Supply And Demand - Chapter 3 Page 33
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Part I: Preliminaries
But remember that chicken prices actually fell, so something else was going on.
Here’s what happened: For U.S. chicken producers, Europe is an alternate market
to the United States. As you’ve learned, when the price in an alternate market falls,
supply in the original market increases. In this case, with chicken prices in Europe
falling, U.S. producers shifted sales back to the home market. In Figure 14, this is
represented by a rightward shift in the supply curve to S
—more chicken offered
2006
in the United States at any given price.
We know that the rightward shift in the supply curve had to be greater than the
rightward shift in the demand curve, because that is the only way the price could
2
have fallen.
So, while rising demand played some role in explaining the rise in U.S.
consumption (as in the first-glance explanation), a more important reason was the
increase in supply.
Why should we worry about the proper explanation for this event, which hap-
pened in the past? Because, as you’ll see in later chapters, the tools we’ve just used
to analyze this past event can help us make proper predictions about the future as
well. And they can be applied to any competitive market.
For example, some observers have predicted there will be rapid growth in solar-
power electricity-generation over the next decade. Does this mean the price of
solar-generated electricity will be lower or higher than it is now? Or in the market
for health care, the price of many services, such as visits to the doctor or hospital
stays, is likely to rise over the next decade. Will this be accompanied by an increase
in the quantity of these services supplied? Or a decrease?
As you probably suspect, the answer to these questions, and hundreds more like
them, depends on which force—demand or supply—is the dominant change in the
market. You’ll be asked to look at a few cases similar to these in the end-of-chapter
problems.
Summary
In a market economy, prices are determined through the interac-
face. According to the law of supply, supply curves slope upward.
tion of buyers and sellers in markets. Perfectly competitive mar-
The supply curve will shift if there is a change in the price of an
kets have many buyers and sellers, and none of them individually
input, the price of an alternate good, the price in an alternate
can affect the market price. If an individual, buyer, or seller has
market, the number of firms, expectations of future prices, or (for
the power to influence the price of a product, the market is imper-
some goods) a change in weather.
fectly competitive.
Equilibrium price and quantity in a market are found where
The model of supply and demand explains how prices are
the supply and demand curves intersect. If either of these curves
determined in perfectly competitive markets. The quantity
shifts, price and quantity will change as the market moves to a
demanded of any good is the total amount buyers would choose to
new equilibrium.
purchase given the constraints that they face. The law of demand
Economists frequently use a three-step process to answer
states that quantity demanded is negatively related to price; it tells
questions about the economy. The three steps—taken several
us that the demand curve slopes downward. The demand curve is
times in this chapter—are to (1) characterize the market or mar-
drawn for given levels of income, wealth, tastes, prices of substi-
kets involved in the question; (2) find the equilibrium in the mar-
tute and complementary goods, population, and expected future
ket; and (3) ask what happens when something changes. This
price. If any of those factors changes, the demand curve will shift.
three-step process will be used throughout the textbook.
The quantity supplied of a good is the total amount sellers
would choose to produce and sell given the constraints that they
In the figure, you’ll notice that the supply curve shifts just enough to bring the price down to $0.14 per pound—the same as the new price in
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Europe. The U.S. price has to drop to about the same level as the price in Europe, because if not, U.S. producers would continue shifting sales
away from Europe and into the United States, causing further price declines in the United States.
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