USING EYE ONTHE price of coffee

n  Why Did thePrice of Coffee Soar in 2010 and 2011?

You can use thisstory to review the key fact that factors that shift the supply curve do notnecessarily shift the demand curve. In particular, the heavy rains in Colombia,Indonesia, Mexico, and Vietnam affected only the supply curve and had noeffect on the demand curve. To demonstrate this point, ask your students howmany of them knew there were heavy rains in these countries in 2009-2010. Veryfew, if any, will know the recent weather patterns of other countries. Thisfact can serve as an excellent reminder of the point that the factors thataffect supply do not affect demand. Ask your students how these changes couldhave affected their demand if they didn’t know of them. The only factor thatinfluenced their demand was the higher price of coffee not the heavy rains. So the change in the price of coffee leads toa movement along the demand curve, not a shift of the demand curve.

USING EYE ONYour LIFE

n  UsingDemand and Supply

This Eye points out that students will encountersupply and demand throughout their life. You can mention to them that supplyand demand is also highly relevant when it comes to investing. For instance, in2004 the price of ethanol soared because of government initiatives for use ofethanol in fuel. These initiatives increased the demand for ethanol and therebylead to dramatic price hikes ... and equally dramatic increases in the profitsof ethanol producers and their stock prices. If a student had been able to“guess” in 2003 that the government was likely to respond to high oil prices byenacting policies that favored ethanol, that student could have made a killingin the stock market. Indeed, supply and demand are perhaps the real fundamentalthat underlies stock prices!

ADDITIONALEXERCISEs FOR ASSIGNMENT

n  Questions

n   Checkpoint 4.1  Demand

1.      TheInternet was born in 1969. For the next 20 years, mainly scientists inuniversities and research laboratories used it. But in the 1990s, the use ofInternet service increased dramatically and the price per hour of Internetservice fell.

1a.    Arethere any substitutes for Internet service? If so, provide an example.

1b.    Arethere any complements of Internet service? If so, provide an example.

1c.    Whatare the main developments that brought about the dramatic increase in thequantity of Internet service during the 1990s?

1d.   Whichdevelopments that you identified in part (c) shifted the demand curve forInternet service rightward?

1e.    Which developments that you identified inpart (c) increased the quantity demanded of Internet service?

2.     Answer and explain your answer for each ofthe events listed below.

2a.    Whathappens to the demand curve for pumpkins in October?

2b.    Whathappens to the demand curve for Gatorade in summer?

2c.    Whathappens to the demand curve for gasoline if 20 percent of all new cars arerequired to be electric powered?

2d.   Whathappens to the demand and the demand curve for beef if more people decide tobecome vegans?

2e.    Theprice of a concert ticket increases. What is the effect on the demand curve forconcerts?

2f.     Becauseof concerns about terrorism, more firms want to buy metal detectors. Whathappens to the demand for metal detectors?

2g.    More people decide to have a pet cat. Whatis the effect of this decision on the demand for cat food?

n   Checkpoint 4.2  Supply

3.      Inthe market for SUVs, several events occur one at a time. Explain the influenceof each event on the quantity supplied of SUVs and the supply of SUVs.Illustrate the effects of each event by either a movement along the supply curveor a shift in the supply curve and say which event or events illustrates thelaw of supply in action. The events are:

3a.    Theprice of a truck rises.

3b.    Theprice of an SUV falls.

3c.    Theprice of an SUV is expected to fall next year.

3d.   AnSUV engine defect requires a huge and costly manufacturer's recall to replacethe defective engines.

3e.    Anew robot technology lowers the cost of producing SUVs.

4.     Answer and explain your answer for each ofthe events listed below.

4a.    Whathappens to the supply curve of new homes if the wage rate paid to carpentersfalls?

4b.    Companiescan produce both cardigan sweaters and pullover sweaters. What happens to thesupply curve of cardigan sweaters if the price of a pullover sweater increases?

4c.    Whathappens to the supply curve of pig’s feet if the price of fried pork rindsdecreases?

4d.   The price of a metal detector rises. Whathappens to the supply and the supply curve of metal detectors?

n   Checkpoint 4.3  MarketEquilibrium

5.     Suppose a technological advance lowers thecost of producing computer memory chips. What is the effect of this change onthe demand for memory chips, the supply of memory chips, the equilibrium priceof memory chips, and the equilibrium quantity of memory chips?

6.     Suppose people read reports that eatingoatmeal helps prevent heart disease. What is the effect of this change on theequilibrium price of oatmeal and the equilibrium quantity of oatmeal?

7.     What happens to equilibrium price and theequilibrium quantity of each good described in the situations described below?Illustrate your answers.

7a.  Sunnyvale isnamed the most livable city in theUnited States. At the same time,the wage rates of homebuilders, electricians, and plumbers in Sunnyvale increase. Describe what happens to the new homemarket in Sunnyvale.

7b.  The price of airline fuel falls by 10 percent.At the same time, people’s incomes increase and they prefer to fly to theirvacation destinations. Describe what happens to the market for airline travel.

7c.   Installation costs for small satellite TVdishes fall by 10 percent. At the same time, network owners increase the costof programming packages shown via satellite TV dish systems. Describe whathappens in the market for small satellite TV dishes.

8.     During 2004, orange growers in Florida experiencedthree hurricanes. As a result, the amount of oranges harvested in Florida was smaller thanusual. Orange growers in other states experienced normal growing conditions.What was the effect of the smaller harvests in Florida? How do you think the price oforanges and the quantity bought and sold changed in early 2005? What do youpredict happened to the price of frozen orange juice in early 2005? Use graphsof the orange market and the frozen orange juice market to illustrate youranswers.

9.     The USAToday reported that in 2007, more than 25 percent of the corn crop could beused to produce ethanol, up from 20 percent in 2006 and 6 percent in 2000. USA Today also reported that farmers areexpected to switch to corn from soybeans, wheat, and even cotton. One farmer,Leon Corzine of Assumption, Ill.,said he plans to devote 90 percent to corn and 10 percent to soybeans in 2007.Four years ago he planted half corn and half soybeans. Explain why farmers areswitching to corn production and if most farmers agree with Leon Corzine, howwill the price of soybeans change.

nAnswers

n   Checkpoint 4.1  Demand

1a. Thereare five services provided by the Internet: e-mail, information on Web pages,home shopping services, information on fast breaking news, and entertainment.The only substitute for Internet e-mail service, if a person is interested inthe speed of service, is the telephone. For bulky or unique items (like largedocuments, magazines, bills, photographs) or if you don’t mind waiting, postalservices are substitutes. In terms of Web pages, some provide a great deal ofinformation and others provide minimal, basic information on their firms. Ifyou need the basic information and you want it fast, there are no realsubstitutes for the Internet. If you want detailed information, substitutes forthe Internet are phone calls or literature sent from the firm. For homeshopping, catalogs and home shopping channels on television are substitutes,though slower (in the case of catalogs) or generally without as muchinformation (in the case of television home shopping channels). For informationon fast breaking news, possibly radio or television is a substitute. Forentertainment, substitutes abound. For instance, listening to music can be doneby accessing an Internet radio station or, as substitutes, a local radiostation or a CD. The Internet has cartoons, for which comic books and cartoonson television are substitutes. More generally, anything that providesentertainment substitutes for the Internet’s entertainment services, thoughsome (watching a movie on a DVD) are not particularly close substitutes.

1b.  Thecomplements to the Internet are computers, phone lines, modems, cable modems,and DSL lines provided by the phone service.

1c.   Themain developments are quicker and cheaper computers and modems and moreInternet providers supplying better service. Additionally, more people now owncomputers.

1d.  Thenew, cheaper computers and modems, which are complements of Internet servicehave shifted the demand curve for Internet service rightward. More people nowown computers, and this change in the number of buyers also shifts the demandcurve rightward.

1e.   Theincrease in quantity demanded occurs when the supply curve shifts. An increasein the number of providers and an increase in technology shift the supply curverightward. When the supply curve shifts, rightward there is a movement downalong the demand curve and an increase in the quantity demanded.

2a.  As people prepare for fall holidays, peopleincrease their preferences for pumpkins. The demand curve for pumpkins shiftsrightward.

2b.  People exercise more in the summer and spendmore time outside getting thirsty. There is an increase in the demand forGatorade during the summer and the demand curve for Gatorade shifts rightward.

2c.   As more cars are required to be electricpowered, the demand for gasoline decreases. The demand curve for gasolineshifts leftward.

2d.  As more people decide to become vegans, thedemand for beef decreases and the demand curve for beef shifts leftward.

2e.   There is a movement up along the demand curvefor concerts. The demand curve does not shift because the only factor thatchange is the price.

2f.   Firms have increased their preferences formetal detectors. The demand for metal detectors increases and the demand curveshifts rightward.

2g.  Cat food and cats are complements. As morepeople decide they want a pet cat, the demand for cat food increases.

n   Checkpoint 4.2  Supply

3a.  A truck is a substitute in production for anSUV. If the price of a truck rises, auto makers produce more trucks and fewerSUVs. The supply curve for SUVs shifts leftward from S₀ to S₁ as shown in Figure 4.1.

 

 

 

 

 

 

 

 

 

 

3b.  When the price of an SUV falls, there is amovement down along the supply curve for SUVs. This outcome is shown in Figure4.2 in which the price falls from P₀ to P₁, and the quantity supplieddecreases from Q₀ to Q₁.

 

 

 

 

 

 

 

 

 

 

 

3c.   If we expect the price of SUVs to fall nextyear, suppliers increase the current supply to take advantage of current higherprices. The supply curve shifts rightward from S₀ to S₁,as shown in Figure 4.3.

3d.  To replace the defective engines, the automaker incurs higher production costs. The cost increase decreases the supplyand shifts the supply curve leftward, as shown in Figure 4.1.

3e.   Thenew robot technology decreases production costs for SUVs. This change increasesthe supply of SUVs and the supply curve for SUVs shifts rightward, as shown inFigure 4.3.

 

 

 

 

4a.  Carpenters help produce new homes, so they area resource used in the production of new homes. As the wage rate paid tocarpenters falls, the cost of producing housing decreases. The supply of newhomes increases and the supply curve of new homes shifts rightward.

4b.  Cardigan sweaters and pullover sweaters aresubstitutes in production. If the price of a pullover sweater increases, thesupply of cardigan sweaters decreases. The supply curve of cardigan sweatersshifts leftward.

4c.   Pig’s feet and fried pork rinds arecomplements in production. If the price of fried pork rinds decreases, thesupply of pig’s feet decreases and the supply curve of pig’s feet shiftsleftward.

4d.  The higher price increases the quantity ofmetal detectors supplied. There is a movement up along the supply curve. Supplydoes not change and the supply curve does not shift because the only factorthat changes is the price of metal detectors.

n   Checkpoint 4.3  MarketEquilibrium

5.     The technological advance has no effect onthe demand for memory chips. The supply of memory chips increases. Theequilibrium price of a memory chip falls and the equilibrium quantity of amemory chip increases.

6.     The reports increase people’s preferencefor oatmeal. The demand for oatmeal increases. The equilibrium price of oatmealrises and the equilibrium quantity increases.

                 

7a.  As people hear how nice  it is to live in Sunnyvale, the demand for new  homes in Sunnyvale  increases and the demand curve in Fig. 4.4a shifts rightward, from D0 to D1. At the same time,  an increase in building costs decreases the supply of new homes, so the  supply curve shifts leftward from S0 to S1. As Figures 4.4a, 4.4b,  and 4.4c show, the equilibrium price of new homes increases, from P0 to P1 in the figures. What  happens to the equilibrium quantity depends on which curve shifts the most.  If the curves shift the same amount, as in Figure 4.4a, the equilibrium  quantity does not change. If the demand curve shifts more than the supply  curve, as in Figure 4.4b, the equilibrium quantity increases. If the supply  curve shifts more than the demand curve, as in Figure 4.4c, the equilibrium  quantity decreases.

 

 

                 

7b.  As the price of airline  fuel falls, airlines’ costs fall. The supply of airline travel increases and  the supply curve of airline travel shifts rightward in Fig. 4.5a from S0 to S1. At the same time,  people decide to take more airline trips, so the demand curve for airline  travel shifts rightward from D0 to D1. As figures 4.5a, 4.5b,  and 4.5c show, the equilibrium quantity increases from Q0 to Q1. The  figures also show that the effect on the price is indeterminate unless you  know which curve shifts the most.

 

                 

7c.   A decrease in  installation costs is a decrease in production costs. The supply curve of satellite  TV dishes shifts rightward in Fig. 4.6a from S0 to S1. At the  same time, the price of programming, which is a complement of satellite TV  dishes, increases. The demand curve for satellite dishes shifts leftward from  D0 to D1. Figures 4.6a, 4.6b,  and 4.6c each demonstrates that the equilibrium price of satellite dishes decreases  from P0 to P1. But the effect on  the quantity is ambiguous.

 

8.     Figure 4.7 shows the effect of the smallerharvest of oranges. The equilibrium in the world market for orangesin a normal year has an (assumed) equilibrium price of a ton of oranges of$2,000 and an (assumed) equilibrium quantity of oranges is 60 million tons ayear. Then the smaller harvest of oranges in Florida decreasesthe supply of oranges and the supply curve shifts leftward. In Figure 4.7, thesupply curve of oranges shifts leftward from S₀ to S₁. Theequilibrium price of a ton of oranges rises from $2,000 a ton to $2,100 a ton,and the equilibrium quantity of oranges decreases from 60 million tons to 55million tons of oranges a year. The price of a ton of oranges rose and thequantity of oranges decreased.

        Orangesare an input used to produce frozen orange juice. The higher price of a ton oforanges means that the price of a resource used to produce frozen orange juicerises. The supply of frozen orange juice decreases so that the supply curveshifts leftward. Figure 4.8 illustrates this situation. The equilibrium in themarket for frozen orange juice in a normal year has an (assumed) equilibriumprice of $5,000 a ton and an (assumed) equilibrium quantity of 10 million tonsa year. The hike in the price of oranges decreases the supply of orange juiceand the supply curve shifts leftward. In Figure 4.8, the supply curve shiftsleftward from S₀ to S₁. The equilibrium price of a ton of frozen orange juice rises from$5,000 a ton to $6,000 a ton, and the equilibrium quantity of frozen orangejuice decreases from 10 million tons to 9 million tons.

9.     Farmers areswitching to corn production because the increase in the demand from ethanolproducers has raised the price of corn. Farmers can now earn a larger profitproducing corn rather than soybeans. If most farmers switch away from soybeansto corn, the supply of soybeans will decrease. The decrease in supply will leadto a higher price for soybeans, thereby increasing the profit of the farmerswho continue to produce soybeans.

 4market_forces.ppt(下载附件 2.3 MB)