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Supply and Demand Shift! We’ve brought Supply and Demand Together, but what happens when a shifting event occurs? D $6.00 D S Event: It is discovered that Lifesavers candy causes Ebola $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 0 5 10 15 20 25 30 35 Three Steps to Analyzing Changes in Eq’m To determine the effects of any event, 1. Decide whether event shifts S curve, D curve. 2. Decide in which direction curve shifts. 3. Use supply-demand diagram to see how the shift changes eq’m P and Q. EXAMPLE: The Market for Hybrid Cars P price of hybrid cars S1 P1 D1 Q1 Q quantity of hybrid cars EXAMPLE 1: A Shift in Demand EVENT TO BE ANALYZED: P S1 Increase in price of gas. STEP 1: D curve shifts because STEP 2: price of gas affects demand for D shifts right hybrids. because high gas STEP 3: S curve doeshybrids not price makes The shift causes an shift, because price more attractive increase in price of gas does not cars. relative to other and quantity affect cost of of hybrid cars. producing hybrids. P2 P1 D1 Q1 Q2 quantity of hybrid cars D2 Q EXAMPLE 1: A Shift in Demand Notice: When P rises, producers supply a larger quantity of hybrids, even though the S curve has not shifted. Always be careful to distinguish b/w a shift in a curve and a movement along the curve. P S1 P2 P1 D1 Q1 Q2 quantity of hybrid cars D2 Q EXAMPLE 2: A Shift in Supply EVENT: New technology reduces cost of producing hybrid cars. P S1 S2 STEP 1: S curve shifts because STEP 2: event affects P1 cost of production. P2 S shifts right D curve does not because event STEPbecause 3: shift, reduces cost, The shift causes production technology makes production price to fallof the is not one more profitable at and quantity to rise. factors that affect any given price. demand. D1 Q1 Q2 quantity of hybrid cars Q