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Supply and Demand
Transcript of Supply and Demand
During the Obama administration, the development of low-cost batteries for electric cars received large amounts of federal funding in terms of subsidies. Meanwhile, American households gave a higher priority towards minimizing their environmental impact. Consider the market for zero-emissions electric vehicles where there is an upward-sloping supply curve and a downward-sloping demand curve.
ANSWER: Both curves will shift right. The equilibrium price change is ambiguous.The equilbrium quantity increases.
"Lumber and brick are substitutes in home construction. Suppose the price of lumber increases due to new regulations for the logging industry."
The equilibrium price increases. The equilibirum quantity increases.
"Suppose that there is a sudden reduction in the number of restaurants in your hometown. How would this increase affect the market for restaurant food?"
The equilibrium price increases. The equilibirum quantity decreases.
"According to the Washington Post article "The Downsides of Cheap Corn" farmers' 2014 crop revenues were down from prior years despite very productive harvests all around the United States. Which of the following is the explanation offered by the article for this apparent paradox?"
The increase in the supply of crops has decreased prices by a greater percentage than the percentage increase in quantity of sales.
"Use the equations below to calculate equilibrium price and quantity."
Equilibrium Quantity: 100
Equilibrium Price: $400
According to the Washington Post article "The Downsides of Cheap Corn," the farming machinery market is heavily influenced by the prevailing conditions in the agricultural sector as a whole. Shift the curves in the graph below to illustrate the 2014 sales and profitability changes observed in the market for tractors, as reported by the article.
The focus of this presentation is to explain the impact of shifts in the market supply and the demand curves on the equilibrium price and output.
Supply and Demand
In order to understand what a shift in the supply and demand curve does to the equilibrium price and output we need to understand a few basic terms:
Now we will look at shifts in the supply curve, possible reasons for its shift, and what it does to equilibrium price and quantity.
A supply curve will shift right for the following reasons:
Costs to create good decrease
-because firms have more money to make more goods
Firms expect greater demand
- firms will produce more in order to avoid excess demand (shortage of goods).
Supply: Shift Right
A demand curve will shift for the following reasons, according to Chapter 4.4, Page 79-80:
Change in Income -
for example, increase in income causes more consumers to buy normal goods, a decrease in income would cause more consumers to buy alternate goods.
Change in Price of a Substitute Good
- because more consumers will choose a substitute product if it's cheaper in comparison to other products
Change in Price of a Complimentary Good
- as in, a decrease in prices of a product usually bought alongside another product, because if one is cheaper, people are more likely to buy them both
Change in Population
- because that means more potential consumers of a product
Consumer Preferences Change
- now more consumer want a certain good over another
Expected Change in Future Prices
- because consumers will want to stock up on the good if they think the price of the good will increase later
According to the textbook (Ch. 4.2, Pg 71), supply is how much a firm is willing and capable of selling.
The amount that firms are capable/willing to sell is the amount of a product that consumers have available to them.
Supply can be influenced by the following, because all of these listed reasons affect the amount of profit the firm can potentially make. (The more profit a firm is making the more product they are willing to produce)
- price of the product - wage paid to workers
- price of materials - cost of capital
- taxes paid to the federal government
In reference to the textbook (Ch. 4.4, Pg.78-80), demand is how much consumers are willing and capable of buying.
The following reasons are capable of influencing a consumers thoughts on buying a product (therefore affecting demand):
- price of the product - consumers income
- price of substitute goods - preferences/ads
- price of complimentary goods
Equilibrium is where the quantity demanded and the quantity supplied intersect on a supply v. demand graph. In other words, quantity demanded and quantity supplied equal each other.(Ch. 4.3, Pg. 76)
This is ideal for firms as it means there is no excess demand or excess supply.
A supply curve will shift left for the following reasons:
Costs to create goods increase -
firms now have less money to produce goods.
Firms expect less demand
- firms will produce less in order to avoid a surplus of goods (excess supply).
Supply: Shift Left
~MIDTERM: Question 10~
"In considering the relationships between price and quantity demanded, ceteris paribus means economists assume that:"
According to the textbook (Ch. 4.2, Pg. 74), ceteris paribus is Latin for all other variables being held fixed. An example of this would be when drawing a market supply curve because the factors that could affect individual supply is held constant.
all other variables remain unchanged.
~SLO2: Question 5~
~SLO2: Question 9~
The graph below represents the market for luxury automobiles. Now suppose that one of the industry's major suppliers of luxury cars has decided to exit the market to focus on its line of economy cars. At the same time the average price of luxury cars has increased and the quantity of cars sold has increased. Manipulate the graph to demonstrate these changes in the market for luxury automobiles.
~SLO2: Question 13~
~SLO2: Question 20~
"The graph below represents the market for soft
drinks. Now suppose that one of the industry's major suppliers of soft drinks has decided to exit the market to focus on its snack foods. At the same time the average price of soft drinks has increased and the total amount of soft drink sales has increased. Manipulate the graph to demonstrate these changes in the market for soft drinks."
SLO2: Question 1
Assuming that the demand for corn stayed the same, then an increase in the production of corn (supply), made the supply curve shift right (like in the image). This causes the equilibrium price (circled in red) to fall, while the equilibrium quantity rises.
SLO2: Question 3
In the article John Deere said there was a "15 percent plunge in profit". Since there was less demand, the supply curve will move to the
This causes the new equilibrium price to be lower and the new equilibrium quantity to be lower as well.
This (red), new supply curve is where it is because in the question it says that the price fell and production grew (typical for right shift in supply curve). The new equilibrium is at (4.5, 14) because the problem says that prices decrease to $4.5/bushel and the production to 14 billion. In order to make (4.5, 14) the new equlibrium, the supply curve must move right. The problem does not mention the demand increasing or decreasing, hence, it stays where it is.
SLO2: Question 4
In order to solve this question you must set the equation up as follows then:
600-2Q = 200+2Q
400-2Q = 2Q
4q = 400
Q = 100
Then do the same with P, but isolate Q:
(P-600)/-2 = Q and (P-200)/2 = Q
(P-600)/-2 = (P-200)/2
-.5P+300 = .5P-100
P = $400
SLO2: Question 6
This will cause a shift left in the supply curve because there are less SUPPLIERS, therefore, the equilibrium quantity goes down. Due to the product being more scarce, the equilibrium price goes up.
SLO2: Question 7
Now that the price of lumber went up there will be a greater demand for its substitute, brick. Therefore, the equilibrium price of bricks can increase because its demand is higher, and the quantity produced also increases because there is more profit being made due to the rising prices.
The supply curve moves to the left because a major supplier decided to exit the market, and the demand curve moved to the right because a major supplier exiting the market, means other firms will be getting a higher demand for luxury cars. These changes causes the price to increase to the cars being more scarce, and will cause suppliers to produce a higher quantity.
"There has been a sudden influx of refugees in the small town of Dallon, leading to a doubling of the local population. How does this sudden influx affect the local market for food?."
The equilibrium price increases. The equilibirum quantity increases.
SLO2: Question 12
Now that the population has gone up, there is more potential consumers, meaning, a higher demand. Therefore, the right shift in the demand curve causes there to be a greater quantity produced (because of a greater demand), and the price will also rise due to the product now being more scarce (because more consumers are competing to obtain the good).
Now that the battery has funding and more people want to buy the car (because people are prioritizing eco-friendly goods) both the supply and demand curve will shift right. Since they are both shifting, and the price is unclear, change is ambiguous. On the other hand, since more people are supplying the good, and more people are demanding the good, naturally the quantity of the good will also increase.
SLO2: Question 15
1) Simple subtraction is used to solve this. The "more" hints at subtraction taking place. Therefore in the last row: 15-5.7 = 9.3 million pounds
2) Because the columns are about demand, and the demand has increased, this causes a shift right for the demand curve.
Since a supplier has decided to exit the market, naturally this makes the supply curve to shift left. Since the price and quantity have increased, the demand curve must move up to show that the equilibrium price/quantity increase as well. The demand increases because there are less suppliers, and hence, different firms are experiencing more potential buyers.
Since more firms are entering the market place, that means there are more suppliers, hence, a greater supply (right shift in the supply curve). If you look at 8 on the y-axis, in the graph before the curve was moved, its x-value is 2. Meaning for $8, 2 braces can be supplied. After the supply curve moved, 4 braces can be supplied per $8.
SLO2: Question 24