Supply And Demand - Chapter 3 Page 32
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37Chapter 3: Supply and Demand
83
1 4
F I G U R E
The U.S. Market for
S
2005
Chicken
Price
As chicken prices declined in
per
Europe (an alternate market
Pound
for U.S. producers), the
supply curve in the U.S.
S
market shifted rightward,
2006
from S
to S
. At the
A
$0.42
2005
2006
same time, normal increases
in income and population
caused a (smaller) rightward
shift in demand, from D
2005
to D
. The market
B
2006
0.14
equilibrium moved from
D
point A to point B with an
2006
increase in equilibrium
D
2005
quantity from Q
to Q
.
1
2
Quantity of
Q
Q
Because the supply shift was
1
2
Chicken
greater, the market price fell,
from $0.42 to $0.14 per
pound.
was no danger from eating infected chickens (cooking kills the virus), millions of
consumers in Europe decided to take no chances. They simply stopped eating chick-
en. This is represented by the sizable leftward shift in the demand curve, to D
in
2006
Figure 13. The equilibrium price of dark meat chicken fell from about $0.42 per
pound to about $0.14 per pound.
We know the leftward shift in the demand curve was greater than the leftward
shift in the supply curve, because that is the only way to explain the drop in price
that actually occurred. So, although a decrease in supply played some role in
explaining the drop in European consumption (as in the first-glance explanation), a
more important reason for the drop in consumption was a decrease in demand.
Now let’s consider the U.S. market. The demand side of the market is chicken
buyers in the United States. And once again, the supply side of the market consists
of chicken producers around the world who have the potential to sell their chicken
to Americans. However, in practice, the supply side of the market is limited to
American chicken farmers. This is because the United States is a chicken exporter:
it produces all the chickens demanded in the home market, and then some. This fact
will turn out to be important.
Figure 14 depicts the U.S. chicken market. The initial equilibrium in June 2005
was at point A, with the price at about $0.42, the same price as in Europe.
Now let’s look at what changed. In early 2006, there was no “chicken panic” in
the United States since the virus had not yet affected U.S. chicken flocks. (Remember:
The chicken in U.S. supermarkets was American-produced chicken.) And it is true
that the United States was experiencing a healthy rate of income and population
growth, so the demand for chicken—a normal good—rose. In Figure 14, we’ve
shifted the demand curve rightward a bit, to D
. If this had been the only change,
2006
U.S. chicken prices would have risen somewhat.
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