Today

• Continue demand– shifts in demand

• Supply

Recall: The Demand Curve

• What is measured on each axis?4

3

2

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D

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

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.

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

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.

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.

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.

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.

A Change in Demographics

• Increased population in Richmond will increase demand for cheese.

• Other demographics, age, #children, ethnic groups, etc.

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.

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

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.

The Supply Curve

• Only P changes as we move along this supply curve.

Quantity(lb.per week)

Price($/lb.)

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S

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”.

Shifts in Supply

• Changes in other factors affecting supply will shift the supply curve.

• Called a “change in the supply of cheese”.

Increase in Supply

• The quantity supplied QS is higher at every possible price.

• Shifts rightward.

Price($/lb.)

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SS’

Quantity(lb.per week)

Decrease in Supply

• The QS is lower at every possible price.

• Shifts leftward.

Price($/lb.)

4

3

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00 100 200 300 400

SS’

Quantity(lb.per week)

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

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

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).

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.

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.

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.

A change in the number of sellers

• A larger number of sellers will increase supply.

• A smaller number will decrease supply.

Coming Up

• Market Equilibrium

• How changes in demand and supply affect market equilibrium.

Group Work

• Exercises with supply

• Exercises with demand

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.

Supply of Beef

• The price of cattle feed rises.

Supply of Tomatoes

• A new, square variety is invented which allows for easier shipment to market.

• (Fits onto a Wendy’s burger better, too.)

Supply of Cabernet Sauvignon

• The price of merlot (another variety) rises as Americans discover this slightly sweet table wine.

Supply of Toilet Paper

• Falling profits in the TP industry lead firms to exit the market.

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.

Demand for Meat

• Dr. Atkin’s diet book, proclaiming weight loss through high protein, low carb diet, becomes wildly popular.

Demand for Tomatoes

• Summer abundance leads to a fall in the price of this popular vegetable.

Demand for Cabernet Sauvignon (Red Wine)

• The price of cheese rises.

Demand for Toilet Paper

• A rumor circulates that stores are about to run out of toilet paper—panic ensues.