Demand and Supply PDF

MGMG506 Thai Economy in Global Context Slide: 1-1 Demand and Supply Book Chapter 4: The Market Forces of Supply and Demand PowerPoint Sli...

MGMG506 Thai Economy in Global Context Slide: 1-1 Demand and Supply Book Chapter 4: The Market Forces of Supply and Demand PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Demand (อุปสงค์) Quantity demanded (ปริมาณอุปสงค์) Amount of a good that buyers are willing and able to purchase (ปริมาณ สินค้าที่ผู้ซอื้ มีความต้องการและสามารถซื้อสินค้านั้นได้) Law of demand (กฎของอุปสงค์) Other things equal (สมมติให้ทุกอย่างคงที่) When the price of the good rises, quantity demanded of a good falls. (เมื่อราคาสินค้าเพิ่มขึน้ ปริมาณอุปสงค์ต่อสินค้านั้นจะลดลง) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 3 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Demand Demand schedule - a table Relationship between the price of a good and quantity demanded Demand curve - a graph Relationship between the price of a good and quantity demanded Individual demand Demand of one individual © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 4 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 1 Catherine’s Demand Schedule and Demand Curve Price of Ice-Cream Cones 1. A decrease Price of Quantity of $3.00 in price... Ice-Cream Cones 2.50 Cone Demanded 2.... increases quantity $0.00 12 cones 2.00 of cones demanded. 0.50 10 1.50 1.00 8 1.50 6 1.00 Demand curve 2.00 4 2.50 2 0.50 3.00 0 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones The demand schedule is a table that shows the quantity demanded at each price. The demand curve, which graphs the demand schedule, illustrates how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Demand Market demand Sum of all individual demands for a good or service Market demand curve Sum the individual demand curves horizontally Total quantity demanded of a good varies As the price of the good varies Other things constant © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 6 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 2 Market Demand as the Sum of Individual Demands The quantity demanded in a market is the sum of the quantities demanded by all the buyers at each price. Thus, the market demand curve is found by adding horizontally the individual demand curves. At a price of $2.00, Catherine demands 4 ice-cream cones, and Nicholas demands 3 ice-cream cones. The quantity demanded in the market at this price is 7 cones. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Figure 2 Market Demand as the Sum of Individual Demands Catherine’s demand + Nicholas’s demand = Market demand Price of Price of Price of Ice-Cream Ice-Cream Ice-Cream Cones Cones Cones $3.00 DCatherine $3.00 $3.00 DNicholas 2.50 2.50 2.50 2.00 2.00 2.00 1.50 1.50 1.50 DMarket 1.00 1.00 1.00 0.50 0.50 0.50 0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 0 2 4 6 8 10 12 14 16 18 Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Demand Shifts in the demand curve (การเปลี่ยนแปลงของเส้นอุปสงค์) Increase in demand (อุปสงค์เพิ่มขึ้น เส้นอุปสงค์เคลื่อนไปทางขวา) Any change that increases the quantity demanded at every price Demand curve shifts right Decrease in demand (อุปสงค์ลดลง เส้นอุปสงค์เคลื่อนไปทางซ้าย) Any change that decreases the quantity demanded at every price Demand curve shifts left © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 9 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 3 Shifts in the Demand Curve Price of Ice-Cream Increase in Cones Demand Decrease in Demand Demand Demand Demand curve, D1 curve, D2 curve, D3 0 Quantity of Ice-Cream Cones Any change that raises the quantity that buyers wish to purchase at any given price shifts the demand curve to the right. Any change that lowers the quantity that buyers wish to purchase at any given price shifts the demand curve to the left. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Demand Variables that can shift the demand curve (ปัจจัยสาคัญที่ทาให้เส้นอุปสงค์เปลี่ยนแปลง) Income (รายได้) Prices of related goods (ราคาของสินค้าที่เกี่ยวข้อง) Tastes (รสนิยมของการบริโภค) Expectations (การคาดการณ์ในอนาคต) Number of buyers (จานวนผู้ซื้อในตลาด) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 11 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Demand Income Normal good (สินค้าปกติ – อุปสงค์ต่อสินค้านั้นจะเพิม่ ขึ้นเมื่อผู้บริโภคมีรายได้สูงขึ้น เช่น รถยนต์ เสื้อผ้า อุปกรณ์อิเล็กทรอนิกส์) Other things constant An increase in income leads to an increase in demand Inferior good (สินค้าด้อย – อุปสงค์ต่อสินค้านั้นจะลดลงเมื่อผู้บริโภคมีรายได้สูงขึ้น เช่น อาหารกระป๋อง บะหมี่กึ่งสาเร็จรูป บริการรถเมล์ รถยนต์มือสอง เสื้อผ้าลดราคา) Other things constant An increase in income leads to a decrease in demand © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 12 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Demand Prices of related goods Substitutes - two goods (สินค้าทดแทน เช่น ก๊าซกับน้ามันเบนซิน) An increase in the price of one Leads to an increase in the demand for the other Complements – two goods (สินค้าประกอบกัน เช่น printer กับหมึกพิมพ์ บ้าน สร้างใหม่กับกระเบื้องหลังคา) An increase in the price of one Leads to a decrease in the demand for the other © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 13 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Demand Tastes Change in tastes – changes the demand Expectations about the future Expect an increase in income (อุปสงค์เพิ่มขึ้น เมื่อคาดการณ์ว่ารายได้ในอนาคตจะเพิ่มขึ้น) Increase in current demand Expect higher prices (อุปสงค์เพิ่มขึ้น เมื่อคาดการณ์ว่าราคาสินค้านั้นในอนาคตจะสูงขึ้น) Increase in current demand Number of buyers – increase Market demand - increases © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 14 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Table 1 Variables That Influence Buyers This table lists the variables that affect how much consumers choose to buy of any good. Notice the special role that the price of the good plays: A change in the good’s price represents a movement along the demand curve, whereas a change in one of the other variables shifts the demand curve. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 Two ways to reduce the quantity of smoking demanded 1. Shift the demand curve for cigarettes and other tobacco products Public service announcements Mandatory health warnings on cigarette packages Prohibition of cigarette advertising on television If successful Shift demand curve to the left © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 16 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Two ways to reduce the quantity of smoking demanded 2. Try to raise the price of cigarettes Tax the manufacturer Higher price Movement along demand curve 10% ↑ in price → 4% ↓ in smoking Teenagers: 10% ↑ in price → 12% ↓ in smoking Demand for cigarettes vs. demand for marijuana Appear to be complements © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 17 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 4 Shifts in the Demand Curve versus Movements along the Demand Curve (a) A Shift in the Demand Curve (b) A Movement along the Demand Curve Price of Cigarettes, per Pack Price of Cigarettes, per Pack A policy to discourage A tax that raises the price smoking shifts the of cigarettes results in a demand curve to the left movement along the demand curve $4.00 C B A $2.00 2.00 A D1 D2 D1 0 10 20 0 12 20 Number of Cigarettes Smoked per Day Number of Cigarettes Smoked per Day If warnings on cigarette packages convince smokers to smoke less, the demand curve for cigarettes shifts to the left. In panel (a), the demand curve shifts from D1 to D2. At a price of $2.00 per pack, the quantity demanded falls from 20 to 10 cigarettes per day, as reflected by the shift from point A to point B. By contrast, if a tax raises the price of cigarettes, the demand curve does not shift. Instead, we observe a movement to a different point on the demand curve. In panel (b), when the price rises from $2.00 to $4.00, the quantity demanded falls from 20 to 12 cigarettes per day, as reflected by the movement from point A to point C. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 Supply (อุปทาน) Quantity supplied (ปริมาณอุปทาน) Amount of a good that sellers are willing and able to sell. ปริมาณสินค้าที่ผู้ขายต้องการและสามารถขายได้ Law of supply (กฎของอุปทาน) (อุปทานต่อสินค้าจะเพิม่ ขึ้น เมื่อราคาสินค้านั้นสูงขึ้น) Other things equal When the price of the good rises Quantity supplied of a good rises © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 19 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Supply Supply schedule - a table Relationship between the price of a good and the quantity supplied Supply curve - a graph Relationship between the price of a good and the quantity supplied Individual supply Supply of one seller © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 20 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 5 Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cones Supply curve Price of Quantity Ice-cream Of Cones $3.00 1. An increase Cone Supplied 2.50 in price... $0.00 0 cones 0.50 0 2.00 1.00 1 1.50 2.... increases 1.50 2 quantity of cones 2.00 3 1.00 supplied. 2.50 4 3.00 5 0.50 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones The supply schedule is a table that shows the quantity supplied at each price. This supply curve, which graphs the supply schedule, illustrates how the quantity supplied of the good changes as its price varies. Because a higher price increases the quantity supplied, the supply curve slopes upward. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Supply Market supply Sum of the supplies of all sellers for a good or service Market supply curve Sum of individual supply curves horizontally Total quantity supplied of a good varies As the price of the good varies All other factors that affect how much suppliers want to sell are hold constant © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for 22 use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for Figure 6 Market Supply as the Sum of Individual Supplies The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. Thus, the market supply curve is found by adding horizontally the individual supply curves. At a price of $2.00, Ben supplies 3 ice-cream cones, and Jerry supplies 4 ice- cream cones. The quantity supplied in the market at this price is 7 cones. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 Figure 6 Market Supply as the Sum of Individual Supplies Ben’s supply + Jerry’s supply = Market supply Price of Price of Price of Ice-Cream Ice-Cream Ice-Cream Cones Cones Cones SBen SMarket $3.00 $3.00 SJerry $3.00 2.50 2.50 2.50 2.00 2.00 2.00 1.50 1.50 1.50 1.00 1.00 1.00 0.50 0.50 0.50 0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 0 2 4 6 8 10 12 14 16 18 Quantity of Quantity of Quantity of Ice-Cream Cones Ice-Cream Cones Ice-Cream Cones © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 Supply Shifts in supply Increase in supply Any change that increases the quantity supplied at every price Supply curve shifts right Decrease in supply Any change that decreases the quantity supplied at every price Supply curve shifts left © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 25 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exhibit 7 Shifts in the Supply Curve Price of Supply Supply Ice-Cream Supply curve, S3 curve, S1 Cones curve, S2 Decrease In supply Increase in Supply 0 Quantity of Ice-Cream Cones Any change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 Supply Variables that can shift the supply curve Input Prices (ราคาปัจจัยการผลิต) Technology (การเปลี่ยนแปลงของเทคโนโลยี) Expectations about future (การคาคการณ์ในอนาคตเกี่ยวกับราคาและปริมาณ) Number of sellers (จานวนผู้ผลิต/ผู้ขายในตลาด) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 27 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Supply Input Prices Supply – negatively related to prices of inputs Higher input prices – decrease in supply Technology Advance in technology – increase in supply © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 28 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Supply Expectations about future Affect current supply Expected higher prices Decrease in current supply Number of sellers – increase Market supply - increase © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 29 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Table 2 Variables That Influence Sellers This table lists the variables that affect how much producers choose to sell of any good. Notice the special role that the price of the good plays: A change in the good’s price represents a movement along the supply curve, whereas a change in one of the other variables shifts the supply curve. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30 Supply and Demand Together Equilibrium - a situation Various forces are in balance A situation in which market price has reached the level where Quantity supplied = quantity demanded Supply and demand curves intersect 31 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Supply and Demand Together Equilibrium price Balances quantity supplied and quantity demanded Market-clearing price Equilibrium quantity Quantity supplied and quantity demanded at the equilibrium price © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 32 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 8 The Equilibrium of Supply and Demand Price of Ice-Cream Cones Equilibrium Supply $3.00 2.50 Equilibrium price 2.00 Equilibrium quantity 1.50 1.00 Demand 0.50 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones The equilibrium is found where the supply and demand curves intersect. At the equilibrium price, the quantity supplied equals the quantity demanded. Here the equilibrium price is $2.00: At this price, 7 ice- cream cones are supplied, and 7 ice-cream cones are demanded. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33 Supply and Demand Together Surplus (ปริมาณส่วนเกิน) Quantity supplied > quantity demanded Excess supply Downward pressure on price Movements along the demand and supply curves Increase in quantity demanded Decrease in quantity supplied © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 34 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Supply and Demand Together Shortage (ปริมาณขาดแคลน) Quantity demanded > quantity supplied Excess demand Upward pressure on price Movements along the demand and supply curves Decrease in quantity demanded Increase in quantity supplied © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 35 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 9 Markets Not in Equilibrium Price of (a) Excess Supply Price of (b) Excess demand Ice-Cream Ice-Cream Cones Surplus Supply Cones Supply $2.50 2.00 $2.00 1.50 Demand Demand Shortage Quantity Quantity Quantity Quantity demanded supplied supplied demanded 0 4 7 10 0 4 7 10 Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones In panel (a), there is a surplus. Because the market price of $2.50 is above the equilibrium price, the quantity supplied (10 cones) exceeds the quantity demanded (4 cones). Suppliers try to increase sales by cutting the price of a cone, and this moves the price toward its equilibrium level. In panel (b), there is a shortage. Because the market price of $1.50 is below the equilibrium price, the quantity demanded (10 cones) exceeds the quantity supplied (4 cones). With too many buyers chasing too few goods, suppliers can take advantage of the shortage by raising the price. Hence, in both cases, the price adjustment moves the market toward the equilibrium of supply and demand © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 36 Supply and Demand Together Law of supply and demand The price of any good adjusts To bring the quantity supplied and the quantity demanded for that good into balance In most markets Surpluses and shortages are temporary © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 37 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Supply and Demand Together Three steps to analyzing changes in equilibrium 1. Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves 2. Decide whether the curve shifts to the right or to the left 3. Use the supply-and-demand diagram Compare the initial and the new equilibrium Effects on equilibrium price and quantity © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 38 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Table 3 Three Steps for Analyzing Changes in Equilibrium 1. Decide whether the event shifts the supply or demand curve (or perhaps both). เหตุการณ์ที่เกิดขึ้นส่งผลต่อการเปลี่ยนแปลงของเส้นอุปสงค์หรือุปทาน 2. Decide in which direction the curve shifts. (เส้นอุปสงค์/อุปทานเปลี่ยนแปลงไปในทิศทางใด) 3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity. ใช้ diagram แสดงให้เห็นการเปลี่ยนแปลงของราคาและปริมาณดุลภาพ © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 39 Supply and Demand Together A change in market equilibrium due to a shift in demand – One summer - very hot weather (เหตุการณ์ - ในฤดูร้อนที่อากาศร้อนมาก) – Effect on the market for ice cream? (เหตุการณ์นี้ส่งผลต่อตลาดไอศครีมอย่างไร) 1. Hot weather – shifts the demand curve (tastes ) (อากาศร้อนทาให้อุปสงค์ ต่อไอศครีมเปลี่ยนแปลงจากปัจจัยด้านรสนิยม) 2. Demand curve shifts to the right (ณ ระดับราคาเท่าเดิม เส้นอุปสงค์เคลือ่ นไป ทางขวา) 3. Higher equilibrium price; higher equilibrium quantity (ระดับราคาดุลยภาพ สูงขึ้น ปริมาณดุลภาพเพิม่ ขึ้น) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 40 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 10 How an increase in demand affects the equilibrium Price of 1. Hot weather increases the Ice-Cream demand for ice cream... Cones Supply 2. …resulting in a higher price... New equilibrium $2.50 Initial equilibrium 2.00 3. …and a higher D1 D2 quantity sold. 0 7 10 Quantity of Ice-Cream Cones An event that raises quantity demanded at any given price shifts the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. Here an abnormally hot summer causes buyers to demand more ice cream. The demand curve shifts from D1 to D2, which causes the equilibrium price to rise from $2.00 to $2.50 and the equilibrium quantity to rise from 7 to 10 cones. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 41 Supply and Demand Together A change in market equilibrium due to a shift in supply – One summer - a hurricane destroys part of the sugarcane crop: higher price of sugar – Effect on the market for ice cream? 1. Change in price of sugar - supply curve 2. Supply curve - shifts to the left 3. Higher equilibrium price; lower equilibrium quantity © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 42 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 11 How a Decrease in Supply Affects the Equilibrium Price of 1. An increase in the price of sugar reduces Ice-Cream the supply of ice cream... Cones New equilibrium S2 2. …resulting in a higher price... S1 $2.50 2.00 Initial equilibrium 3. …and a smaller quantity sold. Demand 0 4 7 Quantity of Ice-Cream Cones An event that reduces quantity supplied at any given price shifts the supply curve to the left. The equilibrium price rises, and the equilibrium quantity falls. Here an increase in the price of sugar (an input) causes sellers to supply less ice cream. The supply curve shifts from S1 to S2, which causes the equilibrium price of ice cream to rise from $2.00 to $2.50 and the equilibrium quantity to fall from 7 to 4 cones. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 43 Supply and Demand Together Shifts in both supply and demand One summer: hurricane and heat wave (เกิดพายุเฮอริเคนและคลื่นความร้อน) 1. Heat wave – shift demand curve; hurricane – shift supply curve 2. Demand curve shifts to the right; Supply curve shifts to the left 3. Equilibrium price raises If demand increases substantially while supply falls just a little: equilibrium quantity rises If supply falls substantially while demand rises just a little: equilibrium quantity falls © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license 44 distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 12 A Shift in Both Supply and Demand (a) Price Rises, Quantity Rises (b) Price Rises, Quantity Falls Price of Price of Ice-Cream New Ice-Cream New Large decrease Cones Large increase equilibrium Cones in supply equilibrium in demand S2 D2 S2 S1 D1 S1 P2 P2 P1 D2 P1 Initial equilibrium Small decrease Initial Small increase in supply D1 equilibrium in demand 0 Q1 Q2 0 Q2 Q1 Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Here we observe a simultaneous increase in demand and decrease in supply. Two outcomes are possible. In panel (a), the equilibrium price rises from P1 to P2, and the equilibrium quantity rises from Q1 to Q2. In panel (b), the equilibrium price again rises from P1 to P2, but the equilibrium quantity falls from Q1 to Q2. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 45 Exercise Use demand and supply analysis to evaluate the impacts (higher, lower, same, depend) of the following events on the equilibrium price and quantity. Events Equilibrium Price Equilibrium Quantity Higher price of complements and Down Down Lower price of substitutes Higher expected future price Up Depend Higher expected future income and Depend Up better production technology © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted 46 in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.