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The main goals of this chapter are to: Explain how changes in supply and demand affect equilibrium prices and quantities; identify what government-set prices are and how they can cause product surpluses and shortages; illustrate how supply and demand analysis can provide insights on actual-economy situations.
3A Appendix Demand, Supply, and Market Equilibrium McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved Lettuce • Supply shifts left for lettuce • Weather destroys part of the crop • Demand doesn’t change • Consumers still want as much lettuce as before • Equilibrium price rises which will reduce the quantity demanded LO6 3App-2 Lettuce S2 Price (per pound) S1 P2 P1 D1 Q2 Q1 Quantity (pounds) LO6 3App-3 Exchange Rates • Exchange rates – the price of one country’s currency in terms of another country’s currency • Currency appreciation: the value of one of the currencies, in terms of the other, has increased • Currency depreciation: the value of one of the currencies, in terms of the other, has decreased LO6 3App-4 Dollar price of euro Exchange Rates S1 $1.50 $1.25 D2 D1 Q1 Q2 Quantity of euros LO6 3App-5 Pink Salmon • Supply shifts right for pink salmon • New technology • New fishers enter the industry • Demand shifts left for pink salmon • Increases in consumer’s income • Reductions in the price of substitutes LO6 3App-6 Pink Salmon S1 Price (per pound) S2 P1 P2 D2 Q1 D1 Q2 Quantity (in pounds) LO6 3App-7 Gasoline • Supply of gasoline decreases • Refinery breakdowns • Mideast politics and warfare • Rising price of oil • Demand for gasoline increases • Consumers’ incomes increased • Low mileage SUVs popular LO6 3App-8 Gasoline Price (per gallon) S2 S1 P2 P1 D2 D1 Q1 Q2 Quantity (in gallons) LO6 3App-9 Sushi • Supply shifts right • Increase in the number of sushi • LO6 bars Demand shifts right • Consumers’ tastes for sushi increases 3App-10 Sushi S1 Price (per pound) S2 P1 D2 D1 Q1 Q2 Quantity (pounds) LO6 3App-11 Preset Prices • Preset prices can cause market • • LO6 imbalances Olympics Figure Skating Finals • Preset price results in a shortage of tickets Olympics Curling Preliminaries • Preset prices result in a surplus of tickets 3App-12 Preset Prices P S P2 b P1 a Shortage D Q1 Q2 Figure Skating Quantity (tickets) LO6 Price (per ticket) Price (per ticket) P S Surplus P2 a b P1 D Q2 Q1 Curling Quantity (tickets) 3App-13 ... destroys part of the crop • Demand doesn’t change • Consumers still want as much lettuce as before • Equilibrium price rises which will reduce the quantity demanded LO6 3App-2 Lettuce S2 Price (per... D1 Q2 Quantity (in pounds) LO6 3App-7 Gasoline • Supply of gasoline decreases • Refinery breakdowns • Mideast politics and warfare • Rising price of oil • Demand for gasoline increases • Consumers’... popular LO6 3App-8 Gasoline Price (per gallon) S2 S1 P2 P1 D2 D1 Q1 Q2 Quantity (in gallons) LO6 3App-9 Sushi • Supply shifts right • Increase in the number of sushi • LO6 bars Demand shifts right