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Chapter 2 Supply and Demand: The Basics Introduction to Economics (Combined Version) 5th Edition The Demand Curve A demand curve shows the quantity of a good demanded at various prices. Examples: At a price of $2.00 per pound, buyers are willing and able to purchase 2 billion pounds of chicken per year (point A). At a price of $1.00 per pound, they will purchase 3 billion pounds (point B). Introduction to Economics (Combined Version) 5th Edition Change in the Quantity Demanded All conditions—other than price—that affect demand are considered to be constant under the “other things being equal” clause of the law of demand. As long as these other conditions do not change, the only two variables at work are quantity demanded (on the horizontal axis) and price (on the vertical axis). The effect of a change in price on quantity demanded is shown by a movement along the demand curve. Introduction to Economics (Combined Version) 5th Edition Change in Demand Conditions other than price of chicken that affect demand for chicken include prices of other goods and consumer incomes and tastes. Example: Suppose the price of chicken remains constant at $2 per pound while the price of beef (a substitute) increases. The demand for chicken will increase, shown by a shift in the demand curve from D1 to D2 . Introduction to Economics (Combined Version) 5th Edition Change in Consumer Income Suppose an increase in consumer income causes the demand curve for chicken to shift from D1 to D2 , as shown. This indicates that chicken is__. an inferior good a normal good a substitute a complement Introduction to Economics (Combined Version) 5th Edition The Supply Curve A supply curve shows the quantity of a good producers will supply at any given price, other things being equal. Examples: If the price of chicken is $2, producers will supply $2 billion pounds per year. If the price is $3, they will supply $3 billion pounds per year. Introduction to Economics (Combined Version) 5th Edition The Supply Curve and the PPF • The production possibility frontier provides one explanation of why the supply curve has a positive slope. • As the quantity of chicken produced increases, the opportunity cost of producing it increases, as shown by the increasing slope of the PPF. Introduction to Economics (Combined Version) 5th Edition A Change in Supply Conditions other than price of chicken that affect the supply of chicken include technology, input prices, prices of other goods, and expectations. Example: Suppose the price of chicken feed increases. The supply curve will shift upward S1 to S3 . Suppose new organic farming methods lower the cost of producing chicken. The supply curve will shift downward S1 to S2 . Introduction to Economics (Combined Version) 5th Edition Equilibrium When the plans of buyers and sellers mesh when they are tested in the market place, the market is in equilibrium. If the price is too high, there will be a surplus. If the price is too low, there will be a shortage. Introduction to Economics (Combined Version) 5th Edition A Change in Equilibrium Which diagram best represents the effect of an increase in the cost of corn used as feed for beef cattle on the market for beef? An increase in the price of an input will shift the supply curve as shown in the right-hand diagram. Introduction to Economics (Combined Version) 5th Edition Bonus Case Study: Supply and Demand for Olive Oil No meal in Southern Europe is complete without a basket of bread and a dish of olive oil. In the spring of 2013, olive oil prices spiked dramatically. For a complete slideshow presentation of the supply and demand for olive oil, follow this link or visit Ed Dolan’s Econ Blog for February 5, 2013. Bread and Olive Oil Photo by Ewan Munro http://commons.wikimedia.org/wiki/File:Murano,_Mayfair,_London _%285210809193%29.jpg Introduction to Economics (Combined Version) 5th Edition