if prices rise, what happens to producer surplus (all other things being equal)?

Chapter iii. Demand and Supply

3.2 Shifts in Demand and Supply for Goods and Services

Learning Objectives

By the end of this department, you will exist able to:

• Place factors that touch on demand
• Graph demand curves and demand shifts
• Identify factors that touch on supply
• Graph supply curves and supply shifts

The previous module explored how price affects the quantity demanded and the quantity supplied. The result was the demand curve and the supply curve. Cost, however, is not the but matter that influences demand. Nor is it the merely thing that influences supply. For example, how is demand for vegetarian food afflicted if, say, wellness concerns cause more than consumers to avoid eating meat? Or how is the supply of diamonds affected if diamond producers notice several new diamond mines? What are the major factors, in addition to the toll, that influence demand or supply?

Visit this website to read a cursory annotation on how marketing strategies tin influence supply and demand of products.

What Factors Affect Need?

We defined demand as the amount of some product a consumer is willing and able to purchase at each price. That suggests at least two factors in improver to price that affect demand. Willingness to purchase suggests a want, based on what economists call tastes and preferences. If you neither need nor want something, you volition not buy it. Power to buy suggests that income is important. Professors are unremarkably able to afford ameliorate housing and transportation than students, because they have more income. Prices of related goods can touch on demand also. If you demand a new motorcar, the price of a Honda may touch on your demand for a Ford. Finally, the size or composition of the population can affect demand. The more than children a family has, the greater their demand for clothing. The more than driving-age children a family has, the greater their demand for car insurance, and the less for diapers and baby formula.

These factors matter both for demand past an individual and demand by the market place as a whole. Exactly how practise these diverse factors affect demand, and how do we show the furnishings graphically? To answer those questions, we need the ceteris paribus assumption.

The Ceteris Paribus Assumption

A need bend or a supply curve is a human relationship between ii, and just two, variables: quantity on the horizontal axis and price on the vertical axis. The assumption behind a demand curve or a supply curve is that no relevant economic factors, other than the production'due south cost, are changing. Economists telephone call this assumption ceteris paribus, a Latin phrase meaning "other things being equal." Any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal. A demand curve or a supply curve is a relationship betwixt ii, and just ii, variables when all other variables are kept abiding. If all else is not held equal, and so the laws of supply and demand will not necessarily hold, every bit the following Clear Information technology Up characteristic shows.

When does ceteris paribus utilize?

Ceteris paribus is typically practical when we look at how changes in price bear upon demand or supply, but ceteris paribus tin be practical more mostly. In the real earth, demand and supply depend on more factors than simply price. For case, a consumer's demand depends on income and a producer's supply depends on the toll of producing the product. How can we analyze the effect on demand or supply if multiple factors are changing at the aforementioned fourth dimension—say price rises and income falls? The reply is that we examine the changes 1 at a time, assuming the other factors are held constant.

For example, we can say that an increase in the toll reduces the amount consumers will buy (assuming income, and anything else that affects demand, is unchanged). Additionally, a decrease in income reduces the corporeality consumers tin beget to purchase (assuming price, and anything else that affects demand, is unchanged). This is what the ceteris paribus supposition really means. In this particular case, afterward nosotros analyze each factor separately, nosotros tin combine the results. The corporeality consumers buy falls for two reasons: beginning considering of the college price and second considering of the lower income.

How Does Income Touch Demand?

Let's use income as an example of how factors other than cost affect demand. Figure 1 shows the initial demand for automobiles as D₀. At point Q, for example, if the price is $20,000 per car, the quantity of cars demanded is 18 million. D₀ too shows how the quantity of cars demanded would change as a result of a higher or lower price. For example, if the price of a car rose to $22,000, the quantity demanded would decrease to 17 million, at point R.

The original demand bend D₀, like every need curve, is based on the ceteris paribus assumption that no other economically relevant factors alter. At present imagine that the economy expands in a way that raises the incomes of many people, making cars more affordable. How will this affect need? How can we bear witness this graphically?

Return to Figure 1. The price of cars is still $20,000, merely with higher incomes, the quantity demanded has now increased to 20 meg cars, shown at point Southward. As a result of the higher income levels, the demand bend shifts to the correct to the new demand curve D_ane, indicating an increase in need. Tabular array 4 shows clearly that this increased need would occur at every price, not merely the original one.

Figure 1. Shifts in Demand: A Car Example. Increased demand means that at every given price, the quantity demanded is higher, so that the need bend shifts to the right from D₀ to D₁. Decreased demand means that at every given price, the quantity demanded is lower, then that the demand curve shifts to the left from D₀ to D₂.

Toll	Decrease to D2	Original Quantity Demanded D0	Increase to D1
$16,000	17.6 one thousand thousand	22.0 meg	24.0 one thousand thousand
$18,000	16.0 million	20.0 million	22.0 meg
$20,000	14.four one thousand thousand	18.0 million	20.0 one thousand thousand
$22,000	xiii.6 meg	17.0 million	19.0 million
$24,000	13.two million	xvi.5 one thousand thousand	xviii.5 meg
$26,000	12.8 million	xvi.0 million	18.0 million
Table 4. Price and Need Shifts: A Auto Example

Now, imagine that the economy slows down so that many people lose their jobs or work fewer hours, reducing their incomes. In this case, the decrease in income would lead to a lower quantity of cars demanded at every given price, and the original demand curve D₀ would shift left to D₂. The shift from D₀ to D₂ represents such a decrease in demand: At any given price level, the quantity demanded is now lower. In this example, a cost of $20,000 means 18 1000000 cars sold forth the original need curve, merely simply 14.4 1000000 sold afterward demand fell.

When a need curve shifts, it does non mean that the quantity demanded past every individual buyer changes by the same corporeality. In this example, not anybody would have higher or lower income and not everyone would buy or not purchase an additional automobile. Instead, a shift in a need curve captures an blueprint for the marketplace as a whole.

In the previous department, nosotros argued that higher income causes greater demand at every price. This is true for most goods and services. For some—luxury cars, vacations in Europe, and fine jewelry—the effect of a ascension in income tin be especially pronounced. A production whose demand rises when income rises, and vice versa, is called a normal adept. A few exceptions to this pattern do exist. As incomes rise, many people will buy fewer generic make groceries and more proper name brand groceries. They are less probable to buy used cars and more likely to buy new cars. They will exist less probable to rent an apartment and more likely to own a habitation, then on. A production whose demand falls when income rises, and vice versa, is chosen an junior good. In other words, when income increases, the demand curve shifts to the left.

Other Factors That Shift Need Curves

Income is non the simply cistron that causes a shift in demand. Other things that change demand include tastes and preferences, the composition or size of the population, the prices of related goods, and even expectations. A modify in any 1 of the underlying factors that determine what quantity people are willing to buy at a given cost will cause a shift in demand. Graphically, the new demand curve lies either to the correct (an increase) or to the left (a subtract) of the original demand curve. Let's look at these factors.

Changing Tastes or Preferences

From 1980 to 2014, the per-person consumption of chicken by Americans rose from 48 pounds per yr to 85 pounds per yr, and consumption of beef savage from 77 pounds per year to 54 pounds per yr, according to the U.S. Department of Agronomics (USDA). Changes similar these are largely due to movements in gustatory modality, which change the quantity of a good demanded at every price: that is, they shift the demand curve for that good, rightward for chicken and leftward for beef.

Changes in the Composition of the Population

The proportion of elderly citizens in the The states population is rising. It rose from ix.eight% in 1970 to 12.6% in 2000, and volition be a projected (by the U.South. Demography Agency) twenty% of the population past 2030. A lodge with relatively more children, similar the Usa in the 1960s, volition have greater demand for goods and services like tricycles and twenty-four hours care facilities. A society with relatively more than elderly persons, as the United States is projected to have past 2030, has a college demand for nursing homes and hearing aids. Similarly, changes in the size of the population can affect the demand for housing and many other goods. Each of these changes in demand volition be shown every bit a shift in the demand bend.

The need for a production tin too be affected by changes in the prices of related goods such as substitutes or complements. A substitute is a good or service that can be used in place of another expert or service. Equally electronic books, like this one, become more available, you would wait to see a decrease in need for traditional printed books. A lower price for a substitute decreases demand for the other product. For example, in contempo years as the price of tablet computers has fallen, the quantity demanded has increased (because of the law of demand). Since people are purchasing tablets, there has been a decrease in demand for laptops, which can exist shown graphically equally a leftward shift in the demand bend for laptops. A college toll for a substitute good has the opposite issue.

Other goods are complements for each other, significant that the goods are often used together, considering consumption of i good tends to enhance consumption of the other. Examples include breakfast cereal and milk; notebooks and pens or pencils, golf game balls and golf game clubs; gasoline and sport utility vehicles; and the five-way combination of salary, lettuce, tomato, mayonnaise, and bread. If the price of golf clubs rises, since the quantity demanded of golf clubs falls (considering of the police force of need), need for a complement good similar golf balls decreases, too. Similarly, a higher price for skis would shift the demand curve for a complement proficient like ski resort trips to the left, while a lower price for a complement has the reverse consequence.

Changes in Expectations well-nigh Time to come Prices or Other Factors that Touch on Demand

While information technology is clear that the price of a good affects the quantity demanded, it is also true that expectations near the time to come price (or expectations about tastes and preferences, income, and so on) tin affect need. For example, if people hear that a hurricane is coming, they may rush to the store to buy flashlight batteries and bottled water. If people learn that the price of a skillful similar java is likely to ascent in the future, they may head for the shop to stock up on coffee now. These changes in demand are shown as shifts in the curve. Therefore, a shift in demand happens when a alter in some economical factor (other than cost) causes a different quantity to be demanded at every cost. The following Work Information technology Out feature shows how this happens.

Shift in Demand

A shift in demand means that at any price (and at every price), the quantity demanded will be unlike than it was before. Following is an example of a shift in demand due to an income increase.

Step 1. Draw the graph of a demand curve for a normal good like pizza. Pick a price (similar P₀). Identify the corresponding Q₀. An example is shown in Figure 2.

Figure 2. Need Curve. The demand curve tin can exist used to place how much consumers would buy at any given price.

Step 2. Suppose income increases. As a result of the change, are consumers going to buy more than or less pizza? The answer is more. Describe a dotted horizontal line from the chosen price, through the original quantity demanded, to the new signal with the new Q₁. Draw a dotted vertical line downwards to the horizontal axis and label the new Q₁. An case is provided in Figure 3.

Figure iii. Demand Curve with Income Increase. With an increase in income, consumers volition purchase larger quantities, pushing demand to the right.

Step 3. Now, shift the curve through the new point. You will see that an increase in income causes an upwards (or rightward) shift in the demand bend, then that at any cost the quantities demanded will exist higher, as shown in Figure 4.

Figure iv. Demand Bend Shifted Right. With an increase in income, consumers will purchase larger quantities, pushing need to the correct, and causing the demand bend to shift right.

Summing Upward Factors That Change Need

Six factors that can shift need curves are summarized in Effigy five. The direction of the arrows indicates whether the need bend shifts represent an increase in need or a decrease in demand. Notice that a change in the cost of the skillful or service itself is not listed among the factors that can shift a need curve. A alter in the price of a skillful or service causes a movement along a specific demand curve, and it typically leads to some change in the quantity demanded, just it does not shift the demand curve.

Figure 5. Factors That Shift Demand Curves. (a) A list of factors that can cause an increase in demand from D₀ to D₁. (b) The same factors, if their management is reversed, can cause a decrease in demand from D₀ to D₁.

When a demand curve shifts, it will and then intersect with a given supply bend at a different equilibrium price and quantity. We are, even so, getting ahead of our story. Before discussing how changes in need can impact equilibrium price and quantity, we kickoff demand to discuss shifts in supply curves.

How Product Costs Affect Supply

A supply bend shows how quantity supplied will change as the price rises and falls, assuming ceteris paribus then that no other economically relevant factors are changing. If other factors relevant to supply do alter, and then the unabridged supply bend will shift. Just every bit a shift in demand is represented past a change in the quantity demanded at every price, a shift in supply means a change in the quantity supplied at every cost.

In thinking about the factors that affect supply, remember what motivates firms: profits, which are the difference between revenues and costs. Goods and services are produced using combinations of labor, materials, and machinery, or what we call inputs or factors of product. If a business firm faces lower costs of production, while the prices for the good or service the business firm produces remain unchanged, a firm'south profits go upwardly. When a house's profits increase, information technology is more motivated to produce output, since the more it produces the more turn a profit information technology volition earn. So, when costs of production autumn, a business firm will tend to supply a larger quantity at whatsoever given toll for its output. This can be shown by the supply curve shifting to the right.

Take, for example, a messenger visitor that delivers packages around a city. The company may find that buying gasoline is one of its principal costs. If the price of gasoline falls, then the company volition observe it can deliver messages more cheaply than before. Since lower costs correspond to higher profits, the messenger visitor may now supply more than of its services at any given cost. For example, given the lower gasoline prices, the company can now serve a greater area, and increase its supply.

Conversely, if a business firm faces higher costs of production, then it will earn lower profits at any given selling toll for its products. As a effect, a higher price of production typically causes a house to supply a smaller quantity at whatsoever given cost. In this case, the supply curve shifts to the left.

Consider the supply for cars, shown past bend South₀ in Effigy half-dozen. Point J indicates that if the price is $xx,000, the quantity supplied will be 18 1000000 cars. If the price rises to $22,000 per car, ceteris paribus, the quantity supplied will rising to twenty million cars, equally betoken Chiliad on the S₀ curve shows. The aforementioned information can exist shown in table class, as in Table 5.

Figure six. Shifts in Supply: A Car Instance. Decreased supply means that at every given cost, the quantity supplied is lower, so that the supply bend shifts to the left, from S₀ to South_i. Increased supply ways that at every given price, the quantity supplied is higher, so that the supply bend shifts to the right, from Due south₀ to Southward₂.

Price	Decrease to Due southane	Original Quantity Supplied S0	Increase to Due southii
$16,000	x.5 million	12.0 million	13.2 million
$18,000	thirteen.five million	xv.0 1000000	sixteen.5 1000000
$twenty,000	16.v million	eighteen.0 million	nineteen.8 million
$22,000	18.five million	20.0 million	22.0 one thousand thousand
$24,000	19.v 1000000	21.0 million	23.1 million
$26,000	20.5 million	22.0 million	24.ii million
Table 5. Price and Shifts in Supply: A Car Example

Now, imagine that the price of steel, an important ingredient in manufacturing cars, rises, so that producing a car has become more expensive. At whatsoever given price for selling cars, auto manufacturers volition react by supplying a lower quantity. This tin exist shown graphically as a leftward shift of supply, from Southward₀ to S₁, which indicates that at any given toll, the quantity supplied decreases. In this example, at a price of $20,000, the quantity supplied decreases from 18 million on the original supply bend (Due south₀) to 16.five meg on the supply curve South₁, which is labeled as signal 50.

Conversely, if the price of steel decreases, producing a automobile becomes less expensive. At any given toll for selling cars, car manufacturers can now expect to earn higher profits, and so they will supply a higher quantity. The shift of supply to the correct, from S₀ to S_two, means that at all prices, the quantity supplied has increased. In this example, at a toll of $20,000, the quantity supplied increases from xviii million on the original supply curve (Due south₀) to xix.eight million on the supply curve S₂, which is labeled Thou.

Other Factors That Affect Supply

In the example to a higher place, nosotros saw that changes in the prices of inputs in the production process will impact the cost of production and thus the supply. Several other things bear upon the price of product, likewise, such equally changes in atmospheric condition or other natural conditions, new technologies for production, and some authorities policies.

The toll of production for many agronomical products will be affected past changes in natural conditions. For example, in 2014 the Manchurian Plain in Northeastern China, which produces most of the country's wheat, corn, and soybeans, experienced its most severe drought in fifty years. A drought decreases the supply of agricultural products, which means that at any given price, a lower quantity will be supplied; conversely, especially proficient conditions would shift the supply curve to the right.

When a firm discovers a new technology that allows the firm to produce at a lower toll, the supply curve will shift to the right, too. For instance, in the 1960s a major scientific effort nicknamed the Green Revolution focused on breeding improved seeds for basic crops like wheat and rice. By the early 1990s, more than two-thirds of the wheat and rice in depression-income countries around the world was grown with these Green Revolution seeds—and the harvest was twice as loftier per acre. A technological comeback that reduces costs of production will shift supply to the correct, so that a greater quantity will be produced at any given toll.

Authorities policies can affect the cost of product and the supply curve through taxes, regulations, and subsidies. For example, the U.Southward. authorities imposes a tax on alcoholic beverages that collects nearly $8 billion per yr from producers. Taxes are treated equally costs by businesses. Higher costs decrease supply for the reasons discussed above. Other examples of policy that can impact cost are the broad array of regime regulations that crave firms to spend coin to provide a cleaner environment or a safer workplace; complying with regulations increases costs.

A government subsidy, on the other manus, is the opposite of a tax. A subsidy occurs when the government pays a house directly or reduces the house's taxes if the firm carries out sure deportment. From the house's perspective, taxes or regulations are an additional cost of production that shifts supply to the left, leading the firm to produce a lower quantity at every given price. Regime subsidies reduce the cost of product and increase supply at every given toll, shifting supply to the right. The following Work It Out feature shows how this shift happens.

Shift in Supply

Nosotros know that a supply curve shows the minimum price a firm will accept to produce a given quantity of output. What happens to the supply curve when the cost of product goes up? Following is an example of a shift in supply due to a production cost increase.

Step ane. Draw a graph of a supply curve for pizza. Pick a quantity (like Q₀). If you draw a vertical line upwardly from Q₀ to the supply curve, yous will run into the price the house chooses. An example is shown in Effigy 7.

Effigy 7. Supply Bend. The supply curve tin can exist used to testify the minimum price a business firm will accept to produce a given quantity of output.

Step two. Why did the firm cull that price and non some other? One way to retrieve nearly this is that the price is composed of ii parts. The beginning role is the average cost of production, in this case, the cost of the pizza ingredients (dough, sauce, cheese, pepperoni, and then on), the cost of the pizza oven, the rent on the store, and the wages of the workers. The second part is the firm'south desired profit, which is adamant, among other factors, past the profit margins in that detail business. If yous add these two parts together, you get the cost the firm wishes to charge. The quantity Q0 and associated price P0 give you i point on the business firm'south supply curve, every bit shown in Figure eight.

Figure 8. Setting Prices. The cost of production and the desired turn a profit equal the toll a firm will fix for a product.

Stride iii. Now, suppose that the toll of production goes upwards. Perhaps cheese has become more than expensive past $0.75 per pizza. If that is true, the house will desire to raise its price by the corporeality of the increase in cost ($0.75). Depict this point on the supply bend straight above the initial bespeak on the curve, but $0.75 higher, as shown in Figure 9.

Figure 9. Increasing Costs Leads to Increasing Cost. Because the cost of production and the desired turn a profit equal the price a house will gear up for a product, if the cost of production increases, the toll for the production will also need to increment.

Step 4. Shift the supply bend through this point. You lot will run into that an increase in cost causes an upward (or a leftward) shift of the supply curve and so that at any price, the quantities supplied will be smaller, equally shown in Figure x.

Figure x. Supply Curve Shifts. When the cost of production increases, the supply curve shifts upwardly to a new toll level.

Summing Up Factors That Change Supply

Changes in the cost of inputs, natural disasters, new technologies, and the touch on of government decisions all impact the cost of production. In turn, these factors affect how much firms are willing to supply at whatsoever given toll.

Figure 11 summarizes factors that change the supply of goods and services. Notice that a change in the price of the product itself is not among the factors that shift the supply curve. Although a modify in toll of a good or service typically causes a change in quantity supplied or a movement along the supply curve for that specific good or service, information technology does non cause the supply curve itself to shift.

Figure eleven. Factors That Shift Supply Curves. (a) A list of factors that can cause an increment in supply from S₀ to S₁. (b) The same factors, if their direction is reversed, can cause a decrease in supply from S₀ to South₁.

Considering demand and supply curves appear on a ii-dimensional diagram with only price and quantity on the axes, an unwary company to the land of economics might be fooled into believing that economics is near only four topics: demand, supply, price, and quantity. However, demand and supply are really "umbrella" concepts: demand covers all the factors that affect demand, and supply covers all the factors that affect supply. Factors other than price that touch on demand and supply are included past using shifts in the demand or the supply curve. In this way, the two-dimensional need and supply model becomes a powerful tool for analyzing a broad range of economic circumstances.

Primal Concepts and Summary

Economists frequently utilize the ceteris paribus or "other things being equal" assumption: while examining the economic impact of 1 event, all other factors remain unchanged for the purpose of the assay. Factors that tin can shift the need curve for goods and services, causing a unlike quantity to exist demanded at any given price, include changes in tastes, population, income, prices of substitute or complement goods, and expectations about hereafter conditions and prices. Factors that can shift the supply curve for appurtenances and services, causing a dissimilar quantity to be supplied at any given cost, include input prices, natural conditions, changes in technology, and government taxes, regulations, or subsidies.

Self-Check Questions

1. Why do economists apply the ceteris paribus assumption?
2. In an analysis of the market for paint, an economist discovers the facts listed below. Country whether each of these changes will affect supply or demand, and in what direction.
   1. In that location have recently been some important cost-saving inventions in the engineering science for making paint.
   2. Paint is lasting longer, so that holding owners need not repaint as often.
   3. Because of astringent hailstorms, many people demand to repaint now.
   4. The hailstorms damaged several factories that brand paint, forcing them to shut down for several months.
3. Many changes are affecting the market place for oil. Predict how each of the following events volition bear upon the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram. Create a sketch of the diagram if necessary.
   1. Cars are becoming more fuel efficient, and therefore go more miles to the gallon.
   2. The wintertime is uncommonly cold.
   3. A major discovery of new oil is fabricated off the declension of Norway.
   4. The economies of some major oil-using nations, like Nippon, slow downward.
   5. A war in the Heart E disrupts oil-pumping schedules.
   6. Landlords install additional insulation in buildings.
   7. The toll of solar energy falls dramatically.
   8. Chemical companies invent a new, pop kind of plastic made from oil.

Review Questions

1. When analyzing a marketplace, how do economists deal with the problem that many factors that affect the market are changing at the same time?
2. Proper noun some factors that can cause a shift in the demand bend in markets for appurtenances and services.
3. Proper noun some factors that tin can cause a shift in the supply curve in markets for goods and services.

Critical Thinking Questions

1. Consider the demand for hamburgers. If the price of a substitute good (for instance, hot dogs) increases and the price of a complement practiced (for case, hamburger buns) increases, tin can you tell for sure what volition happen to the demand for hamburgers? Why or why not? Illustrate your reply with a graph.
2. How exercise you lot suppose the demographics of an crumbling population of "Babe Boomers" in the United States will bear upon the demand for milk? Justify your answer.
3. We know that a change in the price of a product causes a movement along the need curve. Suppose consumers believe that prices will be rising in the future. How will that touch on demand for the production in the nowadays? Tin y'all testify this graphically?
4. Suppose at that place is soda revenue enhancement to curb obesity. What should a reduction in the soda tax do to the supply of sodas and to the equilibrium cost and quantity? Can you show this graphically? Hint: presume that the soda tax is collected from the sellers

Problems

1. Tabular array 6 shows data on the need and supply for bicycles, where the quantities of bicycles are measured in thousands.
   

   Price	Qd	Qs
   $120	50	36
   $150	xl	40
   $180	32	48
   $210	28	56
   $240	24	70
   Table 6. Demand and Supply for Bicycles

   1. What is the quantity demanded and the quantity supplied at a price of $210?
   2. At what price is the quantity supplied equal to 48,000?
   3. Graph the demand and supply curve for bicycles. How can you determine the equilibrium price and quantity from the graph? How tin can you decide the equilibrium price and quantity from the table? What are the equilibrium price and equilibrium quantity?
   4. If the price was $120, what would the quantities demanded and supplied be? Would a shortage or surplus exist? If so, how large would the shortage or surplus be?
2. The computer market in contempo years has seen many more computers sell at much lower prices. What shift in demand or supply is most likely to explain this outcome? Sketch a demand and supply diagram and explain your reasoning for each.
   1. A rise in demand
   2. A fall in demand
   3. A ascent in supply
   4. A fall in supply

References

Landsburg, Steven E. The Armchair Economist: Economics and Everyday Life. New York: The Free Press. 2012. specifically Section Iv: How Markets Piece of work.

National Chicken Quango. 2015. "Per Capita Consumption of Poultry and Livestock, 1965 to Estimated 2015, in Pounds." Accessed April 13, 2015. http://world wide web.nationalchickencouncil.org/virtually-the-manufacture/statistics/per-capita-consumption-of-poultry-and-livestock-1965-to-estimated-2012-in-pounds/.

Wessel, David. "Saudi Arabia Fears $xl-a-Butt Oil, Likewise." The Wall Street Journal. May 27, 2004, p. 42. http://online.wsj.com/news/manufactures/SB108561000087822300.

Glossary

ceteris paribus

other things being equal

complements

goods that are frequently used together and then that consumption of one good tends to enhance consumption of the other

factors of production

the combination of labor, materials, and machinery that is used to produce goods and services; also called inputs

inferior proficient

a good in which the quantity demanded falls equally income rises, and in which quantity demanded rises and income falls

inputs

the combination of labor, materials, and machinery that is used to produce goods and services; also called factors of production

normal expert

a good in which the quantity demanded rises equally income rises, and in which quantity demanded falls as income falls

shift in demand

when a alter in some economic factor (other than cost) causes a different quantity to be demanded at every cost

shift in supply

when a modify in some economic gene (other than price) causes a different quantity to be supplied at every cost

substitute

a good that can supervene upon another to some extent, so that greater consumption of one good tin can mean less of the other

Solutions

Answers to Self-Check Questions

1. To brand information technology easier to analyze complex problems. Ceteris paribus allows y'all to look at the effect of 1 cistron at a time on what it is yous are trying to analyze. When you have analyzed all the factors individually, y'all add the results together to get the final answer.
2. 1. An comeback in engineering that reduces the toll of production volition crusade an increase in supply. Alternatively, you lot can think of this as a reduction in price necessary for firms to supply whatsoever quantity. Either style, this can be shown every bit a rightward (or downward) shift in the supply curve.
   2. An comeback in product quality is treated as an increment in tastes or preferences, significant consumers need more paint at whatever price level, and so need increases or shifts to the right. If this seems counterintuitive, annotation that demand in the time to come for the longer-lasting paint volition fall, since consumers are essentially shifting demand from the futurity to the present.
   3. An increase in need causes an increase in need or a rightward shift in the demand curve.
   4. Factory damage ways that firms are unable to supply equally much in the present. Technically, this is an increase in the price of product. Either way you await at it, the supply curve shifts to the left.
3. 1. More than fuel-efficient cars means there is less need for gasoline. This causes a leftward shift in the demand for gasoline and thus oil. Since the demand curve is shifting down the supply bend, the equilibrium price and quantity both fall.
   2. Cold weather increases the need for heating oil. This causes a rightward shift in the demand for heating oil and thus oil. Since the demand curve is shifting up the supply curve, the equilibrium price and quantity both rising.
   3. A discovery of new oil will make oil more arable. This can be shown as a rightward shift in the supply curve, which will cause a decrease in the equilibrium price along with an increase in the equilibrium quantity. (The supply curve shifts down the demand bend so price and quantity follow the law of need. If price goes downward, then the quantity goes upwardly.)
   4. When an economy slows down, it produces less output and demands less input, including free energy, which is used in the product of virtually everything. A subtract in demand for energy will be reflected equally a decrease in the demand for oil, or a leftward shift in demand for oil. Since the demand curve is shifting down the supply curve, both the equilibrium price and quantity of oil will fall.
   5. Disruption of oil pumping will reduce the supply of oil. This leftward shift in the supply curve volition show a motility up the demand curve, resulting in an increase in the equilibrium price of oil and a decrease in the equilibrium quantity.
   6. Increased insulation will decrease the need for heating. This leftward shift in the demand for oil causes a movement downwardly the supply bend, resulting in a decrease in the equilibrium price and quantity of oil.
   7. Solar energy is a substitute for oil-based free energy. So if solar free energy becomes cheaper, the demand for oil volition decrease equally consumers switch from oil to solar. The decrease in demand for oil will be shown as a leftward shift in the demand curve. As the demand curve shifts down the supply curve, both equilibrium price and quantity for oil will autumn.
   8. A new, popular kind of plastic volition increase the demand for oil. The increment in demand will be shown as a rightward shift in demand, raising the equilibrium cost and quantity of oil.

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Source: https://opentextbc.ca/principlesofeconomics/chapter/3-2-shifts-in-demand-and-supply-for-goods-and-services/

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