shifting supply, demand, and equilibrium

WITH GRAPHING APPLICATIONS

Shifting Supply, Demand, and Equilibrium

Reasons for Changes in Demand

Assume that Demand Curve B represents the baseline (original) consumption of beef in the month of May.

For each of the following scenarios, decide: 1. Will this event cause a

shift in the demand curve?2. If so, will the demand

increase or decrease?3. Which demand curve

likely represents the new demand for beef?

Reasons for Changes in Demand: Scenarios

Scenario Does demand shift?

Increase or Decrease?

New Demand Curve

Beef Prices Expected to RiseSignificant Number of Immigrants ArrivePork Prices DropSurgeon General Warns that Eating Beef is Hazardous to HealthBeef Prices FallReal Income Drops for 3rd MonthCharcoal Shortage Threatens Holiday CookoutsNew Burger Restaurant Sweeps the Nation

Scenario 1: Beef Prices Expected to Rise

This is a Change in Consumer Expectations. Since people are expecting a rise in prices in

the future, they will choose to buy now. As a result, the demand curve for beef will

shift to the right to Demand Curve C – representing the increase in demand.

Scenario 2: Significant Number of Immigrants Arrive

This is a Change in the Number of Consumers.

More mouths to feed means more people buying beef.

As a result, the demand curve for beef will shift to the right to Demand Curve C – representing the increase in demand.

Scenario 3: Pork Prices Drop

This is a Change in the Price of a Substitute Good.

Because it has become less expensive, more people are buying pork instead of beef.

As a result, the demand curve for beef will shift to the left to Demand Curve A – representing the decrease in demand.

Scenario 4: Surgeon General Warns that Eating Beef is Hazardous to Health

This is a Change in Consumer Tastes. Because of the Surgeon General’s warning,

health-conscious consumers will choose alternative foods.

As a result, the demand curve for beef will shift to the left to Demand Curve A – representing the decrease in demand.

Scenario 5: Beef Prices Fall

This is movement along the original curve, so there is no shift.

The graph of beef demand stays at Demand Curve B and the point of actual quantity demanded on that line moves.

Scenario 6: Real Income Drops for 3rd Month

This is a Change in Income. With their income decreasing, people are

choosing to buy less and save more. Alternatively, they might purchase less expensive alternatives to beef.

As a result, the demand curve for beef will shift to the left to Demand Curve A – representing the decrease in demand.

Scenario 7: Charcoal Shortage Threatens Holiday Cookouts

This is a Change in the Price of a Complimentary Product.

Because charcoal is in short supply, it’s likely to be very expensive. Since charcoal grilling is a preferred way of preparing beef on a holiday weekend, people will likely buy less beef.

As a result, the demand curve for beef will shift to the left to Demand Curve A – representing the decrease in demand.

Scenario 8: New Burger Restaurant Sweeps the Nation

This is a Change in Consumer Tastes. Since this new burger place is so popular,

they are buying beef to meet the number of customer orders.

As a result, the demand curve will shift to the right to Demand Curve C – representing the increase in demand.

Reasons for Changes in Demand: Scenarios

Scenario Does demand shift?

Increase or Decrease?

New Demand Curve

Beef Prices Expected to Rise Yes Increase C

Significant Number of Immigrants Arrive

Yes Increase C

Pork Prices Drop Yes Decrease A

Surgeon General Warns that Eating Beef is Hazardous to Health

Yes Decrease A

Beef Prices Fall No

Real Income Drops for 3rd Month

Yes Decrease A

Charcoal Shortage Threatens Holiday Cookouts

Yes Decrease A

New Burger Restaurant Sweeps the Nation

Yes Increase C

Reasons for Changes in Supply

Assume that Supply Curve B represents the baseline (original) supply of foreign and domestic cars.

For each of the following scenarios, decide: 1. Will this event cause a shift

in the supply curve?2. If so, will the supply

increase or decrease?3. Which supply curve likely

represents the new supply for foreign and domestic cars?

Reasons for Changes in Supply: Scenarios

Scenario Does supply shift?

Increase or Decrease?

New Supply Curve

Auto Workers’ Union Agrees to Wage CutsNew Robot Technology Increases EfficiencyNationwide Auto Strike BeginsNew Import Quotas Reduce Foreign Car ImportsCost of Steel RisesAuto Producer Goes Bankrupt; Closes PlantsBuyers Reject New ModelsNational Income Rises 2%

Scenario 1: Auto Workers’ Union Agrees to Wage Cuts

This is a Change in Input Prices. Because they’ll be able to pay their workers

less, this reduces the unit cost to produce cars – so suppliers have an impetus to produce more.

As a result, the supply curve will shift to the right to Supply Curve C – representing the increase in supply.

Scenario 2: New Robot Technology Increases Efficiency

This is a Change in Technology (which is also an Input).

Because they’ll be able to produce cars more efficiency, this reduces the unit cost to produce cars – so suppliers have an impetus to produce more.

As a result, the supply curve will shift to the right to Supply Curve C – representing the increase in supply.

Scenario 3: Nationwide Auto Strike Begins

This is a Change in the Number of Producers.The strike will eliminate domestic

automakers from car production, so fewer suppliers will be producing – and fewer cars are being produced.

As a result, the supply curve will shift to the left to Supply Curve A – representing the decrease in supply.

Scenario 4: New Import Quotas Reduce Foreign Car Imports

This is a Change in Government Policy (which we’ll discuss as an actor on supply and demand in more detail later).

The quotas will reduce the number of foreign cards that can be put into the market – so fewer cars will be produced.

As a result, the supply curve will shift to the left to Supply Curve A – representing the decrease in supply.

Scenario 5: Cost of Steel Rises

This is a Change in Input Prices. Because they’ll have to pay more for steel

used in production, this increases the unit cost to produce cars – so suppliers choose to produce less.

As a result, the supply curve will shift to the left to Supply Curve A – representing the decrease in supply.

Scenario 6: Auto Producer Goes Bankrupt; Closes Plants

This is a Change in the Number of Producers.The plant closing will remove this automaker

from car production, so fewer suppliers will be producing – and fewer cars are being produced.

As a result, the supply curve will shift to the left to Supply Curve A – representing the decrease in supply.

Scenario 7: Buyers Reject New Models

This is movement along the original curve, so there is no shift.

If a particular model fails, the producers will still supply other models that consumers are more interested in purchasing. This neither increases nor decreases the number of cars on the market.

The graph of foreign and domestic car supply stays at Supply Curve B.

Scenario 8: National Income Rises 2%

This is movement along the original curve, so there is no shift.

People may choose, as a result of increased income, to purchase more expensive models of cars, but this neither increases nor decreases the number of cars on the market.

The graph of foreign and domestic car supply stays at Supply Curve B.

Reasons for Changes in Supply: Scenarios

Scenario Does supply shift?

Increase or Decrease?

New Supply Curve

Auto Workers’ Union Agrees to Wage Cuts

Yes Increase C

New Robot Technology Increases Efficiency

Yes Increase C

Nationwide Auto Strike Begins Yes Decrease A

New Import Quotas Reduce Foreign Car Imports

Yes Decrease A

Cost of Steel Rises Yes Decrease A

Auto Producer Goes Bankrupt; Closes Plants

Yes Decrease A

Buyers Reject New Models No

National Income Rises 2% No

Determining Equilibrium

Because of the roles played by both producers and consumers, putting these two elements together shows the actual price at which a good is bought and sold.

The interaction between supply and demand illustrates market equilibrium – when the price has moved to a level at which the quantity of a good demanded equals the quantity of that good supplied.

Finding Equilibrium Price and Quantity

The easiest (and best) way to determine equilibrium price and quantity in a market is by putting the supply curve and demand curve on the same diagram.

The price and quantity where they intersect is equilibrium.

Why is Equilibrium Achieved?

1. In well-established markets in which there is information available about other trades that have taken place, a market price emerges.

2. When prices rise above equilibrium, producers are willing to supply more – but consumers are unwilling to buy more.

3. When prices fall below equilibrium, buyers are willing to buy more – but producers are unwilling to produce a sufficient amount at this price.