corn crop. What happens to the market for corn?to the market for corn?

goes up

Quantity goes down

Let’s look at a shift using numbers:

The government adds a $1 tax to cigarettes.

Does this affect supply or demand?

QUANTITYQUANTITY

1K 2K 3K 4K 5K

Congress adds $1 tax to cigarettes.Congress adds $1 tax to cigarettes.

Price goes up

Quantity goes down

This area represents the $1 tax.

LINKED MARKETS

LINKED MARKETS pertain to those goods which affect other goods.

For instance:For instance:

Coffee =>Coffee =>

Peaches =>Peaches =>

Vegetarianism =>Vegetarianism =>

CreamCream

BlueberriesBlueberries

Leather CoatsLeather Coats

Coffee beans are hit by an unusual frost. What happens to the price and quantity of cream?

Which of the charts (I, II, III, or Which of the charts (I, II, III, or IV) will pertain to these IV) will pertain to these

markets?markets?

QUANTITYQUANTITY

Chart IV represents the depleted coffee crop.

goes up

Quantity goes down

QUANTITYQUANTITY

DD00DD11

The demand for cream decreases as graphed in Chart II.

goes down

Quantity goes down

So, a decrease in the supply of coffee causes the price of coffee to rise. People who do not want to pay the high price for coffee will have a reduced demand for

cream to go into the coffee.

Coffee and cream are considered complementary goods.complementary goods.

A complementary good is defined as a good who, when its price rises causes a decrease in the demand of another

good (or visa versa).

Complementary goods have an inverse relationship between price of

one good and demand for another.

A virus A virus attacks attacks

broccoli. broccoli. What happens What happens to the price to the price and quantity and quantity of brussels of brussels sprouts?sprouts?Which of the charts (I, Which of the charts (I,

II, III, or IV) will II, III, or IV) will pertain to these pertain to these

markets?markets?

QUANTITYQUANTITY

Chart IV represents the depleted broccoli crop.

goes up

Quantity goes down

QUANTITYQUANTITY

Chart I represents the increase in demand of brussels sprouts.

goes up

Quantity goes up

So, the virus creates a diminished supply of

broccoli which drives up the price. Consumers who don’t wish to pay the higher price

will look for a substitute good such as brussels

sprouts.

A substitute good is defined as a good who, when its price rises

causes a increase in the demand of another good (or visa versa).

Substitute goods have a direct relationship between price of one

good and demand for another.

A wrinkle-fre

nice cloth is

invented. What

happens to th

price and

quantity of

cotton?

Which of the charts (I, II, Which of the charts (I, II, III, or IV) will pertain to III, or IV) will pertain to

these markets?these markets?

QUANTITYQUANTITY

The demand for the new cloth The demand for the new cloth increases as graphed in Chart I.increases as graphed in Chart I.

goes up

Quantity goes up

QUANTITYQUANTITY

DD00DD11

The demand for cotton decreases as graphed in

Chart II.

goes down

Quantity goes down

So…..people So…..people using, or using, or

demanding, less demanding, less cotton will cause cotton will cause

the price to go the price to go down and less of down and less of the fabric to be the fabric to be

made.made.Are these goods

substitute or complementary?

Vegetarianism expands greatly, what happens to the

P & Q of leather coats?

Which of the charts (I, II, III, or IV) will pertain to these

markets?

QUANTITYQUANTITY

Chart I shows what happens to the P & Q of vegetables.

goes up

Quantity goes up

QUANTITYQUANTITY

DD00DD11

The demand for beef decreases as graphed in Chart II.

goes down

Quantity goes down

QUANTITYQUANTITY

Chart IV shows what happens to the P & Q of leather coats.

goes up

Quantity goes down

So…..the increase in the purchase So…..the increase in the purchase of vegetables will create a lack of of vegetables will create a lack of demand for beef. This will cause demand for beef. This will cause

fewer cows to be slaughtered, fewer cows to be slaughtered, creating less leather to be creating less leather to be

available, or a decrease in supply, available, or a decrease in supply, which will cause the price to go up which will cause the price to go up

on leather coats.on leather coats.

Demand and Supply:

Single Markets where both curves

shift.

Now let’s see what happens when an event occurs and impacts both

the supply and the demand….

What is the short term impact of the government

legalizing marijuana?

Will this affect the supply curve or the demand curve?Or both?

Chart V: (D ; S Chart V: (D ; S

QUANTITYQUANTITY

What is the short term impact of the government legalizing marijuana?

The The demand demand curve curve moves moves right right

indicatinindicating an g an

increase.increase.The The

supply supply curve curve moves moves right right

increase.increase.

Chart V: (D ; S Chart V: (D ; S

QUANTITYQUANTITY

PRICEPRICES S

This chart shows and increase in both supply and demand. As a result:

Price will be

indeterminate.

Quantity will increas

Frost hits coffee growing areas, while coffee is “cleared”

as a cause of cancer.

Chart VI: (D Chart VI: (D

; S ); S )

QUANTITYQUANTITY

Frost hits coffee growing areas, while coffee is “cleared” as a cause of cancer.

The The demand demand curve curve moves moves right right

increase.increase.The The

supply supply curve curve moves moves left left

decrease.decrease.

SS11 E1

Chart VI: (D Chart VI: (D

; S ); S )

QUANTITYQUANTITY

In this chart, demand will increase while supply decreases. This will result in:

SS11 E1

Price will

increase.

Quantity will be

indeterminate.

A sturdy, shippable tomato that tastes like cardboard is introduced into the market.

Chart VII: (D Chart VII: (D

; S ); S )

QUANTITYQUANTITY

A sturdy, shippable tomato that tastes like cardboard is introduced into the market.

DD0 0 DD1 1

SS0 0 SS11 The The

demand demand curve curve moves moves left left

decrease.decrease.The The

supply supply curve curve moves moves right right

increase.increase.

Chart VII: (D Chart VII: (D

; S ); S )

QUANTITYQUANTITY

When demand is decreased and supply is increased, this results in:

DD0 0 DD1 1

SS0 0 SS11

Price will

decrease.

Quantity will be

indeterminate.

Newspapers report high

levels of salmonella in

chickens, many must be

destroyed.Will this affect

the supply curve or the demand curve?Or both?

Chart VIII: (D Chart VIII: (D

; S ) ; S )

QUANTITYQUANTITY

Newspapers report high levels of salmonella in chickens, many must be destroyed.

DD0 0 DD1 1

The The demand demand curve curve moves moves left left

decrease.decrease.The The

supply supply curve curve moves moves left left

decrease.decrease.

Chart VIII: (D Chart VIII: (D

; S ) ; S )

QUANTITYQUANTITY

PRICEPRICE

This chart shows what happens when demand and supply are both decreased.

DD0 0 DD1 1

Price will be

indeterminate.

Quantity will decreas

Economics Economics is mostly is mostly

about about changes--changes--

not levels.not levels.

Several years ago, Baby M was born to a surrogate mother who had been paid $10,000 to give birth to

the baby. The birth mother changed her mind and sued in court to have the child returned to her. The judge

agreed.

What impact did this have on the supply of surrogate

mothers?

What impact did this have on the demand for babies

born to surrogate mothers?

Using supply and demand analysis, explain why the price of roses

always seems to rise just before Valentine’s

Exercise One:

Using supply and demand Using supply and demand analysis, determine how analysis, determine how

a freeze that kills a freeze that kills half the rose crop half the rose crop

would affect the price would affect the price of roses.of roses.

Using supply and demand analysis, determine how a

freeze that kills half the

rose crop would affect the price

of fine chocolates.

Exercise Two:

Some time ago,the city of Ft.Lauderdale

had an initiative on the general

election ballot that asked

voters to raise the minimum wage in that city to

a level 40 percent above the national minimum wage.

This year the This year the initiative would initiative would make the minimum make the minimum wage be $7.35 in wage be $7.35 in Ft. Lauderdale and Ft. Lauderdale and $5.25 elsewhere.$5.25 elsewhere.

•How would things in Ft. How would things in Ft. Lauderdale have changed if Lauderdale have changed if the initiative had passed?the initiative had passed?

•What would be the same?What would be the same?

•What would change?What would change?

•Predict the effect of the

legislation on the

markets for labor in

Ft. Lauderdale and in the suburbs

outside the city.

•Would you Would you rather work rather work

in Ft. in Ft. Lauderdale Lauderdale or outside or outside the citythe city

•Would you be Would you be more likely more likely

to find a job to find a job in Ft. in Ft.

Lauderdale Lauderdale or outside or outside the city?the city?

There is a small There is a small business person business person who is planning to who is planning to re-locate to the re-locate to the Ft. Lauderdale Ft. Lauderdale

area.area.

*Would you advise the business person to set up *Would you advise the business person to set up business in Ft. Lauderdale or in a suburb of Ft. business in Ft. Lauderdale or in a suburb of Ft.

Lauderdale? What is your reasoning?Lauderdale? What is your reasoning?

Exercise Three:Exercise Three:

Suppose you run a lawn mower business. You charge $15 per Suppose you run a lawn mower business. You charge $15 per standard size lawn and can mow five lawns in an eight hour standard size lawn and can mow five lawns in an eight hour

day. You currently have more people asking you to mow day. You currently have more people asking you to mow their lawns than you can satisfy and estimate that you their lawns than you can satisfy and estimate that you

could sign up as many as 25 additional customers. You have could sign up as many as 25 additional customers. You have two strategies that will permit you to expand your two strategies that will permit you to expand your

business.business.

Strategy Two….is to rent a riding lawn mower that will permit you to mow seven lawns per day. Rent for the riding

mower is $100 per week. Gas and oil for the

mower cost $25 per week.

Strategy One…….is to hire your friend Jim to work for you. Jim is a good worker who will work for $8 an hour.

OPTION 0:

Actually, there are 3 options--the first being “status quo.”

($15 per lawn) X (25 lawns per week) ($15 per lawn) X (25 lawns per week) = $375 per week= $375 per week

OPTION 1:

Hire Jim to work by the hour.

It takes him 8 / 5 = 1.6 hours to mow a lawn

Marginal Revenue per lawn = $15

Marginal loss per lawn = ($8 per hour) X (1.6 hours to mow) = $12.80

$15 - 12.80 = $2.20 extra profit per lawn

If Jim mows 25 lawns per week:

25 X $2.20 = $55 profit per week

YOUR NET REVENUE IS:

$375 + 55 = $430

OPTION 2:

Rent Lawn Mower

MARGINAL REVENUE

(7 lawns per day) X (5 days) = 35 lawns per week

35 lawns X $15 per lawn = $525

MARGINAL LOSS = MARGINAL LOSS = $125$125

$525 -125 = $400

•Should you expand your business? Why or why not?

•Which strategy, if

any, should you use? Why?

•If the riding If the riding lawn mower lawn mower

permitted you to permitted you to mow 8 lawns per mow 8 lawns per day, would your day, would your

strategy change? strategy change? Why or why not? Why or why not?

OPTION 4:

Rent Lawn Mower (8 lawns per day)

MARGINAL REVENUE

(8 lawns per day) X (5 days) = 40 lawns per week

40 lawns X $15 per lawn = $600

MARGINAL LOSS = MARGINAL LOSS = $125$125

$600 -125 = $475

CHANGE IN DEMANDCHANGE IN DEMAND

CHANGE IN QUANTITY CHANGE IN QUANTITY DEMANDEDDEMANDED

The Basic Determinants of DemandDeterminants of Demand are:

1) consumer tastes and preferences

2) number of consumers in the market

3) consumers’ money incomes

4) prices of related goods

5) consumer expectations about future prices and incomes

1) Change in consumer tastesA favorable change in consumer tastes means that more of it will be demanded and shift the demand

curve rightward. Conversely, an unfavorable change in consumer tastes means that less will be demanded and shift the demand curve left.

Changes may occur because:

*a new product comes to the market

*health concerns

2) Number of buyersAn increase in the number of consumers in a market means that more “stuff” will be demanded and shift the demand curve rightward. Conversely, a decrease

change in consumers in a market means that less “stuff” will be demanded and shift the demand curve

to the left.

Factors affecting numbers include:

*improvements in communication

*aging baby boomers

*increased life expectancy

3) Consumer IncomeFor most commodities, a rise in income causes an

increase in demand. Conversely, demand will decline as incomes fall.

Commodities whose demand varies directly with money income are called superior, or NORMAL NORMAL

GOODSGOODS..

Similarly, rising incomes may cause demand for hamburger and charcoal grilles to decline as

wealthier consumers switch to T-bones and gas grilles. Goods whose demand varies inversely with

money income are called INFERIOR GOODSINFERIOR GOODS.

4) Prices of related goodsA change in the price of a related good may increase

or decrease the demand depending upon whether the related good is a substitute goodsubstitute good or a

complementary goodcomplementary good.

*When two products are substitutes the price of one and the demand for the other move in the same

direction.

*When two products are complements, the price of one good and the demand for the other good move

in opposite directions.

5) Expectations of the futureConsumer expectations of higher future prices may prompt them to buy now to “beat” the anticipated

price rise, thus increasing today’s demand.

Conversely, expectations of lower prices may delay purchases.

QUANTITYQUANTITY

PRICEPRICES S

DD0 0 DD1 1

A change in the demand schedule or, graphically, a shift in the location of the demand curve is called a CHANGE IN DEMANDCHANGE IN DEMAND. This is caused by a change

in one or more of the determinents of demand.

QUANTITYQUANTITY

100 200 300 400 500 600

By contrast, a CHANGE IN QUANTITY CHANGE IN QUANTITY DEMANDEDDEMANDED designates the movement of one point to another--from one price quantity to another--on a fixed demand curve, resulting from (I.e.) a change in priceprice.

Price of Ice-Cream Cones

Quantity of Ice-Cream Cones

A tax that raises the price of ice-cream cones results in a

movement along the demand curve.

Changes in Quantity Demanded

CHANGE IN SUPPLYCHANGE IN SUPPLY

CHANGE IN QUANTITY CHANGE IN QUANTITY SUPPLIEDSUPPLIED

The Determinants of SupplyDeterminants of Supply are:

1) resource prices

2) technique of production

3) taxes and subsidies

4) prices of other goods

5) price expectations

6) number of sellers in the market.

1) Resource PricesAn increase in the price of resources used in

production will increase production costs and squeeze profits. This reduction in profits reduces

the incentive for firms to supply output at each product price.

2) TechnologyImprovements in technology enable firms to

produce units of output with fewer resources. Since resources are costly, using fewer of them lowers

production costs and increases supply.

3) Taxes and subsidiesAn increase in sales or property taxes will increase

production costs and reduce supply.

4) Prices of Other GoodsFirms that produce one good can sometimes use their plant and equipment to produce alternative goods. Higher prices of these “other goods” can

sometimes entice producers to switch production to them in order to make more profit.

5) Expectation of futureExpectations of future prices can affect the

willingness of a producer to supply that product.

6) Number of sellersThe larger the number of sellers, the larger the

supply. As more firms enter an industry, the curve moves to the right. As firms leave an industry the

curve shifts to the left.

QUANTITYQUANTITY

A CHANGE IN SUPPLYCHANGE IN SUPPLY means a change in the entire schedule and a shift of the entire curve,

which is caused by a change in one or more of the determinants of supply.

QUANTITYQUANTITY

S S (supply)(supply)$8

100 200 300 400 500 600

In contrast, a CHANGE IN QUANTITY CHANGE IN QUANTITY SUPPLIEDSUPPLIED is a movement from one point to

another on a fixed supply curve. The cause of which is a change in price price of a specific product.

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones0

C$3.00 A rise in the price

of ice cream cones results in a movement along the supply curve.

Change in Quantity Supplied

In 1993, Congress was expected to pass more stringent gun control laws. How would consumer expectations affect supply and demand?

If freezing weather were to destroy most of Florida’s citrus crop, how might consumers react? What would be their rationale?

The price of beef rises. How will this affect the price of chicken?

International trade agreements such as NAFTA and GATT have reduced foreign trade barriers on American farm products. How does this affect supply and demand? What determinant shifts the curve?

The local grocer lowers the price of grapes, which increases demand. Is this a change in demand or a change in quantity demanded?

The price of coffee decreases. What happens to the demand for cream? These two products are called _____________.

Farmers anticipate the price of corn will rise in a few months. What is likely to happen affecting supply and demand?

The price of gasoline falls and, as a result, you drive your car more. How will this affect demand for complementary goods? What kinds of goods are affected?

THE END

Compiled by Virginia Meachum, Economics Teacher, Coral Springs High School, Broward County, FL

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