Begin Slides Created By Kyle Hampton and Kevin Brady Shifts in Supply and Demand Interactive Examples To navigate, please click the appropriate green buttons.

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Slides Created By

Kyle Hampton and Kevin Brady

Shifts in Supply and Demand

Interactive Examples

To navigate, please click the appropriate green buttons.(Do not use the arrows on your keyboard)

Material from this presentation can be found in:

Chapter 3

CoreEconomics, 2e

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Price

PillarCandles(in thousands)

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The four inch pillar candle is commonly found in homes across the United States. There are hundreds of sellers and thousands of buyers of this item.

In this example, we are going to explore the supply of and demand for these candles.

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Let’s take a look at the demand for candles first.

As you have learned, the law of demand states that as the price of a good decreases, the quantity of that good that buyers are willing to buy increases. This is represented graphically by the demand curve for the candles shown to the right.

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Let’s look at supply now.

Remember that the law of supply states that as price increases, the number of units that firms will want to sell will also increase. This is represented by the supply curve for candles shown to the right.

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The price where the quantity firms want to sell equals the quantity that people want to buy is called the equilibrium price ($6). The quantity bought and sold at this price is called the equilibrium quantity (40 thousand).

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Both are found at the point on the graph where the supply curve and the demand curve cross.


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But this equilibrium price and quantity are not at all permanent. The demand curve represents how much people value pillar candles. These values can change at any time.

The supply curve represents the costs to sellers of producing and selling the candles. This too can change at any time.

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One of the exciting features of supply and demand analysis is that it helps us to predict the changes in price and sales that result from these kinds of changes.

For example, we can look at what happens when demand for pillar candles increases.

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Imagine an increase in the demand for candles. There are many reasons this might occur. For example, a hurricane may result in a loss of electric power service to a region. Candlelight is a substitute for electric lighting. Without electric lights, people’s values for candles increase.

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There are two ways to think about an increase in demand. The easiest is to imagine an increase in the number of candles people would want to buy at each possible price.

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In our candle example represented on the right, at a price of $6, people would be willing to buy 40 thousand candles. At a price of $4, people would be willing to buy 80 thousand candles.


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The loss of electric power means that more people would want to buy candles at the $6 price. Let’s say the increase is from 40 thousand to 70 thousand.

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We can imagine a similar increase in buyers at the $4 price: from 80 thousand to 110 thousand.


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An increase in demand means that the quantity people are willing to buy increases at every possible price.

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An increase in demand means that the quantity people are willing to buy increases at every possible price.

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Another way to think of an increase in demand is as an increase in the price people are willing to pay for a particular quantity of a good.

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For example, in the graph to the right, the price that buyers would be willing to pay for 60 thousand candles rises from $5 to $6.50.

The price buyers would pay for 20 thousand candles rises from $7 to $8.50.


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Whether you imagine an increase in demand as quantity demanded increasing at every possible price or the buyers’ willingness to pay increasing for each possible quantity, the result is the same: a shift in the demand curve up and to the right.

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DemandIncrease in quantity demanded at each

price.

Increase in willingness to pay for each quantity.


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Let’s look at the effects of an increase in demand for candles on the equilibrium price and quantity.

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In order to do that, we need to return the demand curve to its original position…

… and display the supply curve for pillar candles.



Price


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Remember that the equilibrium price for candles is $6 and the equilibrium quantity is 40 thousand candles bought and sold.

What happens to equilibrium price when demand increases?

a.It increasesb.It decreasesc.It stays the same.

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Sorry, no.

The price where the supply and demand curves cross changes when the demand curve shifts.

Does it increase or decrease?

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That’s right!

The price increases. What is the new price?

a.$7.00b.$8.00c.$9.00

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Sorry, no.

What is the price where the supply and demand curves cross?

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That’s right!

The new price where the supply and demand curves cross is $7.

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What is the new equilibrium quantity?

a.30 thousand candlesb.40 thousand candlesc.50 thousand candles

Demand

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Sorry, no.

What is the quantity where the supply and demand curves cross?



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That’s right!

The increase in demand has resulted in an increase in the equilibrium quantity from 40 thousand to 50 thousand.

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When the demand for candles increases, both the price of candles and the quantity bought and sold increase.

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Of course, a decrease in demand will have the opposite effect. Equilibrium price will decrease along with the equilibrium quantity.

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Like shifts in demand, shifts in supply can occur for a number of reasons. In our example of candles, the supply may decrease because the price of a good used to make candles increases.

Most candles are made with paraffin wax. Paraffin wax is made from petroleum, a product whose price fluctuates regularly.

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Imagine that the price of petroleum decreases. This would effectively reduce the cost of producing paraffin wax and, by extension, candles.

This decrease in the cost of production increases the supply of pillar candles. As with demand, there are two ways to thinks about an increase in supply.

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In our candle example represented on the right, 40 thousand candles would be sold at a price of $6. At a price of $9, 70 thousand candles would be sold.

Another way of saying this is that the 40 thousandth candle costs $6 to produce. The 70 thousandth candle costs $9 to produce.

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SupplyThis lower cost of production means that the cost of producing each candle has gone down. For example, we might assume that the cost per candle has been decreased by $2. This would result in the cost of the 40 thousandth decreasing from $6 to $4.

And the cost of the 70 thousandth candle decreasing from $9 to $7.


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When the cost of each unit has decreased, this is referred to as an increase in supply.


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SupplyAnother way to think about an increase in supply is as an increase in the number of candles people are willing to sell at every possible price.

In this example, the number candles people are willing to sell at $4 increases from 20 to 40 thousand. The number of candles people are willing to sell at $9 increases from 70 to 90 thousand.


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SupplyWhether you imagine an increase in supply as quantity supplied increasing at every possible price or the cost of each unit decreasing, the result is the same: a shift in the supply curve down and to the right.

Increase in quantity supplied at each

price.

Decrease in the cost of producing each

candle.

A decrease in supply represents an increase in the cost of selling each unit. This is reflected in a shift of the supply curve up and to the left.


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Just like a shift in demand, a shift in supply will change the equilibrium price and quantity in a market. Let’s return to our example and the original supply and demand for pillar candles.



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SupplyA decrease in the supply of candles ______________ the equilibrium quantity of candles bought and sold and ______________ the equilibrium price of those candles.

a.decreases; decreases.b.increases; decreases.c.increases; increases.d.decreases; increases.



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Sorry, no.

Look at where the new supply curve crosses the demand curve to find the new equilibrium price and quantity.


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That’s right. A decrease in supply will shift the curve up and to the left. This results in a decrease in the equilibrium quantity and an increase in the equilibrium price.

In this case the price has increased from $6 to $7. The quantity of candles bought and sold has decreased from 40 to 20 thousand.

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SupplyThe conditions that determine supply and demand for a product are always changing. For this reason, we can expect that supply and demand can shift at the same time. This can make it a little challenging to determine the net effects of these changes on equilibrium price and quantity.


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SupplyBy means of example, imagine a technological improvement that decreases the cost producing candles and thus increases their supply.

At the same time, the price of light bulbs (a substitute for candles in some places) goes down and thus decreases the demand for candles.



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SupplyWhat will happen to the equilibrium price if supply increases and demand decreases?

a.It will increase.b.It will decrease.c.It will stay the same.d.It is impossible to know with just the

information provided.



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Sorry, no.

Remember, the supply curve moves down and to the right; the demand curve moves down and to the left.


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SupplyThat’s right. If both the supply curve and the demand curve are moving down, the point where they cross is certainly going to be moving down as well. This represents a decrease in price.



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SupplyWhat will happen to the equilibrium quantity if supply increases and demand decreases?

a.It will increase.b.It will decrease.c.It will stay the same.d.It is impossible to know with just the information provided.



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SupplySorry, no.

It is possible that the equilibrium quantity will stay the same as shown on the graph to the right.

But this is not a foregone conclusion. What if the supply increase had been greater? What if the demand decrease had been greater? What if either had been smaller?



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SupplySorry, no.

It is possible that the equilibrium quantity will decrease as shown on the graph to the right.

But this is not a foregone conclusion. The example to the right shows a large decrease in demand and smaller increase in supply. But what if the opposite had occurred?



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SupplySorry, no.

It is possible that the equilibrium quantity will increase as shown on the graph to the right.

The example to the right shows a large increase in supply and smaller decrease in demand. But what if the opposite had occurred?


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SupplyThat’s right.

Depending on the relative sizes of the changes in supply and demand, the equilibrium quantity might. . .

. . . increase . . .


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. . . decrease . . .


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Supply. . . or stay the same.

So while price will definitely decrease when demand decreases and supply increases, the effect on quantity bought and sold is indeterminate.


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Documents

supply curve

law of supply states

exciting features of

demand curve cross

thousands of buyers

demandinte examples

demandsupp examples

demandi examples nextshifts