Principles of EconomicsDr. BresnockGraph 12 Changes in Supply (Shifts in the S-Curve)Principles of EconomicsEC 201California State Polytechnic University, PomonaDr. BresnockFall, 2002Lecture 4 Market – An institution or mechanism that brings buyers (aka demanders,consumers), and sellers (aka suppliers, producers, firms, farms, fishermen,etc.) of particular resources together. This section will develop the building blocks of a market. To keep thingssimple initially, the market is assumed to consist of a large number ofbuyers and sellers, i.e. the wheat market. We will study less competitivemarkets at a later time.Demand – schedule that shows the quantities that consumers are willingand able to purchase at each alternative price, at a specific point in time.Law of Demand – there exists an inverse relationship between price (P)and quantity demanded (QD). Thus, if the P of a good falls, the QD of thegood rises and visa 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 visa versa. Sort of a bargaining instinct, or an observed response to “sales” or “discounts”.EC 201 Lecture 4Fall, 2002 A. Bresnock2) Diminishing Marginal Utility (DMU) – the consumer gets less andless additional satisfaction from consuming equal additional units of thesame good. Thus, consumers will purchase additional units only if theprice fall.2EC 201 Lecture 4Fall, 2002 A. Bresnock3) Substitution Effect – if the price of one good falls relative to itssubstitutes, then consumers will buy more of it. Consumers willpurchase more units of the good that is relatively cheaper.4) Income Effect – as the price of a good falls, the consumer can affordmore units of that good (and/or other goods). This is because as pricefor the good falls, the consumer’s “real” income, or purchasing power,increases and visa versa. The consumer’s “money” income is the“take-home pay” or “budget” that the consumer has. How muchquantity the 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 (ofthe good itself). For example, if the price of wheat falls, then the quantityof wheat demanded will rise and visa versa. If the price of jellybeans rises,then the quantity of jellybeans will fall and visa versa. Changes in price willbe shown as movements along one D-Curve. (See Graph 2 above, or Graph1 on the last page). “ Ceteris “Paribus Assumptions for DemandFor one Demand Curve (D-Curve) all things other than Price (of the gooditself) remain the same, or are held constant. For example, a particulardemand curve for wheat is constructed with consumer income, prices ofother related goods, i.e. corn, butter, etc. held constant.What causes “Demand” (D) to change? Changes in the “ceterisparibus” assumptions, or any of the variables that were held constant toconstruct one D-Curve.3EC 201 Lecture 4Fall, 2002 A. BresnockGraph 3 Changes in Demand (Shifts in the D-Curve)D1 =  in Demand (rightward shift of the D-Curve) = consumers arewilling and able topurchase MORE at eachalternative price.D2 =  in Demand (leftward shift of the D-Curve) = consumers arewilling 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 visa versa.2) Consumer Tastes and Preferences -- an  in popularity for aproduct causes demand to , or shift right, and visa versa.3) Consumer Income – the effect of consumer income on demanddepends on how consumers view the good relative to their income.The precise relationship between consumer income and demand isbased 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) Superior/Normal Goods – if income s then consumers willpurchase more of it at each alternative price and visa versa.Demand shifts right. Typical for luxury goods.4EC 201 Lecture 4Fall, 2002 A. Bresnockb) Neutral Goods – if income s or s then consumers will purchasethe same amount of it at each alternative price. Demand does notshift. Typical for necessity goods.5EC 201 Lecture 4Fall, 2002 A. Bresnockc) Inferior Goods – if income s then consumers will purchase lessof it at each alternative price and visa versa. Demand shifts left.Graph 4 Changes in Demand due to Changes in Income4) Prices of Related Goodst -- the effect of prices of other related goodson the demand depends on how consumers view the good relative toother goods. (See “Class Materials”, “Other Notes”, “Types of Goods”document on the Class Web for expanded discussion of this point).a) Complementary Goods – goods or services that are used, orconsumed, together. In general, if two goods say X and Y areviewed as complements, then ifPX s  DY s and visa versa, orPY s  DX s and visa versaGraph 5 Changes in Demand due to Changes in the Price of aComplementary Good6EC 201 Lecture 4Fall, 2002 A. Bresnockb) Substitute Goods – goods or services that a consumer can use inplace of each other. As a result the consumer will be indifferentbetween which good is used to satisfy a need. In general, if twogoods say X and Z are viewed as substitutes, then ifPX s  DZ s and visa versa, orPZ s  DX s and visa versaGraph 6 Changes in Demand due to Changes in