Shifting Supply, Demand, and Equilibrium

1. Shifting Supply, Demand, and Equilibrium Fall 2013

2. 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: Will this event cause a shift in the demand curve? If so, will the demand increase or decrease? Which demand curve likely represents the new demand for cars?

3. Reasons for Changes in Demand: Scenarios

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. Reasons for Changes in Demand: Scenarios

13. 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: Will this event cause a shift in the supply curve? If so, will the supply increase or decrease? Which supply curve likely represents the new supply for foreign and domestic cars?

14. Reasons for Changes in Supply: Scenarios

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

23. Reasons for Changes in Supply: Scenarios

24. 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.

25. 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.

26. Why is Equilibrium Achieved? In well-established markets in which there is information available about other trades that have taken place, a market price emerges. When prices rise above equilibrium, producers are willing to supply more – but consumers are unwilling to buy more. When prices fall below equilibrium, buyers are willing to buy more – but producers are unwilling to produce a sufficient amount at this price.