Reasons for Changes in Demand Assume that Demand Curve B represents the baseline original annual consumption of USmade cars For each of the following scenarios decide Will this event cause a shift in the demand curve ID: 805624
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Slide1
Fall 2013
Shifting Supply, Demand, and Equilibrium
Slide2Reasons 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?
Slide3Reasons for Changes in Demand: Scenarios
Scenario
Does demand
shift?Increase or Decrease?New Demand
Curve
Consumers’ Income
Drops
Millions of Immigrants Enter the U.S.
Price of Foreign Autos Drop
Major Cities
Add Inexpensive Bus Lines
Price of U.S. Autos Rises
Price
of U.S. Autos Expected to Rise Soon
Families Look Forward to Summer
Vacations
U.S.
Auto Firms Launch Effective Ad Campaigns
Slide4Scenario 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.
Slide5Scenario 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.
Slide6Scenario 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.
Slide7Scenario 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.
Slide8Scenario 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.
Slide9Scenario 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.
Slide10Scenario 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.
Slide11Scenario 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.
Slide12Reasons for Changes in Demand: Scenarios
Scenario
Does demand
shift?Increase or Decrease?New Demand
Curve
Consumers’ Income
Drops
Yes
Decrease
A
Millions of Immigrants Enter the U.S.
Yes
Increase
C
Price of Foreign Autos Drop
Yes
Decrease
A
Major Cities
Add Inexpensive Bus Lines
Yes
Decrease
A
Price of U.S. Autos Rises
No
B
Price
of U.S. Autos Expected to Rise Soon
Yes
Increase
C
Families Look Forward to Summer
Vacations
Yes
Increase
C
U.S.
Auto Firms Launch Effective Ad Campaigns
Yes
Increase
C
Slide13Reasons 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?
Slide14Reasons for Changes in Supply: Scenarios
Scenario
Does supply
shift?Increase or Decrease?New Supply
Curve
Auto Workers’ Union Agrees to Wage Cuts
New Robot
Technology Increases Efficiency
Price of U.S. Cars Increases
Nationwide Auto Workers Strike
Begins
Cost of Steel
Rises
Major Auto Producer Goes Out
of Business
Buyers Reject New Car
Models
Government Gives Car Producers a Subsidy
Slide15Scenario 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.
Slide16Scenario 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.
Slide17Scenario 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.
Slide18Scenario 4:
Nationwide Auto
Workers Strike
BeginsThis 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.
Slide19Scenario 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.
Slide20Scenario 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.
Slide21Scenario 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.
Slide22Scenario 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.
Slide23Reasons for Changes in Supply: Scenarios
Scenario
Does supply
shift?Increase or Decrease?New Supply
Curve
Auto Workers’ Union Agrees to Wage Cuts
Yes
Increase
C
New Robot
Technology Increases Efficiency
Yes
Increase
C
Price of U.S. Cars Increases
No
B
Nationwide Auto Workers Strike
Begins
Yes
Decrease
A
Cost of Steel
Decreases
Yes
Increase
C
Major Auto Producer Goes Out
of Business
Yes
Decrease
A
Buyers Reject New Car
Models
No
B
Government Gives Car Producers a Subsidy
Yes
Increase
C
Slide24Determining 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.
Slide25Finding 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.
Slide26Why 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.