Slides By Timothy Diette and Kevin Brady

1. Interactive Examples Shifts of Supply and Demand Begin To navigate, please click the appropriategreenbuttons. (Do not use the arrows on your keyboard) Material from this presentation can be found in: Chapter 3 Slides By Timothy Diette and Kevin Brady CoreEconomics, 2e

2. Interactive Examples Shifts of Supply and Demand • QUESTION: • Consider the market for oranges. For each of the three scenarios: which curve(s) will shift; will the equilibrium price and quantity increase or decrease; and will the quantity demanded or supplied change? • A new machine is invented that lowers the cost of harvesting oranges. • 2. The FDA announces health benefits to eating oranges. • 3. The income of consumers falls and some orange growers quit the business and turn their orange groves into housing developments. Price Price Supply 1 $30 $25 $20 $15 $10 Demand 1 $5 100 200 300 400 500 600 Bushels of Oranges (in millions) Answer

3. Interactive Examples Shifts of Supply and Demand • ANSWER: • 1. A new machine is invented that lowers the cost of harvesting oranges. • The new machine lowers the cost of production and therefore increases supply. This shift is shown on the graph as a shift from Supply 1 to Supply 2. The equilibrium price decreases from $15 to $10 per bushel and the equilibrium quantity increases from 300 million to 500 million bushels. Note that the new equilibrium price and equilibrium quantity will vary depending how far the supply curve shifts. The movement along Demand 1 is an increase in the quantity demanded. Next Price Supply 1 $30 $25 Supply 2 $20 $15 $10 Demand 1 $5 100 200 300 400 500 600 Bushels of Oranges (in millions)

4. Interactive Examples Shifts of Supply and Demand ANSWER: 2. The FDA announces health benefits to eating oranges. The FDA announcement would likely cause an increase in demand at any given price and therefore cause the shift in demand from Demand 1 to Demand 2. The shift in demand increases the equilibrium price from $15 to $25 and increases the equilibrium quantity from 300 million to 400 million bushels. Note that the new equilibrium price and equilibrium quantity will vary depending how far the demand curve shifts. The movement along Supply 1 is an increase in the quantity supplied. Next Price Supply 1 $30 $25 $20 Demand 2 $15 $10 Demand 1 $5 100 200 300 400 500 600 Bushels of Oranges (in millions)

5. Interactive Examples Shifts of Supply and Demand • ANSWER: • The income of consumers falls and some orange growers quit the business and turn their orange groves into housing developments. • The fall in consumer income decreases demand represented by shifting from Demand 1 to Demand 2. Orange growers quitting the business decreases supply represented by shifting from Supply 1 to Supply 2. In this case, the equilibrium price decreases from $15 to $10 per bushel. The equilibrium quantity decreases from 300 million to 100 million bushels. • If both the demand and supply curves shift simultaneously will you normally be able to predict the change in equilibrium price and quantity? Next Price Supply 2 Supply 1 $30 $25 $20 $15 $10 Demand 1 $5 Demand 2 100 200 300 400 500 600 Bushels of Oranges (in millions)

6. Interactive Examples Shifts of Supply and Demand • ANSWER: • (continued) • No! Take a moment to consider the change in equilibrium price and quantity separately. • In this case, the decrease in supply and decrease in demand both cause a decrease in equilibrium quantity and therefore you can predict with confidence that equilibrium quantity will decrease. • Now turn to the effect of the demand and supply shifts on the equilibrium price. The decrease in demand causes the equilibrium price to decrease. The decrease in supply causes the equilibrium price to increase. Without specific information you would not be able to tell if the equilibrium price increased, decreased or stayed the same after the simultaneous shifts. Price Supply 2 Supply 1 $30 $25 $20 $15 $10 Demand 1 $5 Demand 2 100 200 300 400 500 600 Bushels of Oranges (in millions) The End