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Purdue AGEC 21700 - Shifts in the Supply and Demand Curve

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AGEC 217 1st Edition Lecture 8 Outline of Last LectureI. Demand SurplusA. Definition of SurplusB. Changes in PricesII. Demand ShortageA. Definition of ShortageIII. Other Economic ChangesA. The New Demand CurveB. Demand Curve ShiftsIV. Supply Curve ShiftsOutline of Current Lecture I. Related Goods and ServicesA. Definition of SubstitutesB. Definition of ComplimentsC. How the Demand Curve ShiftsII. Income Shifts the Demand CurveA. Definition of a Normal GoodB. Definition of an Inferior GoodIII. What Causes Curve Shifts?A. Curve Shift ExamplesIV. Definition of Price Ceiling and Price FloorV. Efficiency in the MarketA. Definition of Consumer SurplusB. Definition of Producer SurplusC. Definition of Social SurplusVI. How Price Ceiling affect the CurvesCurrent LectureGoods that are not consumed at the same time, also known as either/or goods, are substitutes. An example of goods that are substitutes are Coke and Pepsi. Normally you don’t consume both, just one or the other. On the other hand, goods that are consumed together are compliments. Examples of compliments are cell phones and their charges. Normally, you don’t buy a charger without also getting a cell phone. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.The demand curve will shift with different substitute and compliment situations. In the case of substitutes: if the price of Pepsi goes up, the demand for Coke will increase. This will cause the demand curve for Coke to shift to the right. In the case of compliments: if the price of chargers goes down, the demand for cell phones will increase. This will cause the cell phone demand curve to shift to the right.We know that the demand curve will shift when income changes. How it changes depends on the type of good. A normal good is any good that society wants to buy more of when their income increases. Most goods are considered normal goods. An inferior good is one that with an increase of income, the demand for it goes down. An example of this type of good is ground beef. Ground beef is a fine good to purchase, but after an increase in income you might decide instead to purchase steak. This makes the ground beef an inferior good.Many situations will cause shifts in the demand curve. Some of them are listed next. A demand curve will shift to the right if: there is an increase in population, increase in preference for a good, price of a substitute rises, price of a compliment falls, and future expectations. Other situations will cause the supply curve to shift to the left. These include: poor conditions for production, rise in prices for inputs, decreased technology, and more costly regulations. A government subsidy, though, will shift the supply curve to the right.Examples of how the demand and supply curves can shift are below.Suppose cell phones become more popular. This will only affect the demand and cause a shift to the right. As you can see below in the graph, both the price and quantity increase. This creates a new market equilibrium. As the supply curve doesn’t change, there will now be a good shortage.Let’s suppose there are two things happening to the US Postal Service. Over time people are sending less mail and more emails and texts. The cost of living is also raising, which means that postal workers will requirean increased salary. In this case Q represents the packages sent and P represents the price to send the packages. The lesser sending of mail is due to a shift in preferences, which will cause the demand curve to shiftleft. The cost of living will cause the supply curve to shift left as well, because cost is increasing. The way the curves are shifting, they will “cancel each other out” in a way. This will cause the first price to equal the secondprice. This is dependent on how steep you draw the curves though. The graphical representation of this situation is shown below.Some markets have what is called a price ceiling. A price ceiling is the maximum price that can be charged in a market. An example of this would be rent control. The price ceiling is always lower than the market equilibrium. Therefore the quantity demanded is greater than the quantity supplied and there will be a shortage. A price floor is the minimum price that can charged in a market. An example of this is minimum wage in the United States. The price floor will always be above the market equilibrium. Therefore the quantity supplied will be greater than quantity demanded, and there will be a surplus. There are terms that describe the efficiency in a market. A consumer surplus is the amount the consumer is willing to pay minus the price paid for a good. The producer surplus is equal to the price received minus the price producers are willing to sell for. A social surplus is the sum of the consumer surplus and producer surplus. An example below shows the where the consumer surplus and producer surplus are on a graph.The graph below shows what happens to consumer surplus when a price ceiling is added. For consumers, some will gain something and some will lose something. The new producer surplus ends up being the producer’s loss. The dead weight loss region is also shown; this is a pure social


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