Graph 12 Changes in Supply (Shifts in the S-Curve)EC 201Cal Poly PomonaDr. BresnockLecture 3 Market – An institution or mechanism that brings buyers (aka demanders, consumers), andsellers (aka suppliers, producers, firms, farms, fishermen, etc.) of particular resources together. This section will develop the building blocks of a market. To keep things simple initially, themarket is assumed to consist of a large number of buyers and sellers, i.e. the wheat market. Wewill study less competitive markets at a later time.Demand – schedule that shows the quantities that consumers are willing and able to purchaseat each alternative price, at a specific point in time.Law of Demand – there exists an inverse relationship between price (P) and quantitydemanded (QD). Thus, if the P of a good falls, the QD of the good rises and vice versa.Graph 1 An Ordinary Downward Sloping Demand FunctionWhy is Demand Downward Sloping?1) Simple Reasoning – people would like to buy more units at lower prices and vice versa. Sort of a bargaining instinct, or an observed response to “sales” or “discounts”.2) Diminishing Marginal Utility (DMU) – the consumer gets less and less additionalsatisfaction from consuming equal additional units of the same good. Thus, consumerswill purchase additional units only if the price fall.EC 201 Lecture 3Dr. Bresnock3) Substitution Effect – if the price of one good falls relative to its substitutes, thenconsumers will buy more of it. Consumers will purchase more units of the good that isrelatively cheaper.4) Income Effect – as the price of a good falls, the consumer can afford more units of thatgood (and/or other goods). This is because as price for the good falls, the consumer’s“real” income, or purchasing power, increases and vice versa. The consumer’s “money”income is the “take-home pay” or “budget” that the consumer has. How much quantitythe consumer can “get”, or purchase, with that “money” income is the consumer’s “real”income.Graph 2 Illustration of the Income EffectWhat causes “Quantity Demanded” (QD) to change? PRICE (of the good itself). Forexample, if the price of wheat falls, then the quantity of wheat demanded will rise and viceversa. If the price of jellybeans rises, then the quantity of jellybeans will fall and vice versa.Changes in price will be shown as movements along one D-Curve. (See Graph 2 above, orGraph 1 on the last page). “Ceteris Paribus” Assumptions for DemandFor one Demand Curve (D-Curve) all things other than Price (of the good itself) remain thesame, or are held constant. For example, a particular demand curve for wheat is constructedwith consumer income, prices of other related goods, i.e. corn, butter, etc. held constant.What causes “Demand” (D) to change? Changes in the “ceteris paribus” assumptions, orany of the variables that were held constant to construct one D-Curve.2EC 201 Lecture 3Dr. BresnockGraph 3 Changes in Demand (Shifts in the D-Curve)D1 =  in Demand (rightward shift of the D-Curve) = consumers are willing and able topurchase MORE at eachalternative price.D2 =  in Demand (leftward shift of the D-Curve) = consumers are willing and able topurchase LESS at eachalternative price.What Shifts, or Changes, Demand?1) Number of Consumers – an  in the number of consumers causes demand to , or shift right, and vice versa.2) Consumer Tastes and Preferences -- an  in popularity for a product causes demand to, or shift right, and vice versa.3) Consumer Income – the effect of consumer income on demand depends on howconsumers view the good relative to their income. The precise relationship betweenconsumer income and demand is based on each individual consumer’s viewpoint. (See“Class Materials”, “Other Notes”, “Types of Goods” document on the Class Web for anexpanded discussion of this point).a) Normal Goods – if income s then consumers will purchase more of it at eachalternative price and vice versa. Demand shifts right. Typical for luxury goods.b) Neutral Goods – if income s or s then consumers will purchase the sameamount of it at each alternative price. Demand does not shift. Typical for necessitygoods.3EC 201 Lecture 3Dr. Bresnockc) Inferior Goods – if income s then consumers will purchase less of it at eachalternative price and vice versa. Demand shifts left.Graph 4 Changes in Demand due to Changes in Income4) Prices of Related Goods -- the effect of prices of other related goods on the demanddepends on how consumers view the good relative to other goods. (See “ClassMaterials”, “Other Notes”, “Types of Goods” document on the Class Web for expandeddiscussion of this point).a) Complementary Goods – goods or services that are used, or consumed, together. Ingeneral, if two goods say X and Y are viewed as complements, then ifPX s  DY s and vice versaGraph 5 Changes in Demand due to Changes in the Price of a Complementary Good4EC 201 Lecture 3Dr. Bresnockb) Substitute Goods – goods or services that a consumer can use in place of each other.As a result the consumer will be indifferent between which good is used to satisfy aneed. In general, if two goods say X and Z are viewed as substitutes, then ifPX s  DZ s and vice versaGraph 6 Changes in Demand due to Changes in the Price of a Substitute Goodb) Unrelated, or Independent, Goods – goods or services that bear no relationship toeach other for consumption purposes. In general, if two goods say X and R areviewed as unrelated, then ifPX s or s  DR stays the same and vice versaGraph 7 Changes in Demand due to Changes in the Price of an Unrelated Good5EC 201 Lecture 3Dr. Bresnock5) Consumer Expectations with respect to (w/r/t):a) Future Income – If the consumer expects that future income will , they will be morelikely to  their consumption today (or normal