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Today • Continue demand – shifts in demand • Supply Recall: The Demand Curve • What is measured on each axis? 4 3 2 1 D 0 0 100 200 300 400 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 Price ($/lb.) 4 S 3 2 • Only P changes as we move along this supply curve. 1 0 0 100 200 300 400 Quantity (lb.per week) Moving Along the Supply Curve • Changes in the price of cheese move us along the supply curve for cheese. • Called a “change the quantity supplied”. Shifts in Supply • Changes in other factors affecting supply will shift the supply curve. • Called a “change in the supply of cheese”. Increase in Supply Price ($/lb.) • The quantity supplied QS is higher at every S S’ possible price. • Shifts rightward. 4 3 2 1 0 0 100 200 300 400 Quantity (lb.per week) Decrease in Supply Price ($/lb.) S’ 4 S 3 • The QS is lower at every possible price. • Shifts leftward. 2 1 0 0 100 200 300 400 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.