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FALL 2013 Shifting Supply, Demand, and Equilibrium
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FALL 2013 Shifting Supply, Demand, and Equilibrium.

Mar 28, 2015

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Page 1: FALL 2013 Shifting Supply, Demand, and Equilibrium.

FALL 2013

Shifting Supply, Demand, and Equilibrium

Page 2: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Reasons for Changes in Demand

Assume that Demand Curve B represents the baseline (original) annual consumption of U.S.-made cars.

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 cars?

Page 3: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Reasons for Changes in Demand: Scenarios

Scenario Does demand shift?

Increase or Decrease?

New Demand Curve

Consumers’ Income Drops

Millions of Immigrants Enter the U.S.

Price of Foreign Autos Drop

Major Cities Add Inexpensive Bus Lines

Price of U.S. Autos Rises

Price of U.S. Autos Expected to Rise Soon

Families Look Forward to Summer Vacations

U.S. Auto Firms Launch Effective Ad Campaigns

Page 4: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 1: Consumers’ Income Drops

This is a Change in Income.Because they will have less money to go

around, consumers will buy fewer cars – regardless of price.

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

Page 5: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 2: Millions of Immigrants Enter the U.S.

This is a Change in the Number of Consumers.

Because there will be more consumers to buy (regardless of price concerns), sales of automobiles will increase.

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

Page 6: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 3: Price of Foreign Autos Drop

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

Consumers will be more likely to buy the foreign cars, reducing the demand for domestic (U.S.-made) automobiles.

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

Page 7: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 4: Major Cities Add Inexpensive Bus Lines

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

Consumers will be more likely to ride public transportation, reducing the demand for cars.

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

Page 8: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 5: Price of U.S. Autos Rises

While people will buy fewer cars as a result of the increase in price, this is movement along the original curve – so there is no shift.

The graph of car demand stays at Curve B.

Page 9: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 6: Price of U.S. Autos Expected to Rise Soon

This a Change in Expectations.Because they anticipate rising prices to

come, consumers will choose to buy now.As a result, the demand curve will shift right

to Curve C – representing the increase in demand.

Page 10: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 7: Families Look Forward to Summer Vacations

This a Change in Expectations.Consumers are looking forward to greater

utility of cars in the near future. (Road trip!) Therefore, they shop for a new car.

As a result, the demand curve for cars shifts right to Curve C – representing the increase in demand.

Page 11: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 8: U.S. Auto Firms Launch Effective Ad Campaigns

This is a Change in Tastes.The U.S. auto industry is able to convince

consumers that they should be American-made, thus increasing sales.

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

Page 12: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Reasons for Changes in Demand: Scenarios

Scenario Does demand shift?

Increase or Decrease?

New Demand Curve

Consumers’ Income Drops Yes Decrease A

Millions of Immigrants Enter the U.S.

Yes Increase C

Price of Foreign Autos Drop Yes Decrease A

Major Cities Add Inexpensive Bus Lines

Yes Decrease A

Price of U.S. Autos Rises No B

Price of U.S. Autos Expected to Rise Soon

Yes Increase C

Families Look Forward to Summer Vacations

Yes Increase C

U.S. Auto Firms Launch Effective Ad Campaigns

Yes Increase C

Page 13: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Reasons for Changes in Supply

Assume that Supply Curve B represents the baseline (original) supply of U.S.-made 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?

Page 14: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Reasons for Changes in Supply: Scenarios

Scenario Does supply shift?

Increase or Decrease?

New Supply Curve

Auto Workers’ Union Agrees to Wage Cuts

New Robot Technology Increases Efficiency

Price of U.S. Cars Increases

Nationwide Auto Workers Strike Begins

Cost of Steel Rises

Major Auto Producer Goes Out of Business

Buyers Reject New Car Models

Government Gives Car Producers a Subsidy

Page 15: FALL 2013 Shifting Supply, Demand, and Equilibrium.

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.

Page 16: FALL 2013 Shifting Supply, Demand, and Equilibrium.

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.

Page 17: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 3: Price of U.S. Cars Increases

While producers will make more cars as a result of the increase in price, this is movement along the original curve – so there is no shift.

The graph of car supply stays at Curve B.

Page 18: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 4: Nationwide Auto Workers 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.

Page 19: FALL 2013 Shifting Supply, Demand, and Equilibrium.

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.

Page 20: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 6: Major Auto Producer Goes Out of Business

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.

Page 21: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 7: Buyers Reject New Car Models

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

This is a shift in demand, not supply.The graph of car supply stays at Curve B.

Page 22: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Scenario 8: Government Gives Car Producers a Subsidy

This is a Change in Input Prices.The government subsidy will decrease the

overall cost of operations for the automobile industry, making it more profitable to produce more cars.

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

Page 23: FALL 2013 Shifting Supply, Demand, and Equilibrium.

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

Price of U.S. Cars Increases No B

Nationwide Auto Workers Strike Begins

Yes Decrease A

Cost of Steel Decreases Yes Increase C

Major Auto Producer Goes Out of Business

Yes Decrease A

Buyers Reject New Car Models No B

Government Gives Car Producers a Subsidy

Yes Increase C

Page 24: FALL 2013 Shifting Supply, Demand, and Equilibrium.

Determining Equilibrium

Putting Supply and Demand together shows the actual price at which a good is bought and sold.

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.

Page 25: FALL 2013 Shifting Supply, Demand, and Equilibrium.

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.

Page 26: FALL 2013 Shifting Supply, Demand, and 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.