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B
manded. For example, it tells us that to sell
7.40
55 million pounds per year, the price must be
Price per Pound




C
7.30
$7.10 per pound. This relationship is shown at
E
point G in Figure 1. If the price were $7.40, how-
7.20
ever, consumers would demand only 50 million
F
7.10
pounds (point B). Because the quantity demanded
G
declines as the price increases, the demand curve
7.00
H has a negative slope.3
6.90
Notice the last phrase in the definitions of the
D
demand schedule and the demand curve: “hold-
0 45 50 55 60 65 70 75
ing all other determinants of quantity demanded
Quantity Demanded
constant.” What are some of these “other things,”
in Millions of Pounds per Year
and how do they affect the demand curve?


Shifts of the Demand Curve
The quantity of beef demanded is subject to a variety of influences other than the price of
beef. Changes in population size and characteristics, consumer incomes and tastes, and
the prices of alternative products such as pork and fish presumably change the quantity
of beef demanded, even if the price of beef does not change.
Because the demand curve for beef depicts only the relationship between the quantity
of beef demanded and the price of beef, holding all other factors constant, a change in beef


This common-sense answer is examined more fully in later chapters.
2


If you need to review the concept of slope, refer back to the appendix to Chapter 1.
3




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Chapter 4 59
Supply and Demand: An Initial Look



price moves the market for beef from one point on the demand curve to another point on
the same curve. However, a change in any of these other influences on demand causes a
shift of the entire demand curve. More generally: A shift in a demand
curve occurs when any
A change in the price of a good produces a movement along a fixed demand curve. By relevant variable other than
contrast, a change in any other variable that influences quantity demanded produces a price changes. If consumers
shift of the entire demand curve. want to buy more at any
and all given prices than
If consumers want to buy more beef at every given price than they wanted previously,
they wanted previously, the
the demand curve shifts to the right (or outward). If they desire less at every given price, demand curve shifts to the
the demand curve shifts to the left (or inward toward the origin). right (or outward). If they
Figure 2 shows this distinction graphically. If the price of beef falls from $7.30 to $7.10 desire less at any given
per pound, and quantity demanded rises accordingly, we move along demand curve D0D0 price, the demand curve
shifts to the left (or inward).
from point C to point F, as shown by the blue arrow. If, on the other hand, consumers sud-
denly decide that they like beef better than they did formerly, or if they embrace a study
that reports the health benefits of beef, the entire demand curve shifts outward from D0D0
to D1D1, as indicated by the brick arrows, meaning that at any given price consumers are
now willing to buy more beef than before. To make this general idea more concrete, and F I GU R E 2
to show some of its many applications, let us consider some specific examples of those Movements along
“other things” that can shift demand curves. versus Shifts of a
Demand Curve
Consumer Incomes If average
incomes rise, consumers will pur-
D1
chase more of most goods, including
beef, even if the prices of those goods D0
remain the same. That is, increases in
income normally shift demand curves
Price per Pound




C
outward to the right, as depicted in $7.30
Figure 3(a), where the demand curve
shifts outward from D0D0 to D1D1,
F
establishing a new price and output 7.10
quantity.
D1
Population Population growth af-
D0
fects quantity demanded in more or
less the same way as increases in av- Quantity Demanded in Millions of Pounds per year
erage incomes. For instance, a larger
population will presumably want to
consume more beef, even if the price
of beef and average incomes do not change, thus shifting the entire demand curve to the
right, as in Figure 3(a). The equilibrium price and quantity both rise. Increases in particu-
lar population segments can also elicit shifts in demand”for example, the United States
experienced a miniature population boom between the late 1970s and mid-1990s. This
group (which is dubbed Generation Y and includes most users of this book) has sparked
higher demand for such items as cell phones and video games.
In Figure 3(b), we see that a decrease in population should shift the demand curve for
beef to the left, from D0D0 to D2D2.

Consumer Preferences If the beef industry mounts a successful advertising cam-
paign extolling the benefits of eating beef, families may decide to buy more at any given
price. If so, the entire demand curve for beef would shift to the right, as in Figure 3(a). Al-
ternatively, a medical report on the dangers of high cholesterol may persuade consumers
to eat less beef, thereby shifting the demand curve to the left, as in Figure 3(b). Again,
these are general phenomena:
If consumer preferences shift in favor of a particular item, its demand curve will shift
outward to the right, as in Figure 3(a).




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Licensed to:
Part 1
60 Getting Acquainted with Economics



F I GU R E 3
Shifts of the Demand
D1
Curve

D2




M
D1
D2




An example is the ever-shifting “rage” in children™s toys”be it Yu-Gi-Oh! cards, elec-
tronic Elmo dolls, or the latest video games. These items become the object of desperate
hunts as parents snap them up for their offspring, and stores are unable to keep up with
the demand.

Prices and Availability of Related Goods Because pork, fish, and chicken are
popular products that compete with beef, a change in the price of any of these other
items can be expected to shift the demand curve for beef. If any of these alternative




Volatility in Electricity Prices
The following newspaper story excerpts highlight the volatility of 2,000

the electricity industry and its susceptibility to manipulation of the
supply-demand mechanism and soaring prices. Although the indus-
try was deregulated more than a decade ago, electricity prices have
generally not fallen and, in many cases, have risen sharply. The 1,500
Federal Energy Regulatory Commission contends that allowing
competition among producers should guarantee the lowest possi-
Price of Electricity




ble price. Why have electricity prices not fallen, unlike other previ-
SOURCE: © AP Images/Paul Sakuma




ously regulated industries?
1,000
Rising fuel costs are one major reason. . . . Another factor is the
very nature of electricity, which must be produced, transmitted
and consumed in an instant . . . electricity cannot be held in
inventory.
500
Critics point to opportunities for suppliers to interfere in the mar-
ket system, including the withholding of power or limiting of pro-
duction during periods of high demand, leading to skyrocketing
100
80
prices. 60
40
20
0
“Shutting down a power plant in July is like the mall closing on JUNE JULY AUGUST

the weekend before Christmas, but in July last year, 20 percent NOTE: Quantity is in billions of quarts per
of generating capacity was shut down in California,” said Robert year.
McCullough, an economist whose Oregon consulting business is
SOURCE: “Flaws Seen In Market for Utilities; Power Play: The Bidding Game” by
advising some of those contending in lawsuits that prices are David Cay Johnston, The New York Times, Late Edition (East Coast), November 21,
being manipulated. 2006, p.C1.




Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:

Chapter 4 61
Supply and Demand: An Initial Look



items becomes cheaper, some consumers will switch away from beef. Thus, the
demand curve for beef will shift to the left, as in Figure 3(b). Other price changes may
shift the demand curve for beef in the opposite direction. For example, suppose
that hamburger buns and ketchup become less expensive. This may induce some con-
sumers to eat more beef and thus shift the demand curve for beef to the right, as in
Figure 3(a). In general:
Increases in the prices of goods that are substitutes for the good in question (as pork,
fish, and chicken are for beef ) move the demand curve to the right. Increases in the
prices of goods that are normally used together with the good in question (such as ham-
burger buns and beef ) shift the demand curve to the left.
This is just what happened when a frost wiped out almost half of Brazil™s coffee bean
harvest in 1995. The three largest U.S. coffee producers raised their prices by 45 percent,
and, as a result, the demand curve for alternative beverages such as tea shifted to the
right. Then in 1998, coffee prices dropped about 34 percent, which in turn caused the de-
mand curve for tea to shift toward the left (or toward the origin).
Although the preceding list does not exhaust the possible influences on quantity de-
manded, we have said enough to suggest the principles followed by demand and shifts of
demand. Let™s turn now to the supply side of the market.



SUPPLY AND QUANTITY SUPPLIED
Like quantity demanded, the quantity of beef that is supplied by business firms such as
farms is not a fixed number; it also depends on many things. Obviously, we expect more
beef to be supplied if there are more farms or more cows per farm. Cows may provide less
meat if bad weather deprives them of their feed. As before, however, let™s turn our atten-
tion first to the relationship between the price and quantity of beef supplied.
Economists generally suppose that a higher price calls forth a greater quantity The quantity supplied is
supplied. Why? Remember our analysis of the principle of increasing cost in Chapter 3 the number of units that
sellers want to sell over a
(page 44). According to that principle, as more of any farmer™s (or the nation™s) resources
specified period of time.
are devoted to beef production, the opportunity cost of obtaining another pound of beef
increases. Farmers will therefore find it profitable to increase beef production only if they
can sell the beef at a higher price”high enough to cover the additional costs incurred to
expand production. In other words, it normally will take higher prices to persuade farm-
ers to raise beef production. This idea is quite general and applies to the supply of most
goods and services.4 As long as suppliers want to make profits and the principle of in-
creasing costs holds:
As the price of any commodity rises, the quantity supplied normally rises. As the price
falls, the quantity supplied normally falls.



The Supply Schedule and the Supply Curve

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