Files 12:56 PM Mon May 16 25% Unit+2+workbook Q . . . Home Insert Draw Layout Review View Calibri Bold (Body) 36 B I U aAv A v Unit 2-Supply and Demand Name: HR: LAW OF SUPPLY Use the space below to take notes during class. supply : The amount of some good / service a producer is willing to supply at each price Law of Supply : The direct relationship between price a quantity for lower supplied that a higher price leads to a higher quantity + some Quantity supplied: The amount of good / service Supply Schedule Price Quantity 26 50 15 75 20 100 25 1. 25 30 1. 50 35 Price Quant 24 Files 12:56 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand Name: HR: FIS H MARKET If you are identified as a seller; \"W\" Yourjob is to sell your fish for as much money as possible. (whole dollars, no cents) Grab an \"S\" card from the table in the center of the room to see what your cost was. Travel around the room to nd a buyer who is willing to give you a reasonable price. Collect the buyer's card and deposit both your card and theirs in the bucket. Record the agreed upon price as a tally on the table on the whiteboard. Record the transaction on your sheet. F'P'PP'N!' If you are identified as a buyer; 1. Yourjob is to buy a fish for as little money as possible. (whole dollars, no cents) 2. Grab a "B" card from the table in the center of the room to see what your budget is. 3. Travel around the room to nd a seller who is willing to give you a reasonable price. 4. Record the transaction on your sheet. Total Round 1 Total Round 2 Total Round 3 Transaction # U'l-PWNH 4 Files 12:56 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand Name: HR: FISH MARKET (continued) Given the buy and sell cards in the game, the following demand schedule and supply schedule are generated. Use this information to plot a demand curve and supply curve on the graph below and then answer the questions below. Supply and Demand for Fish Demand Schedule Price Quanti $1 26 $2 22 $3 18 14 $5 12 10 Price o 2 4 5 8 10 12 1416 1820 2224 26 Quantity 1. At what price does the quantity demanded equal the quantity supplied? This is called equilibrium. tin-00.\") 2. In what price range is the quantity supplied greater than the quantity demanded? This is a surplus. 7% 19.00 3. Consider the start of the first round. How do sellers change their prices when a surplus exists? Lower We WW5 4. In what price range is the quantity supplied less than the quantity demanded? This is a shortage. ('5: Ia-OD 5. If there are more buyers than items, how do sellers change their price? 4 96.029 6. Consider your answers to questions 3 and 5. In both cases, where does the price move towards? w\\\\'~\\ot\\um Files 12:56 PM Mon May 16 25% Unit+2+workbook 0 Q . . . Home Insert Draw Layout Review View Calibri Bold (Body) 36 B I U aA A v = v Unit 2-Supply and Demand Name: HR: FINDING EQUILIBRIUM Use the space below to take notes during class. Equilibrium: The only & where plans for consumers + the plans of producers agree - amount consumers want to Surplus: buy is the same poke at which producers would like to sell Any above- equilibrium price, the quantity supplied excess the quantity demand Shortage: There is excess demand . So Price Do Quantity UT4 Files 12:56 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand Name: HR: DEMAND CHANGES Use the space below to take notes during class. Factor/stimulus How it decreases Demand How it increased Demand Tastes and preferences \"'65er ;\\c% I ' ,; . Income (normal goods) Income (inferior goods) Population change Price of a substitute Price of a complement Change in expectations decrease in Demand increase in Demand Draw the shift Complete the "Demand Changes\" assignment in Canvas. 4 Files 12:56 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand Name: HR: SUPPLY CHANGES Use the space below to take notes during class. Factor/stimulus How it decreases Supply How it increased Supply Costs of Production (inputs) Weather and climate Technology Subsidy Change in expectations decrease in Supply increase in Supply Draw the shift Complete the "Supply Changes\" assignment in Canvas. 4 Files 12:57 PM Mon May 16 Insert Draw Layout Review View MARKET CHANGES Use the graphs below to show the four possible shifts that take place in a market. Demand Decrease Demand Increase Supply Decrease Supply Increase Files 12:57 PM Mon May 16 25% Unit+2+workbook Q . . . Home Insert Draw Layout Review View Calibri Bold (Body 36 B I U aA A v MARKET CHANGES (Continued) Below is a table showing the demand for Frisbees and the supply of Frisbees. Plot these data on the axes provided. Label the demand curve "D," and the supply curve "S," and answer the questions. $6 Price Quantity Quantity Demanded Supplied $5 $1.00 300 100 $2.00 250 150 $3.00 200 200 $4.00 150 250 Price $5.00 100 300 $2 $1 0 0 50 150 200 250 300 350 400 Quantity Fill in the answer blanks with numbers or cross out the incorrect words in parentheses. 1. Under these conditions, competitive market forces would tend to establish and equilibrium price of per Frisbee and an equilibrium quantity of Frisbees. 2. If the current price was $4.00 per Frisbee, buyers would want to buy Frisbees and sellers would want to sell Frisbees. Under these conditions, there would be a (shortage/surplus) of Frisbees. Competitive market forces would tend to cause the price to (increase/decrease) to a prices of $ per Frisbee 3. At this new price, buyers would now want to buy Frisbees, and sellers would now want to sell Frisbees meaning the market has found equilibrium. Because of this change in (price/shifter), the (demand/quantity demanded) changed by Frisbees, and the supply/quantity supplied) changed by Frisbees. 4. If the current price was $2.00 per Frisbee, buyers would want to buy Frisbees and sellers would want to sell Frisbees. Under these conditions, there would be a (shortage/surplus) of Frisbees. Competitive market forces would tend to cause the price to (increase/decrease) to a prices of $ per Frisbee. 5. At this new price, buyers would now want to buy Frisbees, and sellers would now want to sell Frisbees meaning the market has found equilibrium. Because of this change in (price/shifter), the (demand/quantity demanded) changed by Frisbees, and the (supply/quantity supplied) changed by _ Frisbees. 94 Files 12:57 PM Mon May 16 Insert Draw Layout Review View MARKET CHANGES (continued) 6. 10. 11. 12. Assume that the cost of plastic (used to make Frisbees) increases and causes the supply of Frisbees to change as shown in the supply schedule below. Plot 3 new supply curve on the original graph and label it \"52\" Consider the intersection of D1 and 5; Under these conditions, competitive market forces would tend to establish and equilibrium price of 5 per Frisbee and an equilibrium quantity of Frisbees. Compared to the equilibrium price in question 1, we say that, because of this change in (price/shifter), the (supply/quantity supplied) changed, and equilibrium price (increasedgdecreased) and equilibrium quantity (increasedgdecreased). Now assume that people's incomes fall, and that Frisbees are a normal good. The resulting change is reflected in the demand schedule below. Plot the new demand curve on the original graph and label it \"D1\" Quantity Demanded 1 Consider the intersection of D2 and S; Under these conditions, competitive market forces would tend to establish and equilibrium price of $ per Frisbee and an equilibrium quantity of Frisbees. Compared to the equilibrium price in question 7, we say that, because of this change in (price/shifter), the (demand/quantity demanded) changed, and equilibrium price (increasedzdecreased) and equilibrium quantity (increasedgdecreased). Complete the "Market Practice\" assignment in Canvas. 10 4 Files 12:57 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand Name: HR: _ GRAPHING PRACTICE For each of the following scenarios, draw the supply and demand graph with the change indicated. You will receive one point for complete and proper labels and one point for depicting the appropriate shift. 1. Draw a supply and demand graph for screws and label the equilibrium price "Pa\" and the equilibrium quantity \"OD\". Draw the shift that would occur if the price of lumber (a complement of screws) increased. Label the new equilibrium price \"P1\" and the new equilibrium quantity "OJ\". 2. Draw a supply and demand graph for gas and label the equilibrium price \"PD\" and the equilibrium quantity \"00\". Draw the shift that would occur if a new technology lowered the cost of drilling for oil. Label the new equilibrium price "P1\" and the new equilibrium quantity "Q1\". 3. Draw a supply and demand graph for beef and label the equilibrium price \"Pu\" and the equilibrium quantity \"0.\". Draw the shift that would occur ifthe price of corn feed (an input for producing beef) decreased. Label the new equilibrium price \"P1\" and the new equilibrium quantity "Q1\". 11 4 Files 12:57 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand Name: HR: 4. Draw a supply and demand graph for houses (a normal good) and label the equilibrium price \"PE.\" and the equilibrium quantity \"on\". Draw the shift that would occur if consumer incomes increased. Label the new equilibrium price \"P1" and the new equilibrium quantity \"(11". 5. Draw a supply and demand graph for used cars and label the equilibrium price \"Po\" and the equilibrium quantity "QB\". Draw the shift that would occur ifthe price of new cars (a substitute for used cars) increased. Label the new equilibrium price "P1\" and the new equilibrium quantity \"Of. 6. Draw a supply and demand graph for gas and label the equilibrium price \"PD\" and the equilibrium quantity "QB\". Draw the shift that would occur if a new tax is put on the production of gas. Label the new equilibrium price \"P1" and the new equilibrium quantity \"Q\". 12 4 Files 12:57 PM Mon May 16 Insert Draw Layout Review View Unit 2-Supply and Demand Unit 2Supply and Demand Learning Targets: o Differentiate between supply and demand and the resulting impact on equilibrium prices and quantities produced. I Calculate the costs of production and explain their role in firm decision making - Connect the roles of consumers and producers in the product, labor, and financial markets, and the economy as a whole. I Analyze the roles of the market for goods and services (product market) and the market for factors of production (factor market). Law of Demand Why Study Supply and Demand? When economists talk about prices, they are less interested in making judgments than in gaining a practical understanding of what determines prices and why prices change. Consider a price most of us contend with weekly: that ofa gallon of gas. Why was the average price of gasoline in the United States $3.71 per gallon in June 2014? Why did the price for gasoline fall sharply to $1.96 per gallon by January 2016? To explain these price movements, economists focus on the determinants of what gasoline buyers are willing to pay and what gasoline sellers are willing to accept. As it turns out, the price of gasoline in June of any given year is nearly always higher than the price in January of that same year. Over recent decades, gasoline prices in midsummer have averaged about 10 cents per gallon more than their midwinter low. The likely reason is that people drive more in the summer, and are also willing to pay more for gas, but that does not explain how steeply gas prices fell. Other factors were at work during those 18 months, such as increases in supply and decreases in the demand for crude oil. This chapter introduces the economic model of demand and supplyone of the most powerful models in all of economics. The discussion here begins by examining how demand and supply determine the price and the quantity sold in markets for goods and services, and how changes in demand and supply lead to changes in prices and quantities. Demand for Goods and Services Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is fundamentally based on needs and wantsif you have no need or want for something, you won't buy it. While a consumer may be able to differentiate between a need and a want, but from an economist's perspective they are the same thing. Demand is also based on ability to pay. If you cannot pay for it, you have no effective demand. By this definition, a homeless person probably has no effective demand for shelter. What a buyer pays for a unit of the specific good or service is called price. The total number of units that consumers would purchase at that price is called the quantity demanded. A rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded. When the price ofa gallon of gasoline increases, for example, people look for ways to reduce their consumption by combining several errands, commuting by carpool or mass transit, or taking weekend or vacation trips closer to home. Economists call this inverse relationship between price and quantity demanded the law of demand. The law of demand assumes that all other variables that affect demand (which we explain in the next module) are held constant. Access for free at httpszl/openstax.org/books/principles-economics-Ze/pages/i-introduction 4 Files 12:57 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand We can show an example from the market for gasoline in a table or a graph. Economist call a table that shows the quantity demanded at each price, such as Table 3.1, a demand schedule. In this case we measure price in dollars per gallon of gasoline. We measure the quantity demanded in millions of gallons over some time period (for example, per day or peryear) and over some geographic area (like a state or a country). A demand curve shows the relationship between price and quantity demanded on a graph like Figure 3.2, with quantity on the horizontal axis and the price per gallon on the vertical axis. (Note that this is an exception to the normal rule in mathematics that the independent variable (x) goes on the horizontal axis and the dependent variable (y) goes on the vertical. Economics is not math.) ls demand the same as quantity demanded? In economic terminology, demand is not the same as quantity demanded. When economists talk about demand, they mean the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or a demand schedule. When economists talk about quantity demanded, they mean only a certain point on the demand curve, or one quantity on the demand schedule. In short, demand refers to the curve and quantity demanded refers to the (specic) point on the curve. Table 3.1 shows the demand schedule and the graph in Figure 3.2 shows the demand curve. These are two ways to describe the same relationship between price and quantity demanded. Price (per Quantity Demanded gallon) (millions of gallons) $1.00 800 5220 ($2.20 per gallon, 420 million galons) 'E 52700 ($2.00 per gallon. 460 million gallons) $120 700 I=. 5130 ($1.80 per gallon, 500 million gallons) : 5150 ($1.60 per gallon, 550 million gallons) $1.40 600 g 51 40 ($1.40 per gallon, 600 million gallons) 0 ' ($1.20 per gallon. 700 million gallons) .2 51'60 550 t 5120 (5100 er lb 800 'II' lions $1.00 . p 93 n, m: IOI'I ga ) $1.80 500 $2 .00 450 300 400 500 600 TDD 300 900 Quantity of Gasoline (millions of gallons) $2.20 420 Tab|e3.1 Price and Quantity Demanded of Gasoline Figure 3.2 A Demand Curve for Gasoline The demand schedule shows that as price rises, quantity demanded decreases, and vice versa. We graph these points, and the line connecting them is the demand curve (D). The downward slope of the demand curve again illustrates the law of demandthe inverse relationship between prices and quantity demanded. Demand curves will appear somewhat different for each product. They may appear relatively steep or at, or they may be straight or curved. Nearly all demand curves share the fundamental similarity that they slope down from left to right. Demand curves embody the law of demand: As the price increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity demanded Increases. Access for free at httpszllopenslax.org/books/principles-economics-Ze/pages/t-introduction 4 Files 12:57 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand Law of Supply Supply of Goods and Services When economists talk about supply, they mean the amount of some good or service a producer is willing to supply at each price. Price is what the producer receives for selling one unit of a good or service. A rise in price almost always leads to an increase in the quantity supplied of that good or service, while a fall in price will decrease the quantity supplied. When the price of gasoline rises, for example, it encourages profit-seeking firms to take several actions: expand exploration for oil reserves; drill for more oil; invest in more pipelines and oil tankers to bring the oil to plants for refining into gasoline; build new oil refineries; purchase additional pipelines and trucks to ship the gasoline to gas stations; and open more gas stations or keep existing gas stations open longer hours. Economists call this direct relationship between price and quantity suppliedthat a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity suppliedthe law of supply. The law of supply assumes that all other variables that affect supply (to be explained in the next reading) are held constant. Figure 3.3 illustrates the law of supply, again using the market for gasoline as an example. Like demand, we can illustrate supply using a table or a graph. A supply schedule is a table, like Table 3.2 that shows the quantity supplied at a range of different prices. Again, we measure price in dollars per gallon of gasoline and we measure quantity supplied in millions of gallons. A supply curve is a graphic illustration of the relationship between price, shown on the vertical axis, and quantity, shown on the horizontal axis. The supply schedule and the supply curve arejust two different ways of showing the same information. Notice that the horizontal and vertical axes on the graph for the supply curve are the same as for the demand curve. Access for free at httpszllopenstax.org/books/principles-economics-Ze/pages/t-intr0duction 4 Files 12:57 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand Figure 3.3 A Supply Curve for Gasoline The supply schedule is the table that shows quantity supplied of gasoline at each price. As price rises, quantity supplied also increases, and vice versa. The supply curve (5) is created by graphing the points from the supply schedule and then connecting them. The upward slope of the supply curve illustrates the law of supplythat a higher price leads to a higher quantity supplied, and vice versa. Price (per Quantity Supplied (millions gallon) of gallons) $220 ($220 per gallon, 720 million gallors) 15' 52,00 (52.00 per gallon, 700 million gallons) 1% $1.80 ($1.60 per gallon, 680 million gallons) E $1.60 ($1.60 per gallon, 640 million gallons) 2 $1.40 ($1.40 per galon, 600 million gallons) 3 $1.20 ($1.20 per gallon. 550 million gallons) a $1.00 ($1.00 per galon, 500 million gallons) l 'I l I l T l 300 400 500 600 700 300 900 Quantity of Gasoline (millions of gallons) Table3.2 Price and Supply of Gasoline The shape of supply curves will vary somewhat according to the product: steeper, flatter, straighter, or curved. Nearly all supply curves, however, share a basic similarity: they slope up from left to right and illustrate the law of supply: as the price rises, say, from $1.00 per gallon to $2.20 per gallon, the quantity supplied increases from 500 gallons to 720 gallons. Conversely, as the price falls, the quantity supplied decreases. Is supply the same as quantity supplied? In economic terminology, supply is not the same as quantity supplied. When economists refer to supply, they mean the relationship between a range of prices and the quantities supplied at those prices, a relationship that we can illustrate with a supply curve or a supply schedule. When economists refer to quantity supplied, they mean only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve and quantity supplied refers to the (specific) point on the curve. Access for free at httpszllopenslax.org/books/principles-economics-Ze/pages/t-introduction 4 Files 12:57 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand Finding Equilibrium EquilibriumWhere Demand and Supply Intersect Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same graph. Together, demand and supply determine the price and the quantity that will be bought and sold in a market. Figure 3.4 illustrates the interaction of demand and supply in the market for gasoline. The demand curve (D) is identical to Figure 3.2. The supply curve (5) is identical to Figure 3.3. Table 3.3 contains the same information in tabular form. P (5 per gallon) $120 + 777777777 J] 7 777777 A below-equilibrium price $1.00 . Ekces demand D I or shortage $0.50 . l l l l 1' r ' 300 400 500 600 700 800 900 Quantity of Gasoline (millions of gallons) Figure 3.4 Demand and Supply for Gasoline The Quantity Quantity demand curve (D) and the supply curve (5) Price (per demanded supplied intersect at the equilibrium point E, with a price gallon) (millions of (millions cf of $1.40 and a quantity Of gallons) gallons) 600. The equilibrium is the only price where quantity demanded is equal to quantity 51-00 800 500 supplied. At a price above equilibrium like $1.80, quantity supplied exceeds the quantity $120 700 550 demanded, so there is excess supply $140 600 600 la.k.a. surplus). At a price below equilibrium such as $1.20, quantity demanded exceeds $150 550 540 quantity supplied, so there is excess demand la.k.a. shortage). $130 500 680 $2.00 460 700 $2.20 420 720 Access for free at httpszllopenslax.org/books/principles-economics-2e/pages/t-introduction 4 Files 12:57 PM Mon May 16 Insert Draw Layout Review View Unit 2-Supply and Demand Remember this: When two lines on a diagram cross, this intersection usually means something. The point where the supply curve (S) and the demand curve (D) cross, designated by point E in Figure 3.4, is called the equilibrium. The equilibrium price is the only price where the plans of consumers and the plans of producers agreethat is, where the amount of the product consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied). Economists call this common quantity the equilibrium quantity. At any other price, the quantity demanded does not equal the quantity supplied, so the market is not in equilibrium at that price. In Figure 3.4, the equilibrium price is $1.40 per gallon of gasoline and the equilibrium quantity is 600 million gallons. If you had only the demand and supply schedules, and not the graph, you could find the equilibrium by looking for the price level on the tables where the quantity demanded and the quantity supplied are equal. The word \"equilibrium\" means \"balance." If a market is at its equilibrium price and quantity, then it has no reason to move away from that point. However, if a market is not at equilibrium, then economic pressures arise to move the market toward the equilibrium price and the equilibrium quantity. Imagine, for example, that the price of a gallon of gasoline was above the equilibrium pricethat is, instead of $1.40 per gallon, the price is $1.80 per gallon. The dashed horizontal line at the price of $1.80 in Figure 3.4 illustrates this above equilibrium price. At this higher price, the quantity demanded drops from 600 to 500. This decline in quantity reflects how consumers react to the higher price by finding ways to use less gasoline. Moreover, at this higher price of $1.80, the quantity of gasoline supplied rises from the 600 to 680, as the higher price makes it more profitable for gasoline producers to expand their output. Now, consider how quantity demanded and quantity supplied are related at this above-equilibrium price. Quantity demanded has fallen to 500 gallons, while quantity supplied has risen to 680 gallons. In fact, at any above-equilibrium price, the quantity supplied exceeds the quantity demanded. We call this an excess supply or a surplus. With a surplus, gasoline accumulates at gas stations, in tanker trucks, in pipelines, and at oil refineries. This accumulation puts pressure on gasoline sellers. If a surplus remains unsold, those firms involved in making and selling gasoline are not receiving enough cash to pay their workers and to cover their expenses. In this situation, some producers and sellers will want to cut prices, because it is better to sell at a lower price than not to sell at all. Once some sellers start cutting prices, others will follow to avoid losing sales. These price reductions in turn will stimulate a higher quantity demanded. Therefore, if the price is above the equilibrium level, incentives built into the structure of demand and supply will create pressures for the price to fall toward the equilibrium. Now suppose that the price is below its equilibrium level at $1.20 per gallon, as the dashed horizontal line at this price in Figure 3.4 shows. At this lower price, the quantity demanded increases from 600 to 700 as drivers take longer trips, spend more minutes warming up the car in the driveway in wintertime, stop sharing rides to work, and buy larger cars that get fewer miles to the gallon. However, the below-equilibrium price reduces gasoline producers' incentives to produce and sell gasoline, and the quantity supplied falls from 600 to 550. When the price is below equilibrium, there is excess demand, or a shortagethat is, at the given price the quantity demanded, which has been stimulated by the lower price, now exceeds the quantity supplied, which had been depressed by the lower price. In this situation, eager gasoline buyers mob the gas stations, only to find many stations running short of fuel. Oil companies and gas stations recognize that they have an opportunity to make higher profits by selling what gasoline they have at a higher price. As a result, the price rises toward the equilibrium level. Access for free at httpszl/openstax.org/books/principles-economics-Ze/pages/t-intr0duction 4 Files 12:57 PM Mon May 16 Insert Draw Layout Review View Unit 2-Supply and Demand Demand Changes What Factors Affect Demand? We defined demand as the amount of some product a consumer is willing and able to purchase at each price. That suggests at least two factors that affect demand. Willingness to purchase suggests a desire, based on what economists call tastes and preferences. If you neither need nor want something, you will not buy it. Ability to purchase suggests that income is important. Professors are usually able to afford better housing and transportation than students, because they have more income. Prices of related goods can affect demand also. If you need a new car, the price of a Honda may affect your demand for a Ford. Finally, the size or composition of the population can affect demand. The more children a family has, the greater their demand for clothing. The more driving-age children a family has, the greater their demand for car insurance, and the less for diapers and baby formula. These factors matter for both individual and market demand as a whole. Exactly how do these various factors affect demand, and how do we show the effects graphically? To answer those questions, we need the ceteris paribus assumption. The Ceteris Paribus Assumption A demand curve or a supply curve is a relationship between two, and only two, variables: quantity on the horizontal axis and price on the vertical axis. The assumption behind a demand curve or a supply curve is that no relevant economic factors, other than the product's price, are changing. Economists call this assumption ceteris paribus, a Latin phrase meaning "other things being equal.\" Any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal. A demand curve or a supply curve is a relationship between two, and only two, variables when all other variables are kept constant. If all else is not held equal, then the laws of supply and demand will not necessarily hold. How Does Income Affect Demand? Let's use income as an example of how factors other than price affect demand. Figure 3.5 shows the initial demand for automobiles as D0. At point (1, for example, if the price is $20,000 per car, the quantity of cars demanded is 18 million. D0 also shows how the quantity of cars demanded would change as a result of a higher or lower price. For example, if the price of a car rose to $22,000, the quantity demanded would decrease to 17 million, at point R. The original demand curve D0, like every demand curve, is based on the ceteris paribus assumption that no other economically relevant factors change. Now imagine that the economy expands in a way that raises the incomes of many people, making cars more affordable. How will this affect demand? How can we show this graphically? Access for free at httpszllopenstax.org/books/principles-economics-Ze/pages/t-intr0duction 4 Files 12:57 PM Mon May 16 Insert Draw Layout Review View Unit 2-Supply and Demand Return to Figure 3.5. The price of cars is still $20,000, but with higher incomes, the quantity demanded has now increased to 20 million cars, shown at point 5. As a result of the higher income levels, the demand curve shifts to the right to the new demand curve D1, indicating an increase in demand. Table 3.4 shows clearly that this increased demand would occur at every price, notjust the original one. $29,000 $26,000 a $24,000 $22,000 -------------- P=Z, P=2 'DIII =2mmn o :14! milion o :13 miion 0': mnilion $20,000 Price $18,000 $16,000 $14,000 $12,000 $10,000 8 13 14A 17 10 20 23 28 Quantity Figure 3.5 Shifts in Demand: A Car Example Increased demand means that at every given price, the quantity demanded is higher, so that the demand curve shifts to the right from DO to D1. Decreased demand means that at every given price, the quantity demanded is lower, 50 that the demand curve shifts to the left from DO to DZ. Price Decrease to D2 Original Quantity Demanded D! Increase to D1 $16,000 17.6 million 22.0 million 24.0 million $18,000 16.0 million 20.0 million 22.0 million $20,000 14.4 million 18.0 million 20.0 million $22,000 13.6 million 17.0 million 19.0 million $24,000 13.2 million 16.5 million 18.5 million $26,000 12.8 million 16.0 million 18.0 million Tab|e3.4 Price and Demand Shifts: A Car Example Now, imagine that the economy slows down so that many people lose their jobs or work fewer hours, reducing their incomes. In this case, the decrease in income would lead to a lower quantity of cars demanded at every given price, and the original demand curve D0 would shift left to D2. The shift from D0 to D2 represents such a decrease in demand: At any given price level, the quantity demanded is now lower. In this example, a price of $20,000 means 18 million cars sold along the original demand curve, but only 14.4 million sold after demand fell. Access for free at httpszliopenstax.org/books/principles-economics-Ze/pagesH-intr0duction 4 Files 12:58 PM Mon May 16 Insert Draw Layout Review View Unit 2-Supply and Demand When a demand curve shifts, it does not mean that the quantity demanded by every individual buyer changes by the same amount. In this example, not everyone would have higher or lower income and not everyone would buy or not buy an additional car. Instead, a shift in a demand curve captures a pattern for the market as a whole. In the previous section, we argued that higher income causes greater demand at every price. This is true for most goods and services. For someluxury cars, vacations in Europe, and fine jewelrythe effect of a rise in income can be especially pronounced. A product whose demand rises when income rises, and vice versa, is called a normal good. Afew exceptions to this pattern do exist. As incomes rise, many people will buy fewer generic brand groceries and more name brand groceries. They are less likely to buy used cars and more likely to buy new cars. They will be less likely to rent an apartment and more likely to own a home. A product whose demand falls when income rises, and vice versa, is called an inferior good. In other words, when income increases, the demand curve shifts to the left. Other Factors That Shift Demand Curves Income is not the only factor that causes a shift in demand. Other factors that change demand include tastes and preferences, the composition or size of the population, the prices of related goods, and even expectations. A change in any one of the underlying factors that determine what quantity people are willing to buy at a given price will cause a shift in demand. Graphically, the new demand curve lies either to the right (an increase) or to the left (a decrease) of the original demand curve. Let's look at these factors. Changing Tastes or Preferences From 1980 to 2014, the per-person consumption of chicken by Americans rose from 48 pounds per year to 85 pounds per year, and consumption of beef fell from 77 pounds per year to 54 pounds per year, according to the US. Department of Agriculture (USDA). Changes like these are largely due to movements in taste, which change the quantity of a good demanded at every price: that is, they shift the demand curve for that good, rightward for chicken and leftward for beef. Changes in the Composition of the Population The proportion of elderly citizens in the United States population is rising. It rose from 9.8% in 1970 to 12.6% in 2000, and will be a projected (by the US Census Bureau) 20% of the population by 2030. A society with relatively more children, like the United States in the 19605, will have greater demand for goods and services like tricycles and day care facilities. A society with relatively more elderly persons, as the United States is projected to have by 2030, has a higher demand for nursing homes and hearing aids. Similarly, changes in the size of the population can affect the demand for housing and many other goods. Each of these changes in demand will be shown as a shift in the demand curve. Changes in the prices of related goods such as substitutes or complements also can affect the demand for a product. A substitute is a good or service that we can use in place of another good or service. As electronic books, like this one, become more available, you would expect to see a decrease in demand for traditional printed books. A lower price for a substitute decreases demand for the other product. For example, in recent years as the price of tablet computers has fallen, the quantity demanded has increased (because of the law of demand). Since people are purchasing tablets, there has been a Access for free at httpszl/openstax.org/books/principles-economics-Ze/pages/1introduction 4 Files 12:58 PM Mon May 16 Insert Draw Layout Review View Unit 2-Supply and Demand decrease in demand for laptops, which we can show graphically as a leftward shift in the demand curve for laptops. A higher price for a substitute good has the reverse effect. Other goods are complements for each other, meaning we often use the goods together, because consumption of one good tends to enhance consumption of the other. Examples include breakfast cereal and milk; notebooks and pens or pencils, golf balls and golf clubs; gasoline and sport utility vehicles; and the five-way combination of bacon, lettuce, tomato, mayonnaise, and bread. If the price of golf clubs rises, since the quantity demanded of golf clubs falls (because of the law of demand), demand for a complement good like golf balls decreases, too. Similarly, a higher price for skis would shift the demand curve for a complement good like ski resort trips to the left, while a lower price for a complement has the reverse effect. Changes in Expectations about Future Prices or Other Factors that Affect Demand While it is clear that the price of a good affects the quantity demanded, it is also true that expectations about the future price (or expectations about tastes and preferences, income, and so on) can affect demand. For example, if people hear that a hurricane is coming, they may rush to the store to buy ashlight batteries and bottled water. If people learn that the price of a good like coffee is likely to rise in the future, they may head for the store to stock up on coffee now. We show these changes in demand as shifts in the curve. Therefore, a shift in demand happens when a change in some economic factor (other than price) causes a different quantity to be demanded at every price. The following Work It Out feature shows how this happens. Shift in Demand A shift in demand means that at any price (and at every price), the quantity demanded will be different than it was before. Following is an example of a shift in demand due to an income increase. Step 1. Draw the graph of a demand curve for a normal good like pizza. Pick a price (like P0). Identify the corresponding Q0. See an example in Figure 3.6 fil oI) Quantity Demanded Figure 3.6 Demand Curve We can use the demand curve to identify how much consumers would buy at any given price. 10 Access for free at httpszllopenstax.org/books/principles-economics-Ze/pages/'l-intr0duction 4 Files 12:58 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand Step 2. Suppose income increases. As a result of the change, are consumers going to buy more or less pizza? The answer is more. Draw a dotted horizontal line from the chosen price, through the original quantity demanded, to the new point with the new Q1. Draw a dotted vertical line down to the horizontal axis and label the new Q1. Figure 3.7 provides an example. Quantity Demanded Quantity Demanded Figure 3.7 Demand Curve with Income Increase With an increase in income, consumers will purchase larger quantities, pushing demand to the right. Step 3. Now, shift the curve through the new point. You will see that an increase in income causes an upward (or rightward) shift in the demand curve, so that at any price the quantities demanded will be higher, as Figure 3.8 illustrates. Figure 3.8 Demand Curve Shifted Right With an increase in income, consumers will purchase larger quantities, pushing demand to the right, and causing the demand curve to shift right. Summing Up Factors That Change Demand Figure 3.9 summarizes six factors that can shift demand curves. The direction ofthe arrows indicates whether the demand curve shifts represent an increase in demand or a decrease in demand. Notice that a change in the price of the good or service itself is not listed among the factors that can shift a demand curve. A change in the price of a good or service causes a movement along a specific demand curve, and it typically leads to some change in the quantity demanded, but it does not shift the demand curve. Taste shitt to lesser popularity Population likely to buy drops Taste shill to greater popularity Population likely to buy rises lncorne rises (for a normal good) Income drops (for a normal good) 3 Price of substitutes nses 3 Price of substJtutes falls t 'E 0- Pnce of complements falls \"- Prioe of complainants rises Future expectations Future expectations D, encourage buying Dn discourage buying DD Quantity Quantity (3) Factors that increase demand (b) Factors that decrease demand Figure 3.9 Factors That Shift Demand Curves (a) A list of factors that can cause an increase in demand from D0 to D1. (b) The same factors, if their direction is reversed, can cause a decrease in demand from D0 to D1. 11 Access for free at httpszllopenstax.org/books/principles-economics-Ze/pages/t-introduction 4 Files 12:58 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand Supply Changes How Production Costs Affect Supply A supply curve shows how quantity supplied will change as the price rises and falls, assuming ceteris paribus so that no other economically relevant factors are changing. If other factors relevant to supply do change, then the entire supply curve will shift. Just as we described a shift in demand as a change in the quantity demanded at every price, a shift in supply means a change in the quantity supplied at every price. In thinking about the factors that affect supply, remember what motivates firms: profits, which are the difference between revenues and costs. A firm produces goods and services using combinations of labor, materials, and machinery, or what we call inputs or factors of production. If a firm faces lower costs of production, while the prices for the good or service the firm produces remain unchanged, a rm's profits go up. When a firm's profits increase, it is more motivated to produce output, since the more it produces the more profit it will earn. When costs of production fall, a firm will tend to supply a larger quantity at any given price for its output. We can show this by the supply curve shifting to the right. Take, for example, a messenger company that delivers packages around a city. The company may find that buying gasoline is one of its main costs. If the price of gasoline falls, then the company will find it can deliver messages more cheaply than before. Since lower costs correspond to higher profits, the messenger company may now supply more of its services at any given price. For example, given the lower gasoline prices, the company can now serve a greater area, and increase its supply. Conversely, if a firm faces higher costs of production, then it will earn lower profits at any given selling price for its products. As a result, a higher cost of production typically causes a firm to supply a smaller quantity at any given price. In this case, the supply curve shifts to the left. Consider the supply for cars, shown by curve 50in Figure 3.10. Point] indicates that if the price is $20,000, the quantity supplied will be 18 million cars. If the price rises to $22,000 per car, ceteris paribus, the quantity supplied will rise to 20 million cars, as point K on the SO curve shows. We can show the same information in table form, as in Table 3.5. $28,000 $26,000 F - mom 0 - l1! l'lIIHlI $24,000 F-ZIIDN n-Iumlllm $22,000 n-zmm $20,000 ______________________ Price $18,000 $16,000 $14,000 $12,000 $10,000 8 13 16.5 18 19.8 23 Quantity Access for free at httpszllopenstax.org/books/principles-economics-Ze/pages-introduction 4 Files 12:58 PM Mon May 16 Insert Draw Layout Review View Unit 2-Supply and Demand Figure 3.10 Shifts in Supply: A Car Example Decreased supply means that at every given price, the quantity supplied is lower, so that the supply curve shifts to the left, from SO to 51. Increased supply means that at every given price, the quantity supplied is higher, 50 that the supply curve shifts to the right, from SO to $2. Price Decrease to S1 Original Quantity Supplied SO Increase to S2 $16,000 10.5 million 12.0 million 13.2 million 518,000 13.5 million 15.0 million 16.5 million $20,000 16.5 million 18.0 million 19.8 million 522,000 18.5 million 20.0 million 22.0 million 524,000 19.5 million 21.0 million 23.1 million $26,000 20.5 million 22.0 million 24.2 million Table3.5 Price and Shifts in Supply: A Car Example Now, imagine that the price of steel, an important ingredient in manufacturing cars, rises, so that producing a car has become more expensive. At any given price for selling ca rs, car manufacturers will react by supplying a lower quantity. We can show this graphically as a leftward shift of supply, from 50 to 51, which indicates that at any given price, the quantity supplied decreases. In this example, at a price of $20,000, the quantity supplied decreases from 18 million on the original supply curve (SO) to 16.5 million on the supply curve 51, which is labeled as point L. Conversely, if the price of steel decreases, producing a car becomes less expensive. At any given price for selling cars, car manufacturers can now expect to earn higher profits, so they will supply a higher quantity. The shift of supply to the right, from 50 to 52, means that at all prices, the quantity supplied has increased. In this example, at a price of $20,000, the quantity supplied increases from 18 million on the original supply curve (SO) to 19.8 million on the supply curve 52, which is labeled M. Other Factors That Affect Supply In the example above, we saw that changes in the prices of inputs in the production process will affect the cost of production and thus the supply. Several other things affect the cost of production, too, such as changes in weather or other natural conditions, new technologies for production, and some government policies. Changes in weather and climate will affect the cost of production for many agricultural products. For example, in 2014 the Manchurian Plain in Northeastern China, which produces most of the country's wheat, corn, and soybeans, experienced its most severe drought in 50 years. A drought decreases the supply of agricultural products, which means that at any given price, a lower quantity will be supplied. Conversely, especially good weather would shift the supply curve to the right. 13 Access for free at httpszl/openstax.org/books/principles-economics-Ze/pages/t-intr0duction 4 Files 12:58 PM Mon May 16 Insert Draw Layout Review View Unit 2Supply and Demand When a firm discovers a new technology that allows the firm to produce at a lower cost, the supply curve will shift to the right, as well. For instance, in the 19605 a major scientific effort nicknamed the Green Revolution focused on breeding improved seeds for basic crops like wheat and rice. By the early 19905, more than two-thirds of the wheat and rice in low-income countries around the world used these Green Revolution seedsand the harvest was twice as high per acre. A technological improvement that reduces costs of production will shift supply to the right, so that a greater quantity will be produced at any given price. Government policies can affect the cost of production and the supply curve through taxes, regulations, and subsidies. For example, the U.S. government imposes a tax on alcoholic beverages that collects about $8 billion per year from producers. Businesses treat taxes as costs. Higher costs decrease supply for the reasons we discussed above. Other examples of policy that can affect cost are the wide array of government regulations that require firms to spend money to provide a cleaner environment or a safer workplace. Complying with regulations increases costs. A government subsidy, on the other hand, is the opposite of a tax. A subsidy occurs when the government pays a firm directly or reduces the firm's taxes if the firm carries out certain actions. From the firm's perspective, taxes or regulations are an additional cost of production that shifts supply to the left, leading the firm to produce a lower quantity at every given price. Government subsidies reduce the cost of production and increase supply at every given price, shifting supply to the right. The following Work It Out feature shows how this shift happens. Future expectations by producers also affect supply. Expectations about the future price (or expectations about other factors such as regulations, costs, etc.) can affect supply. For example, if a producer expects their product's price to fall in the future, they may unload much of their inventory today, thus increasing supply. If they expect the price to rise in the future, they may withhold supply today in anticipation of being able to sell at the higher price in the future. Shift in Supply We know that a supply curve shows the minimum price a firm will accept to produce a given quantity of output. What happens to the supply curve when the cost of production goes up? Following is an example of a shift in supply clue to a production cost increase. (We'll introduce some other concepts regarding firm decision-making in Chapters 7 and 8.) Step 1. Draw a graph of a supply curve for pizza. Pick a quantity (like Q0). If you draw a vertical line up from Q0 to the supply curve, you will see the price the firm chooses. Figure 3.11 provides an example. 14 Access for free at httpszllopenstax.org/books/principles-economics-Ze/pages/t-introduction 12:58 PM Mon May 16 Insert Draw Layout Review View Unit 2-Supply and Demand Desired prot + Cost of producon wad Qunnlily Supplied Quantity Supplied Figure 3.11 Supply Curve You can use a supply curve to show the minimum price a firm will accept to produce a given quantity of output. Step 2. Why did the firm choose that price and not some other? One way to think about this is that the price is composed of two parts. The rst part is the cost of producing pizzas at the margin; in this case, the cost of producing the pizza, including cost of ingredients (e.g., dough, sauce, cheese, and pepperoni), the cost ofthe pizza oven, the shop rent, and the workers' wages. The second part is the firm's desired profit, which is determined, among other factors, by the profit margins in that particular business. (Desired profit is not necessarily the same as economic profit, which will be explained in Chapter 7.) If you add these two parts together, you get the price the firm wishes to charge. The quantity Q0 and associated price P0 give you one point on the firm's supply curve, as Figure 3.12 illustrates. Figure 3.12 Setting Prices The cost of production and the desired profit equal the price a firm will set for a product. Step 3. Now, suppose that the cost of production increases. Perhaps cheese has become more expensive by $0.75 per pizza. If that is true, the firm will want to raise its price by the amount of the increase in cost (50.75). Draw this point on the supply curve directly above the initial point on the curve, but $0.75 higher, as Figure 3.13 shows. S' 5 P1 P. I S o E P.. ......... e P. n. I r; 1 } Desired prot Desired prot I + + l } Cosiol production Coslol production 0|] Quantity Supplied Quantity Supplied Figure 3.13 Increasing Costs Leads to Increasing Price Because the cost of production and the desired profit equal the price a firm will set for a product, if the cost of production increases, the price for the product will also need to increase. 15 Access for free at httpszl/openstax.org/books/principles-economics-Ze/pages/1introduction 12:58 PM Mon M 24% Unit 2 Full Text 0 Q . . . Home Insert Draw Layout Review View Calibri Regular (Bo 11 B I U aA v A v Unit 2-Supply and Demand Step 4. Shift the supply curve through this point. You will see that an increase in cost causes an upward (or a leftward) shift of the supply curve so that at any price, the quantities supplied will be smaller, as Figure 3.14 illustrates Figure 3.14 Supply Curve Shifts When the cost of production increases, the supply curve shifts upwardly to a new price level. Summing Up Factors That Change Supply Changes in the cost of inputs, natural disasters, new technologies, and the impact of government decisions all affect the cost of production. In turn, these factors affect how much firms are willing to supply at any given price. Figure 3.15 summarizes factors that change the supply of goods and services. Notice that a change in the price of the product itself is not among the factors that shift the supply curve. Although a change in price of a good or service typically causes a change in quantity supplied or a movement along the supply curve for that specific good or service, it does not cause the supply curve itself to shift. So Favorable natural conditions for Poor natural conditions for production production A fall in input prices A rise in input prices A decline in technology Improved technology Price Price (not common) Lower product Higher product taxes/ taxes/ less costly more costly regulations regulations Quantity Quantity (a) Factors that increase supply (b) Factors that decrease supply Figure 3.15 Factors That Shift Supply Curves (a) A list of factors that can cause an increase in supply from SO to S1. (b) The same factors, if their direction is reversed, can cause a decrease in supply from SO to S1. Because demand and supply curves appear on a two-dimensional diagram with only price and quantity on the axes, an unwary visitor to the land of economics might be fooled into believing that economics is about only four topics: demand, supply, price, and quantity. However, demand and supply are really 'umbrella" concepts: demand covers all the factors that affect demand, and supply covers all the factors that affect supply. We include factors other than price that affect demand and supply are included by using shifts in the demand or the supply curve. In this way, the two-dimensional demand and supply model becomes a powerful tool for analyzing a wide range of economic circumstances. Is supply the same as quantity supplied? In economic terminology, supply is not the same as quantity supplied. When economists refer to supply, they mean the relationship between a range of prices and the quantities supplied at those prices, a relationship that we can illustrate with a supply curve or a supply schedule. When economists refer to quantity supplied, they mean only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve and quantity supplied refers to the (specific) point on the curve. 16 Access for free at https://openstax.org/books/principles-economics-2e/pages/1-introduction12:58 PM Mon May 16 Insert Draw Layout Review View Unit 2-Supply and Demand Market Changes Let's begin this discussion with a single economic event. It might be an event that affects demand, like a change in income, population, tastes, prices of substitutes or complements, or expectations about future prices. It might be an event that affects supply, like a change in natural conditions, input prices, or technology, or government policies that affect production. How does this economic event affect equilibrium price and quantity? We will analyze this question using a four-step process. Step 1. Draw a demand and supply model before the economic change took place. To establish the model requires four standard pieces of information: The law of demand, which tells us the slope ofthe demand curve; the law of supply, which gives us the slope of the supply curve; the shift variables for demand; and the shift variables for supply. From this model, find the initial equilibrium values for price and quantity. Step 2. Decide whether the economic change you are analyzing affects demand or supply. In other words, does the event refer to something in the list of demand factors or supply factors? Step 3. Decide whether the effect on demand or supply causes the curve to shift to the right or to the left, and sketch the new demand or supply curve on the diagram. In other words, does the event increase or decrease the amount consumers want to buy or producers want to sell? Step 4. Identify the new equilibrium and then compare the original equilibrium price and quantity to the new equilibrium price and quantity. Let's consider one example that involves a shift in supply and one that involves a shift in demand. Then we will consider an example where both supply and demand shift. Good Weather for Salmon Fishing Supposed that during the summer of 2015, weather conditions were excellent for commercial salmon shing off the California coast. Heavy rains meant higher than normal levels of water in the rivers, which helps the salmon to breed. Slightly cooler ocean temperatures stimulated the growth of plankton, the microscopic organisms at the bottom of the ocean food chain, providing everything in the ocean with a hearty food supply. The ocean stayed calm during fishing season, so commercial fishing operations did not lose many days to bad weather. How did these climate conditions affect the quantity and price of salmon? Figure 3.16 illustrates the four-step approach, which we explain below, to work through this problem. Table 3.6 also provides the information to work the problem. 17 Access for free at httpszllopenstax.org/books/principles-economics-Ze/pages/t-intr0duction 12:58 PM Mon May 16 Draw Layout Review View Unit 2-Supply and Demand $4.00 Eu(P = 3.25. o = 250) V 3. Price (5 per pound) M M a U I $1.00 - $0.50 - $0.00 1 'l ' l i 'l l 0 200 400 600 800 1,000 Quantity (thousands of sh) Figure 3.16 Good Weather for Salmon Fishing: The Four-Step Process Unusually good weather leads to changes in the price and quantity of salmon. Price per Pound Quantity Supplied in 2014 Quantity Supplied in 2015 Quantity Demanded Table3.6 Salmon Fishing Step 1. Draw a demand and supply model to illustrate the market for salmon in the year before the good weather conditions began. The demand curve DO and the supply curve 50 show that the original equilibrium price is $3.25 per pound and the original equilibrium quantity is 250,000 fish. (This price per pound is what commercial buyers pay at the fishing docks. What consumers pay at the grocery is higher.) Step 2. Did the economic event affect supply or demand? Good weather is an example of a natural condition that affects supply. Step 3. Was the effect on supply an increase or a decrease? Good weather is a change in natural conditions that increases the quantity supplied at any given price. The supply curve shifts to the right, moving from the original supply curve 50 to the new supply curve 51, which Figure 3.16 and Table 3.6 show. 18 Access for free at httpszllopenstax.org/books/principles-economics-Ze/pages/'l-introduction 12:58 PM Mon May 16 Insert Draw Layout Review View Unit 2-Supply and Demand Step 4. Compare the new equilibrium price and quantity to the original equilibrium. At the new equilibrium E1, the equilibrium price falls from $3.25 to $2.50, but the equilibrium quantity increases from 250,000 to 550,000 salmon. Notice that the equilibrium quantity demanded increased, even though the demand curve did not move. In short, good weather conditions increased supply of the California commercial salmon. The result was a higher equilibrium quantity of salmon bought and sold in the market at a lower price. Newspapers and the Internet According to the Pew Research Center for People and the Press, increasingly more people, especially younger people, are obtaining their news from online and digital sources. The majority of US. adults now own smartphones or tablets, and most of those Americans say they use them in part to access the news. From 2004 to 2012, the share of Americans who reported obtaining their news from digital sources increased from 24% to 39%. How has this affected consumption of print news media, and radio and television news? Figure 3.17 and the text below illustrates using the four-step analysis to answer this question. Prlce Quantity Figure 3.17 The Print News Market: A Four-Step Analysis A change in tastes from print news sources to digital sources results in a leftward shift in demand for the former. The result is a decrease in both equilibrium price and quantity. Step 1. Develop a demand and supply model to think about what the market looked like before the event. The demand curve D0 and the supply curve SO show the original relationships. In this case, we perform the analysis without specific numbers on the price and quantity axis. Step 2. Did the described change affect supply or demand? A change in tastes, from traditional news sources (print, radio, and television) to digital sources, caused a change in demand for the former. Step 3. Was the effect on demand positive or negative? A shift to digital news sources will tend to mean a lower quantity demanded of traditional news sources at every given price, causing the demand curve for print and other traditional news sources to shift to the left, from D0 to D1. 19 Access for free at httpszl/openstax.org/books/principles-economics-Ze/pages/tintroduction 12:58 PM Mon May 16 Insert Draw Layout Review View Unit 2-Supply and Demand Step 4. Compare the new equilibrium price and quantity to the original equilibrium price. The new equilibrium (E1) occurs at a lower quantity and a lower price than the original equilibrium (E0). The decline in print news reading predates 2004. Print newspaper circulation peaked in 1973 and has declined since then due to competition from television and radio news. In 1991, 55% of Americans indicated they received their news from print sources, while only 29% did so in 2012. Radio news has followed a similar path in recent decades, with the share of Americans obtaining their news from radio declining from 54% in 1991 to 33% in 2012. Television news has held its own over the last 15 years, with a market share staying in the