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The following table shows output per hour for Martha and
Stewart who make gift baskets and potholders:
Output per Hour
Martha
Stewart
Gift Baskets
10
Potholders
20
12
3
CHAPTER OUTLINE
Demand Schedule
The
Demand Curve
The
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Copyright 2004 South-Western
19 of
1. The following table shows output per hour for Martha and
Stewart who make gift baskets and potholders:
Output per Hour
Martha
Stewart
Gift Baskets
10
Potholders
20
12
29 of 48
$2.0
0
1.00
D
0
Change in Demand
A
Decrease
in demand
Demand curve,D3
0
Demand
curve, D1
Demand
curve, D2
Quantity of
Ice-Cream Cones
Consumer Income
As
CONSUMER INCOME
NORMAL GOOD
Price of IceCream Cone
$3.0
0
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0
An increase in
income...
Increase
in demand
D1
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
Quantity
of IceCream
Cones
CONSUMER INCOME
INFERIOR GOOD
Price of IceCream Cone
$3.0
0
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0
An increase in
income...
Decrease
in demand
D2
0 1
D1
2 3 4 5 6 7 8 9 10 11 12
Quantity
of IceCream
Cones
Copyright2004 South-Western
Supply Schedule
The
Supply Curve
The
2.50
2.00
1.50
1.00
0.50
0
1 2
9 10 11 12 Quantity of
Ice-Cream Cones
S
C
$3.0
0
1.00
A rise in the
price of ice cream
cones results in a
movement along
the supply curve.
Quantity
of IceCream
Cones
Change in Supply
A
Supply curve,S3
Decrease
in supply
Supply
curve, S1
Supply
curve, S2
Increase
in supply
Quantity of
Ice-Cream Cones
Prices of Resources
Taxes
Subsidies
Government Regulation
Technology
Competition
Prices of Related Goods
Producer expectations
Weather
PRICES OF RESOURCES
If the prices of a goods resources increase, the
profit earned by the producer will decrease,
causing the supply of that good to decrease
(causing the supply curve to shift left)
If the prices of a goods resources decrease, the
profit earned by the producer will increase,
causing the supply of that good to increase
(causing the supply curve to shift right)
TAXES
If the government raises taxes, the profit earned
by the producer will decrease, causing the supply
of that good to decrease (causing the supply curve
to shift left)
If the government cuts taxes, the profit earned by
the producer will increase, causing the supply of
that good to increase (causing the supply curve to
shift right)
SUBSIDIES
If the government provides subsidies to a
producer, the producers profit will increase,
causing the supply of that good to increase
(causing the supply curve to shift right)
If the government does not provide subsidies to a
producer, the producers profit will decrease,
causing the supply of that good to decrease
(causing the supply curve to shift left)
REGULATION
If the government imposes regulations on a
producer, the profits will decrease, causing the
supply of that good to decrease (causing the
supply curve to shift left)
If the government lifts regulations on a producer,
the profits will increase, causing the supply of
that good to increase (causing the supply curve to
shift right)
Copyright2004 South-Western
Market Equilibrium
equilibrium The condition that exists when
quantity supplied and quantity demanded are
equal. At equilibrium, there is no tendency for
price to change.
Equilibrium Price
The
Equilibrium Quantity
The
Supply
Schedule
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
0
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
solving
solving
p*
p*==$100
$100
Plug equilibrium price into either demand or supply to get equilibrium qua
Chapter Two
67
Excess Demand
Market Equilibrium
Excess Demand
FIGURE 3.9
Excess Demand, or
Shortage
At a price of $1.75 per bushel, quantity
demanded exceeds quantity supplied.
When excess demand exists, there is a
tendency for price to rise.
When quantity demanded equals
quantity supplied, excess demand is
eliminated and the market is in
equilibrium. Here the equilibrium price
is $2.50 and the equilibrium quantity is
35,000 bushels.
Market Equilibrium
Excess Supply
Market Equilibrium
Excess Supply
FIGURE 3.10
Excess Supply, or
Surplus
At a price of $3.00,
quantity supplied exceeds
quantity demanded by
20,000 bushels.
This excess supply will
cause the price to fall.
Market Equilibrium
Changes In Equilibrium
When supply and demand curves shift, the equilibrium
price and quantity change.
FIGURE 3.11
The Coffee Market:
A Shift of Supply
and Subsequent
Price Adjustment
Before the freeze, the coffee
market was in equilibrium at a
price of $1.20 per pound.
At that price, quantity demanded
equaled quantity supplied.
The freeze shifted the supply
curve to the left (from S0 to S1),
increasing the equilibrium price
to $2.40.
SHIFTS IN DEMAND,
SUPPLY UNCHANGED
Demand Increases:
P Q
Demand
Decreases:
P Q
74
SHIFTS IN SUPPLY,
DEMAND UNCHANGED
Supply Increases:
P Q
Supply Decreases:
PQ
75
CHANGES IN EQUILIBRIUM
76 of 48
CHANGES IN EQUILIBRIUM
77 of 48
Market Equilibrium
Changes In Equilibrium
FIGURE 3.12
Examples of Supply
and Demand Shifts
for Product X
When supply and demand both increase, quantity will increase, but
price may go up or down.
2.
3.
5.
6.
Quantity Supplied
(Bushels Per Year)
$1.50
1.75
10,000
2.25
20,000
3.00
30,000
4.00
45,000
5.00
45,000
FIGURE 3.6
Clarence Browns
Individual Supply Curve
A producer will supply more when the price of
output is higher. The slope of a supply curve is
positive. Note that the supply curve is red:
Supply is determined by choices made by firms.
The
The Supply
Supply Curve
Curve shifts
shifts when
when factors
factors
other
other than
than own
own price
price change
change such
such as:
as:
89
SEATWORK