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(%4 D&w00(MARKETS IN ACTION DEMAND AND SUPPLY )&{@    !'()?#'xAxTA%{)8v-'( (? t)Arial8:ao}VQ2AEhM5d1 /=}f{@5"'fZ5,Lebgfka5g"ܳr ^Rc<0(lxrڅ+X+GUcهSA\*ባvp^q 婀5cV-#a5eyT6-z܇l$]}p5fNT@Jh*RBD|,TKHThM{( $JKݒړ)|;if E[n.1j ȀbCن%hNTi'fQ@Eտ6xv))+D0C5bvPin@%baIU:S3 "7R@&˲Bج{ @_+$W`͘4j` |kNX*T5djW7,ܰ=CmHta. Mxc6L e&3!J<oY slC: /g@*o;}5g‘Vf`e.8Sq`WLb70ƻ@A|-2, f1iUlT&)O[6Za5DEJ&ޛW2X@+*T/Dt2nRٱ i&y_^im&jDIH!4X&W,/V@5bQ&x\݊nbfa?VD% (ۨuʃSUvkZ7y 5X5g\9%IG&՛T jlT%*#.J,2bM$c6% ߚi2f˜*ـJL%T _UBb 's> bmc5bzPy%vYV&a"Cb\xe eSIx"ئ{ @5bzP7-Zal-llS5brV7-#Z5k*,[[6)k)@JM))%i@SMnP5bV)%Ipo"`Ob(lfʭ&3*cLF2xY`5bVS&:oPDJh* M^Olk,K}],Ā )7-Q5Cb$0 sf,wS:m< @4̦3fC92.+#$?Lw.Q͊At48R܀5bZQe;a&Rhd@B9Ɛ&@LG n$9d"Z`.8P=nZC [`bTvWΘ4V` lkNX*6L5bRTe?Mn@U©-I%%)lXs‹lSr݅5e^HKm@d.=3KRLH%!gN}QT?)cJneQ<4VZ5V|QzWgp߶i}lۂ]YB,v@5d"Q)Sy@& .2-gZCSK<^2K_gl_ll!nvenv5gPņ͔KRctl.̾,K05 O00(̢Q+)ŠJ=r>ۀ75gt'Yϛ^݅#}iڼ\5gd97q a+.@ko^b56"|l0MrZ/Z "-.DITabcdefghilmnoprstuvy ;*o-0)(Click here to view Figure 1 *'+ydhKP5:o,_JtSM+ ,g%2)(

Resource

Markets

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Product

Markets

.#/ymE€%y\E:߇Bŀ / )0g.' 0)(Households  0и? 1PVxͱ0 ǵrH츕8R pʑ(+(O8,3;/b/YꪔzVEi^t:vxnKlSSaq i@3g͋hm<9SȪ TyNˋ*-6dH?"_B)@,4,QݢB}(Y%cdJ)ZK/N1F$TrQrś?HLth_$.mh8:!f%;XL\frp~[ӜNq:K h&AϗD&Q;H Z3S~bp ~=/Ƴ+}׽~<Ժ\j{\{IuQݾ${^riJt4'\ͥIjgN^k'yqO]ϭ1laC&c3y6&KA@A2@ULH Mb !ҝA@A1@A P AtNLt2K\ 3 $4_[?`0)(Firms  4" 5w}P2(

OVERVIEW OF MARKETS

In this tutorial we will examine how prices are determined in markets for goods, services, and resources, in a market system.

As we shall see, prices are determined by "demand and supply" in any competitive market.

Initially, we will look at product markets, where households (consumers) are the "buyers" or "demanders" and firms are the "sellers" or "suppliers" of the product under study.

The same demand and supply theory can be used to explain prices in resource markets. Figure 1 provides a visual overview of product and resource markets.

5#? 6PQxa0N;_/䝼wNi1$ nh{oZhkn6MS^rRꗇs(( J(( J(( A\WD;'G3"8\?̶Rgx/q`c`Ŋ95+(DGG{9ZQ^BtY|&[Ãpx?2aԜ? 8PPxkn05wN܉;^i MRT215[keYLEty,x;8{*n[tpf۾>֓dWHF'8yM>Ͼ7w@({ /70"#py+\^7 2=(d{SȸWw Gp v4v? 9PPxkr0 ̅wNɕܤ5޴4S$7VaK)e2MSDZ P(-4!:et ѢU>I|_s,ϱ<s,ϱ<qv%ϝ"m3*F^HV$Ļncuapf0b(#2S&bygLDET"q'iְU8ΨFgp"d`r̰,"H*l. ,s$hU;T:,ZN)&wb_c(*S -'ZދU @=Ll^=(8a>;[^ݝo?`CvM)?C]vn3 aMQ m>0X;`쥃K7cv:yR{A@A9@T ͵YtNLt2K >A@A8@LKey Concepts: Product Markets, Resource Markets, Households, Firms

Read the notes on the left of this screen, then click on the Figure 1 link below.

= l ?>z`+%UAy#G 8[^$h9 p 2G#n>??e!* `k [[[j;WPc@XCP%I@Qep`@  p萱N@(xhAp ) ܞAt'sh{sCD!#+++HRx =|*xJ()ymDP8Q(~}_*iܹK@UD`gp333f J!rP xa^u(qȷ./3vE U6sicp#ͧy?DTAUD`gp333 J!rP xa^u(qȷ./3vE < âͮQ u6X,HTBUD`gp333 VVm,R jQ ˧ AosVwab8(V*|byڎw,s3C&?@AB"C)(X"=PRODUCT DEMAND

Quantity Demanded and Price

To understand how prices are determined in a typical product market, we will first focus on the "demand" side of the market for Product A.

This means that we will study household's or buyer's behaviour.

Here, we will study how product price affects household purchases.

The Law of Demand states that there is an inverse relation between Price of A (PA) and Quantity Demanded of A (QdA). When PA decreases, QdA increases. When PA increases, QdA decreases.

In Figure 2 we illustrate the Law of Demand with a Demand Schedule (table) and a Demand Curve for the product, Canadian Red Table Wine.

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Key Concepts: Law of Demand, Demand Schedule, Demand Curve

Read the notes on the left of this screen, then click on the Figure 2 link below.

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Product

Markets

J/ )Kg.' 0)(Households KиdLza+{ A@A2@UH Wb !ҝA@A7@L<' ],83YL@ ?M MN N`Qxy@ ;Oo-0)(Click here to view Figure 3 O Pw}X2(

PRODUCT DEMAND

Quantity Demanded and Price

We have just examined one household's (Adams Family) demand schedule and demand curve for Canadian Red Table Wine. This is called "Individual Demand."

When we examine how the amount purchased by all the households (in total) in one market is related to different prices we call this "Market Demand."

In Figure 3 we illustrate that, for each price, the market demand curve for a product is found by totalling the individual quantity demanded by all households in the market.

In other words, the market demand curve is the horizontal sum of all individual demand curves.

P#GC)(X!#=Key Concepts: Individual Demand vs. Market Demand

Read the notes on the left of this screen, then click on the Figure 3 link below.

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Application Question 1

You are the manager of the on-campus student dorms for a large university. You are currently facing a drastic shortage of housing units

with the number of applicants for dorms out-numbering the number of available dorms two to one. How might the "law of demand" help you eliminate this shortage?

Explain.

.U <Vo0333(Click here for the solution. /V@+,-./?W WX X`Qxlp ;Yo-0)(Click here to view Figure 4 Y ZTƀ2(

Key Concepts: Non-price Factors; Normal vs. Inferior Goods; Substitute vs. Complement Goods; Increase in Demand vs. Decrease in Demand

Read the notes on the left of this screen, then click on the Figure 4 link below.

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PRODUCT DEMAND

Demand and Non-price factors

The Price of Product A is not the only factor that affects the amount of Product A purchased by households.

For most products, non-price factors affecting household demand include: Income, Price of Related Goods, Number of Buyers, and Tastes. When a change in a non-price factor changes household purchases, we say a "Change in Demand" has occurred.

In Figure 4 we illustrate that when non-price factors change, the entire market demand curve for Product A will shift. More specifically, we illustrate an "Increase in Demand," a situation where the market demand curve shifts to the right. At each price, demand is increased.

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Application Question 2

As the owner of a local car dealership, you have two main

lines of business: selling new

cars and repairing old cars.

Which one of these lines of business can be be classified

as an " inferior good?"

/_ <`o0333(Click here for the solution. 0`p@+,-/0?a ab b`Qxlp ;co-0)(Click here to view Figure 5 c dw} 2(

PRODUCT DEMAND

Demand and Non-price factors

The non-price determinants discussed in Figure 4 can also change in ways that can cause a decrease in demand for Product A.

The following non-price determinants can cause a decrease in demand for A

- A decrease in income and A is a normal good (high quality red wine)

- An increase in income and A is an inferior good (generic brand red wine)

- A decrease in the price of B, a substitute of A. Price of white wine, a substitute of red wine decreases.

- An increase in the price of B, a complement of A. Price of red meat, a complement of red wine increases.

Figure 5 describes a decrease in demand graphically, as a shift leftward in the market demand curve.

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Key Concepts: Non-price Factors; Normal vs. Inferior Goods; Substitute vs. Complement Goods; Increase in Demand vs. Decrease in Demand

Read the notes on the left of this screen, then click on the Figure 5 link below.

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The Sept 11, 2001 airplane hijacking, and related terrorism in

the air, has increased the demand for some modes of transportation and decreased the demand for others. Explain.

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PRODUCT DEMAND

Demand and Non-price factors

Economists typically use two different phrases to distinguish between changes in consumer purchases caused by price changes vs. non-price factors.

Change in Quantity Demanded

The phrase "Change in Quantity Demanded" is used to refer to a change in consumer purchases caused by a change in the Price of A. Graphically, this is shown as a movement along the same demand curve.

Change in Demand

The phrase "Change in Demand" is used to refer to a change in consumer purchases caused by a change in a Non-price factor. Graphically, this is a shift in the entire demand curve.

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Key Concepts: Change in Quantity Demanded vs Change in Demand

Read the notes on the left of this screen, then click on the Figure 6 link below.

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Application Question 4

Canadian provinces are spending a larger portion of their budgets on healthcare and a smaller portion on areas like education. As a result, we have seen teachers striking for higher wages and colleges and universities actively seeking private funding sources. What major trend in demand can help explain these government budget changes?

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Product

Markets

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PRODUCT SUPPLY

Quantity Supplied and Price

To understand how prices are determined in a typical product market, we now turn to the "supply" side of the market for Product A.

This means that we will study firms' or sellers' behaviour. Here we study how product price affects firms' willingness to supply Product A.

The Law of Supply states that there is a direct relation between Price of A (PA) and Quantity Supplied of A (QsA). When PA increases, QsA increases. When PA decreases, QsA decreases.

In Figure 7 we illustrate the Law of Supply with a Supply Schedule (table) and a Supply Curve for the product, Canadian Red Table Wine.

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Key Concepts: Law of Supply, Supply Schedule, Supply Curve

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PRODUCT SUPPLY

Quantity Supplied and Price

We have just examined one firm's (Rouge's) supply schedule and supply curve for Canadian Red Table Wine. This is called "Individual Supply."

When we examine how the amount supplied by all the firms (in total) in one market is related to different prices we call this "Market Supply."

In Figure 8 we illustrate that, for each price, the market supply curve for a product is found by totalling the individual quantity supplied by all firms in the market.

In other words, the market supply curve is the horizontal sum of all individual supply curves.

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Key Concepts: Individual Supply vs. Market Supply

Read the notes on the left of this screen, then click on the Figure 8 link below.

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Canadian nurses have been faced with larger workloads due to a significant shortage in their occupation. How might the provincial governments, who set nurses wages, use the "law of supply" to help eliminate the nursing shortage in Canada.

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Key Concepts: Non-price Factors; Cost of Inputs, Technology, Taxes,

Subsidies, Increase in Supply vs. Decrease in Supply

Read the notes on the left of this screen, then click on the Figure 9 link below.

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PRODUCT SUPPLY

Supply and Non-price factors

Non-price factors or determinants can shift the entire market supply curve.

If the number of firms supplying Product A increases or if factors, such as a decrease in the cost of inputs, technology, and government subsidies, increase the profitability of Product A, then there will be "An Increase in Supply." In this case the entire market supply curve will shift rightward.

If a non-price factor causes a "Decrease in Supply" then the entire market supply curve will shift leftward. This can be caused by a decrease in the number of firms supplying Product A or an increase in cost of inputs or an increase in taxes imposed on Product A. Figure 9 displays shifts in the market supply curve.

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Application Question 6

It is estimated that the U.S. government subsidizes its U.S. wheat farmers at eight times the rate that Canadian governments subsidize its Canadian wheat farmers. According to the theory of supply, what will these large U.S. subsidies do to Canadian wheat farm prices and incomes?

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Key Concepts: Change in Quantity Supplied vs Change in Supply

Read the notes on the left of this screen, then click on the Figure 10 link below.

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PRODUCT SUPPLY

Supply and Non-price factors

Two different phrases are used to distinguish between changes in amounts supplied caused by price changes vs. non-price factors.

Change in Quantity Supplied

The phrase "Change in Quantity Supplied" is used to refer to a change in firms' amount supplied caused by a change in the Price of A. Graphically, this is shown as a movement along the same supply curve.

Change in Supply

The phrase "Change in Supply" is used to refer to a change in firms' supply caused by a change in a Non-price factor. Graphically, this is a shift in the entire supply curve.

Figure 10 illustrates these two different types of changes.

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Application Question 7

How can the Canadian government use the theory of supply to implement policies that discourage smoking? How do these policies end up benefiting non-smokers?

. <o0333(Click here for the solution. /p -?)0<(After you have completed all the slides and figures in this tutorial re-visit this page and see if you can answer Application Question 7 below. 0 @+,./0? A  <o0)(Click here to view Figure 11 - _~a[2)(

Product

Markets

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Key Concepts: Equilibrium, Equilibrium Price, Equilibrium Quantity,

Market Clearing Price, Shortages, Surpluses

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MARKET EQUILIBRIUM

In any competitive market demand and market supply jointly determine the market price and quantity.

Equilibrium is where the market "tends towards" or "settles at." This is where:

Market Demand = Market Supply.

At equilibrium, the price is called equilibrium price, "Pe". The quantity is called equilibrium quantity, "Qe."

We call the "equilibrium price" the "market clearing price" as that is the only price where shortages and surpluses can be avoided or cleared.

Figure 11 illustrates an equilibrium situation in the Canadian Red Wine market.

/# )g.' 0)(Households 0и2L@+,./02? M `Qx} <o?0)(Click here to view Figure 12  +]2(

Key Concepts: Effect of Changes in Demand or Supply on Equilibrium

Read the notes on the left of this screen, then click on the Figure 12 link below.

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CHANGES IN EQUILIBRIUM

If a non-price factor changes, this can change the market equilibrium.

Generally speaking, there are four distinct types of equilibrium changes that can occur:

1. An increase in demand causes "Pe" to increase and "Qe" to increase.

2. A decrease in demand causes "Pe" to decrease and "Qe" to decrease.

3. An increase in supply causes "Pe" to decrease and "Qe" to increase.

4. A decrease in supply causes "Pe" to increase and "Qe" to decrease.

Figure 12 describes each change with a practical example.

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Application Question 8

Financial advisors suggest that investors should always keep an eye on the stocks that show a large volume of trades on any given day. What is the difference between the following two stocks? Stock A shows a heavy trading volume with its price on the increase. Stock B shows a heavy trading volume with its price on the decrease.

. <o0333(Click here for the solution. /0 -?)0<(After you have completed all the slides and figures in this tutorial re-visit this page and see if you can answer Application Question 8 below. 0 @+,./0? ^ `Qx` <o?0)(Click here to view Figure 13  ,]2(

Key Concepts: Effects of Changes in Multiple Factors on Equilibrium

Read the notes on the left of this screen, then click on the Figure 13 link below.

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APPLICATIONS

Industry/Occupation Outlook

The four types of equilibrium changes presented in Figure 12 can be applied to forecast future prices and quantities in any Canadian industry. As well, this theory can be used to predict the future direction of wages and employment in any occupation.

In developing an industry or occupation forecast, one has to be able to determine the effects of a series of non-price factors (not just one) on the industry equilibrium price and quantity.

To do this we suggest predicting the effect of each individual non-price factor on "Pe" and "Qe," one at a time. Then, at the end, review all the combined price effects and then all the combined quantity effects. Figure 13 provides an example.

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U.S lumber firms claim that the provincial governments charge too low a stumpage fee (less than market value) to Canadian lumber firms when these firms harvest Canadian trees. As a result, the Canadian lumber firms can sell their finished product (2x4's) at a lower price than U.S. lumber firms can, to U.S homebuilders. U.S. lumber firms charge that this constitutes unfair trade. How does a low stumpage fee affect the market for lumber?

.Hz <o0333(Click here for the solution. / 0 -?)0<(After you have completed all the slides and figures in this tutorial re-visit this page and see if you can answer Application Question 9 below. 0 @!&+,-./0?$ \_0)(Congratulations! You have completed this concept tutorial!! !@!  ߻ Ox߻ Ox s\ĀH w2(

Solution to Application Question 1

According to the "law of demand" if you significantly raise monthly dorm rents in the next academic year, this will help you reduce, if not eliminate the dorm shortage. That is, if rents (dorm "prices") increase, this will reduce the student demand for on-campus dorms in the next academic year. Theoretically the increased dorm rents will also help ensure that the students who value on-campus housing the most have an opportunity to bid the dorms away from students who put a lesser value on on-campus dorms. On the other hand, increasing the monthly rental prices "discriminates" against the poorer student.

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Application Question 1

You are the manager of the on-campus student dorms for a large university. You are currently facing a drastic shortage of housing units

with the number of applicants for dorms out-numbering the number of available dorms two to one. How might the "law of demand" help you eliminate this shortage?

Explain.

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Solution to Application Question 2

The car repair portion of the business is the "inferior good." In other words, during a recession, when consumer incomes are falling, the demand for the auto repair side of the business increases, while the demand for the new car portion decreases. As a dealer, you are wise to promote the repair side of your business during a recession, and cut back your new car inventory.

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Application Question 2

As the owner of a local car dealership, you have two main

lines of business: selling new

cars and repairing old cars.

Which one of these lines of business can be be classified

as an " inferior good?"

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Solution to Application Question 3

On shorter destination routes, the demand

for substitute modes of transportation such

as bus and rental cars has significantly increased. With the extra time spent going through airport security, and the extra airport security fees charged, these cheaper substitute modes are starting to get one to shorter destinations almost as fast as the airplane. However, the demand for transportation modes that complement

airline flights has decreased. Examples include: taxicabs, airport shuttle buses and rent-a-cars in distant vacation destination sites.

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Application Question 3

The Sept 11, 2001 airplane hijacking and related terrorism in

the air has increased the demand for some modes of transportation and decreased the demand for others. Explain.

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Solution to Application Question 4

The aging population has resulted in a large increase in demand for healthcare services, including medical (doctors) services and hospital stays, both of which are paid out of provincial governments' budgets. Since these budgets are limited, this has resulted in a smaller portion of government spending on education.

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Application Question 4

Canadian provinces are spending a larger portion of their budgets on healthcare and a smaller portion on areas like education. As a result, we have seen teachers striking for higher wages and colleges and universities actively seeking private funding sources. What major trend in demand can help explain these government budget changes?

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Solution to Application Question 5

The law of supply applies to resource markets, as well as product markets. That is, the higher the wage rate offered (price) in an occupation, the greater is the willingness of people to supply labour for this occupation. Therefore, if the government offers higher wages to nurses, this should increase the willingness of student to choose nursing as a career, over other possible careers. In turn, the quantity of nurses supplied should increase.

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Application Question 5

Canadian nurses have been faced with larger workloads due a significant shortage in their occupation. How might the provincial governments, who set nurses wages, use the "law of supply" to help eliminate the nursing shortage in Canada.

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Solution to Application Question 6

The large U.S. subsidies to U.S. wheat farmers will significantly increase the U.S wheat supply in the global market for wheat. In turn, this will reduce the global price that Canadian wheat farmers will recieve for supplying their wheat. This will decrease the income received by Canadian wheat farmers. As an example, in 2001, wheat farm income in Saskatchewan is estimated to fall 76% below the current five year average income received by these farmers. It should be noted that Europe subsidizes its farmer at 13 times the subsidy rate given to Canadian farmers.

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Application Question 6

It is estimated that the U.S. government subsidizes its U.S. wheat farmers at eight times the rate that Canadian governments subsidize its Canadian wheat farmers. According to the theory of supply, what will these large U.S. subsidies do to Canadian wheat farm prices and incomes?

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Solution to Application Question 7

The provincial and federal governments might consider raising the excise taxes imposed on cigarette manufacturers. As of 1998, B.C. and Newfoundland were imposing a tax of $22 per 200 cigarettes while Ontario was imposing a tax of $4.70 per 200 cigarettes manufactured. This was in addition to Federal excise taxes ranging from $5.35 in B.C. and Newfoundland to $2.65 in Ontario, per 200 cigarettes manufactured. These taxes result in a "decrease in supply" of Canadian cigarettes and ultimately increase the market price of cigarettes. The increased price of cigarettes helps to discourage smoking. In turn this reduces the degree of second hand smoke and the amount of our tax dollars that goes towards treating smoke related diseases.

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Application Question 7

How can the Canadian government use the theory of supply to implement policies that discourage smoking? How do these policies end up benefiting non-smokers?

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Solution to Application Question 8

Note that a heavy trading volume is like saying the "quantity" of this share sold has increased. Stock A is in a situation where its price and quantity both increased. This indicates that there is "an increase in demand for Stock A." In other words the market is viewing Stock A positively. Stock B is in a situation where its quantity increased, but its price decreased. This indicates that there is "an increase in supply for Stock B." Overall, investors are trying to get out of Stock B. In other words the market is viewing Stock B negatively.

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Application Question 8

Financial advisors suggest that investors should always keep an eye on the stocks that show a large volume of trades on any given day. What is the difference between the following two stocks? Stock A shows a heavy trading volume with its price on the increase. Stock B shows a heavy trading volume with its price on the decrease.

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Solution to Application Question 9

Assuming, for the moment, that the U.S. claim of unfair trade is true, the low stumpage fee is the cost of an input to the production of Canadian lumber. This means that a major cost is kept deliberately lower by Canadian governments. This causes an "increase in supply" of cheap Canadian lumber in the U.S. The price of Canadian lumber is lower than it would be if a higher stumpage fee was charged. Note that the Candian lumber firms can debate this claim of unfair trade as an international trade tribunal has judged this U.S.claim to be false in past disputes.

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Application Question 9

U.S lumber firms claim that the provincial governments charge too low a stumpage fee (less than market value) to Canadian lumber firms when these firms harvest Canadian trees. As a result, the Canadian lumber firms can sell their finished product (2x4's) at a lower price than U.S. lumber firms can, to U.S homebuilders. U.S. lumber firms charge that this constitutes unfair trade. How does a low stumpage fee affect the market for lumber?

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Product

Markets

/ )g.' 0)(Households и 3 $_[?`0)(Firms  " ee0(Figure 1: Product & Resource Markets and Roles of Households & Firms  @l  ;E w}P2(

OVERVIEW OF MARKETS

In this tutorial we will examine how prices are determined in markets for goods, services, and resources, in a market system.

As we shall see, prices are determined by "demand and supply" in any competitive market.

Initially we will assume product markets, where households (consumers) are the "buyers" or "demanders" and firms are the "sellers" or "suppliers" of the product under study.

The same demand and supply theory can be used to explain prices in resource markets. Figure 1 provides a visual overview of product and resource markets.

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Price

$29,999

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Price

$150.00

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Wine

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Resource

Markets

; )g.' 0)(Households 03 $_[?`0)(Firms   w 0)(In resource markets the roles of firms and households are reversed. Households supply resources. Firms demand resources.   ` ee0(Figure 1: Product & Resource Markets and Roles of Households & Firms  l  w}P2(

OVERVIEW OF MARKETS

In this tutorial we will examine how prices are determined in markets for goods, services, and resources, in a market system.

As we shall see, prices are determined by "demand and supply" in any competitive market.

Initially we will assume product markets, where households (consumers) are the "buyers" or "demanders" and firms are the "sellers" or "suppliers" of the product under study.

The same demand and supply theory can be used to explain prices in resource markets. Figure 1 provides a visual overview of product and resource markets.

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Supply

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Demand

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Sales

Rep

$50/hr.

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Supply

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Price

Land

$1000

per acre

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Supply

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Rate

Entrep.

40%

Ǡ @P @@@@@@@@@@@@@@@@    ? w}P2(

OVERVIEW OF MARKETS

In this tutorial we will examine how prices are determined in markets for goods, services, and resources, in a market system.

As we shall see, prices are determined by "demand and supply" in any competitive market.

Initially we will assume product markets, where households (consumers) are the "buyers" or "demanders" and firms are the "sellers" or "suppliers" of the product under study.

The same demand and supply theory can be used to explain prices in resource markets. Figure 1 provides a visual overview of product and resource markets.

 # /om0)(End of Figure 1 m@  ?  oO2)(

Click here to exit Figure 2

  z3|I%鷈"  22(

Figure 2: Individual Demand Schedule & Demand Curve: Red Table Wine

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In Figure 2 we will examine the Adams Family's Individual Demand Schedule

and Demand Curve for Canadian Red Table Wine. Both the schedule (table)

and the demand curve describe how the Adam's Family monthly purchases

of red table wine are related to different possible prices of wine.

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Figure 2A Demand Schedule

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Figure 2B Demand Curve

;E mw}2(

PRODUCT DEMAND

Quantity Demanded and Price

To understand how prices are determined in a typical product market, we will first focus on the "demand" side of the market for Product A.

This means that we will study household's or buyer's behaviour.

Here we study how product price affects household purchases.

The Law of Demand states that there is an inverse relation between Price of A (PA) and Quantity Demanded of A (QdA). When PA decreases, QdA increases. When PA increases, QdA decreases.

In Figure 2 we illustrate the Law of Demand with a Demand Schedule (table) and a Demand Curve for the product, Canadian Red Table Wine.

# -逭2(

Point a in the Demand Schedule below illustrates that when the price of wine

is $8.00 per litre, the Adams Family will purchase 2 litres per month.To show

Point a as one point on a demand curve, click on Point a in the table below.

L {oE2)(

$8.00 2

#  Wl 0)(a  Wl 0(a  Wl 0)(a *!@@zo%ٌ5rKԹ-r˛0 rk,%*PJl mWl 2(

a

 /逭2(

Point b in the Demand Schedule below illustrates that when the price of wine

is $7.00 per litre, the Adams Family will purchase 3 litres per month.To show

Point b as one point on a demand curve, click on Point b in the table below.

L oEu2)(

$8.00 2

$7.00 3

# $ Wl 0)(b  Wt 0(b  Wl 0)(b *! G/$0DPůPoint c in the Demand Schedule below illustrates that when the price of wine

is $6.00 per litre, the Adams Family will purchase 4 litres per month.To show

Point c as one point on a demand curve, click on Point c in the table below.

!L 3"oE/2)(

$8.00 2

$7.00 3

$6.00 4

"# $#!# G $Wd{ 0)(c  %Wl 0(c  &Wl 0(c  'Wd{ 0)(c 4(+$%&'#( u m)Wl 2(

a

%) m*Wt 2(

b

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Point d in the Demand Schedule below illustrates that when the price of wine

is $5.00 per litre, the Adams Family will purchase 5 litres per month.To show

Point d as one point on a demand curve, click on Point d in the table below.

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$8.00 2

$7.00 3

$6.00 4

$5.00 5

-# ..$%&'#. u /Wl 0)(d  0Wt 0(d  1Wl 0)(d *2!/01%2 m3Wl 2(

a

'3 f4Wl 2)(

b

(4t  m5Wt 2(

b

)5t  m6Wl 2(

c

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d

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$8.00 2

$7.00 3

$6.00 4

$5.00 5

$4.00 6

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a

)? m@Wt 2(

b

*@t  mAWl 2(

c

+A  B-逭2(

Point e in the Demand Schedule below illustrates that when the price of wine

is $4.00 per litre, the Adams Family will purchase 6 litres per month.To show

Point e as one point on a demand curve, click on Point e in the table below.

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Click here to exit Figure 2

 DC_-o Ew 2)(

Click here to create the Individual Demand Curve for Canadian Red Wine

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If you draw a line that connects Points a, b, c, d, e in Figure 2B below, you

will have created the Adams Family's Individual Demand Curve for Red Wine.

GL mHWt 2(

d

HT IoE2)(

$8.00 2

$7.00 3

$6.00 4

$5.00 5

$4.00 6

I# $J;<=(J3ǀ mKWl 2(

a

*K mLWt 2(

b

+Lt  mMWl 2(

c

,M  mNWl 2(

e

-NԹ@  *+,-P^8p  Oo2(

Click here to continue.

 Oa` PoO2)(

Click here to exit Figure 2

 P]Qz+ $qA"-迋+L` },o0gj` o2,x30n.,ՠ5h)YX@q)@JR6,+&1q"6@5)`c KiM˘ݰ,( s\h+cr7le.l-٬1dـ e͘!`aq,-r˛0 r9[#̔@5)`k)gFm,JJo0 r,[-MIb6 ժ -.lKlSE~yk״] $8.00 2

$7.00 3

$6.00 4

$5.00 5

$4.00 6

R#  LSB2)(

If you draw a line that connects Points a, b, c, d, e in Figure 2B below, you

will have created the Adam's Family Individual Demand Curve for Red Wine.

 SL mTWt 2(

d

'TT UoU12)(

Adams Family's

Demand Curve is

downward sloping, indicating that PA

and Qda are inversely related

*U fVWl 2)(

a

+V mWWt 2(

b

,Wt  mXWl 2(

c

-X  mYWl 2(

e

.YԹ@   !#%'(*+,-.?   ZoO2)(

Click here to exit Figure 2

Z m[w}2(

PRODUCT DEMAND

Quantity Demanded and Price

To understand how prices are determined in a typical product market, we will first focus on the "demand" side of the market for Product A.

This means that we will study household's or buyer's behaviour.

Here we study how product price affects household purchases.

The Law of Demand states that there is an inverse relation between Price of A (PA) and Quantity Demanded of A (QdA). When PA decreases, QdA increases. When PA increases, QdA decreases.

In Figure 2 we illustrate the Law of Demand with a Demand Schedule (table) and a Demand Curve for the product, Canadian Red Table Wine.

[# /\om0)(End of Figure 2 \m@   /0?] ];E ;^oO0)(Click here to exit Figure 3 ^_rŭM %1E*>̷@#@ lv}:=-gԣ \˄ћHhϧG`` r*3i1lgQ.fe(ͤ4ggӣѰ }J0`ڻmϧG``F69NF3Y(h32fcg3yk>0mm^ggӣѰ }J0`ڌ@#@ `_ `w+ `2(

Figure 3: Individual Demand vs Market Demand: Red Table Wine

` l ?axR0@ѐ$W bh JmsG?MR|>N1rIƅVvUwo<ăx0?c%<6ۖ68xq͛Q^]8by ÎA@Aa@Cx ^`xQ{ b cCိ2)(

In Figure 3 we assume that the market for Canadian red table wine consists

of 1000 housesholds, each with an individual demand curve identical to the one

shown for the Adams Family in the previous Figure 2.

 c  dw}X2(

PRODUCT DEMAND

Quantity Demanded and Price

We have just examined one household's (Adams Family) demand schedule and demand curve for Canadian Red Table Wine. This is called "Individual Demand."

When we examine how the amount purchased by all the households (in total) in one market is related to different prices we call this "Market Demand."

In Figure 3 we illustrate that, for each price, the market demand curve for a product is found by totalling the individual quantity demanded by all households in the market.

In other words, the market demand curve is the horizontal sum of all individual demand curves.

 d#ferAAUnJKѤKts+FI)H G@3vy<ZZ# \Hw9N#GkQ@` VC9N#GkQ@`gqrHm lv};<G.YYF֣ցh,tfggӳz10m厓C@3vy<ZZ# \HhϧG`b0`9ϧg5b0`ڌ@3ed4x F QHw,^s;>F֣ցj3i厔o@3vy<ZZ# \ҚqHw9N#GkQ@` VT9N#GkQ@`gqr3h j=h66 0.YY_v};<Gf,gq4x F @c6 6s;>F֣ցh,.w9N#GkQ@`啗ggӳz10mFm `\yvy<ZZ# ͤ; :a^3ig3h j=h6rL]m lv};<G.YYv};<Gf3gq4x F @cy6 6s;>F֣ցh,t\fggӳz10m啚ggӳz10mFm `\bqHw9N#GkQ@` Vm9N#GkQ@`gqrMm lv};<G.Xͤ;ϧg5b0`9Ggq4x F @cA6 6s;>F֣ցh,^s;>F֣ցj3i厝ό@3vy<ZZ# \qHw9N#GkQ@` Vz_9N#GkQ@`gq e f>퀭2)(

At the price of $8.00 per litre Point a shows an individual quantity demanded of 2 litres. If you click on Point a below, the market quantity demanded

of (2 litres x 1000 firms) = 2000 litres per month will display at Point A.

 f8 fgWf{ 2)(

2

g٠ kh_b`2)(

$8.00

hA @  ioO2)(

Click here to exit Figure 3

ijyX2Oa"^0 i1.ddMRJS zyScŞgrGD3rR^ ]8}&k88n1ɔ+FI-(5$r rSts+FI)H5 \h qYvy< F QHh ң@#@ lv};FֳQfc69N#GkQ@` @#@ lv};<G/Gl>*3i16yj=h6z6Yvy< F QHh w@#@ lv};<G/EL>+9NF3Y(j3i1z"aQHhϧg5b0`wg3h j=h66 0/B>*3i16yj=h6zQHhϧg5b0`%Fm 6s;>F֣ցhNϧG`b0`ڌ@#@ `\qQHhϧG`b0`ϧg5b0`ڌ@3c69N#GkQ@` >+9N#GkQ@`F69N#GkQ@` >*3i1l< F @c69N#gցh:\|Vs;>F-Gfc+@#@ lv};<gԣ \1Yvy<ZZ# ͤ4Fvy<ZZ# \Yvy< F QHh >*3i16yj=h6sWGFm 6s;>F֣ցh4|Tfcg3yk>0m惏ggӳz10mFm 0.f8ͤ;ϧg5b0`RGg3h j=h66 0/RZ?3ig3h j=h6z 9vy<ZZ# ͤ; Ԥggӳz10mFm `^$s;>F֣ցj3i%ac6 6s;>F֣ցh-#gq4x F @Ii$ͤ;ϧg5b0`RIX3h j=h66 0/RZLV3ig3h j=h6zaYvy<ZZ# ͤ4Fm 6s;>gցhϧG`b0`ڌ@#@ `^x|Tfggӳz10mC69N#GkQ@` k@#@ lv};<G/M>+9N#GkQ@`F0pͤ4ggӣѰ z10m%c6 6s;>F֣ցh-'gq4x F @IC6s;>F֣ցj3iRJR3h j=h66 0/RZT&3ig3h j=h6zҭHw9N#GkQ@` Ԗь@3vy<ZZ# ^~w9N#GkQ@`)%s4x F QHwI-ϧg5b0`ڌ@3Iivͤ;ϧg5b0`KKm lv};<G/Rv`;ϧg5b0`ڌ@zHw9N#GkQ@` Ԥggӳz10mFm `^ʬfggӳz10m)&ns4x F QHw-4;gq4x F @JIv};<GfKMrm lv};<G/RZm&3ig3h j=h6zuvy<ZZ# ͤ; Ԗ@3vy<ZZ# ^$s;>F֣ցj3i)'6s4x F QHw-:{gq4x F @JIv};<GfKOm lv};<G/Rvy;ϧg5b0`ڌ@s%GFm 6s;>F-G.cͤ4ggӳz10mggӳz10mFm 0._ͤ4ggӣѰ z10m폊ggӣѰ z10mFm 0.\ͤ;ϧg5b0`iFvy<ZZ# \!Hͤ4ggӳ9l< F QHV*11ܳqEFvy<ZZ# \ns;>F֣ցj3i厐@3vy<ZZ# \yvy<ZZ# ͤ; :E>3ig3h j=h6r3h j=h66 0.YY!|v};<Gf$gq4x F @c6 6s;>F֣ցh,tfggӳz10mkggӳz10mFm `\tvy<ZZ# ͤ; VP/9N#GkQ@`gqrJ7m lv};<G.XM8ͤ;ϧg5b0`+*oϧg5b0`ڌ@3eef4x F QHw,s;>F֣ցj3i厖c@3vy<ZZ# \Hw9N#GkQ@` H\;ϧg5b0`ڌ@r3h j=h66 0.YYF֣ցh,s;>F֣ցj3i厙@3vy<ZZ# \F֣ցh,tfggӳz10m厜@3vy<ZZ# \ӠHw9N#GkQ@` Vu9N#GkQ@`gqrNm lv};<G.X8ͤ;ϧg5b0`+=/ϧg5b0`ڌ@3 j jk_E2)(

At the price of $8.00 the market quantity demanded is the horizontal sum of

the 1000 individual quantity demands. Click on Point b below to proceed.

 k8 jl_Q`2)(

2000

lLH fmWf{ 2)(

2

m٠ kn_b`2)(

$8.00

nA  moW{ 2(

A

ols( pg% 2)(

Market Qd

at $8.00

p,X q_yaB2)(

Indiv Qd

at $8.00

qCa` rw 2)(

2 + 2 + 2 + 2 ..... 1000 times = 2000 litres

ra`Z^)$*DPůgցj3i1tc ͤ4ggӳz0 N9NF3Y(j3i1riFm 6s;>F֣ցh.};<Gfcg3rim 6s;>F֣ցh.⩾s;>F֣ցj3i1rӳz10mFm 6s8.l`Fvy<ZZr8ӳz10mFm 6s8.F֣ցh.s;>F֣ցj3i1rӳz10mFm 6s8.Ϭ`Fvy<ZZr,ӳz10mFm 6s8.`Fvy<ZZrӳz10mFm 6s8..};<Gfcg3r QHhϧg5`.n};<Gfcg3rQm 6s;>F֣ցh.};<Gfcg3rӳz10mFm 6s8.`Fvy<ZZr ӳz10mFm 6s8.,`Fvy<ZZ s kt_b`2)(

$8.00

 tA  ku_b`2)(

$7.00

uB`  fvWf{ 2)(

3

v٠ w>퀭2)(

At the price of $7.00 per litre Point b shows an individual quantity demanded of 3 litres. If you click on Point b below, the market quantity demanded

of (3 litres x 1000 firms) = 3000 litres per month will display at Point B.

w8Z^  mxW{ 2(

A

xls(@  yyXsO\!^0 i1.Kx2)JXi5LhDT (eIt#$jF7|ƃ^ EAþi-%OaI}Ӌsrqȕ̃#?$RIrSrIH7%&VEi0]$Ź9JAJD\pLI}Ӌsrqȕ̃#?$RIrSkczDy 蝉QHhϧg5b0`苉g3lz10mFm 0/C\N3i16yj=h6zpHhϧg5b0`9Fm 6s;>gQ/AFֳQ.j8Hͤ4ggӳz10m旓ggӳz10mFm 0.gy8Hͤ4ggӳb0`' ϧgQ@`Fd#69N#GkQ@` N9N#GkQ@`F#69NF3Q@` *N3i1l< F @d#6 6s;>F֣ցh:&s;>F֣ցj3i1sFm 6s;>F֣ցh9l&s;>F֣ցj3i1zpHhϧG`` lϧg5b0`ڌ@#@ lp/PN9N#GkQ@`gqzrY6yj=h669 ϧg5b0`ڌ@#@ lp/NNK>F֣ցj3i168Lv}:=-Gfcyj=h669 ggӳz10mFm `^Ԟ fcg3yj=h6zrY4x F QHh gӳz10mFm 6s85(KFtz6ZZ# ^DNs;>gցj3i1zRHhϧG`b0` gӳb0`ڌ@#@ lp/SN9N#gցj3i1zrY4x F QHhJǣ`b0`ڌ@#@ lv}8C+_cg3yj=h66^԰fcg3yj=h6zϹtz6ZZ# ͤ4Kpm 6s;>gցhW.NF3Q@`F^ hϧG`b0`ڌ@zSHhϧG`b0`L83yj=h6651Ftz6ZZ# ^Dʬz6ZZ# ͤ4ggӁz326s;>gցj3iMm 6s;>gցh54Ftz6ZZ# ^Lfcg3yj=h6zetz6ZZ# ͤ4Mǣ`b0`ڌ@#@ lv}857Ftz6ZZ# ^fcg3yj=h6zSHhϧG`b0`Nm 6s;>gցhQ;Cgցj3i1^Lfcg3yj=h6zSɱHhϧG`b0`' Ftz6ZZ# \rpvy<ZZ# ͤ; N3i14x F @3lF֣ցh.⩾s;>F֣ցj3i1rӳz10mFm 6s8.l`Fvy<ZZr8ӳz10mFm 6s8.F֣ցh.s;>F֣ցj3i1rӳz10mFm 6s8.Ϭ`Fvy<ZZr,ӳz10mFm 6s8.`Fvy<ZZrӳz10mFm 6s8..};<Gfcg3r QHhϧg5`.n};<Gfcg3rQm 6s;>F֣ցh.};<Gfcg3rӳz10mFm 6s8.`Fvy<ZZr ӳz10mFm 6s8.,`Fvy<ZZ y kz_b`2)(

$8.00

 zA  k{_b`2)(

$7.00

{B`  j|_Q`2)(

3000

|`0 f}Wf{ 2)(

3

}٠#Z^  m~W{ 2(

A

~ls( mW{ 2(

B

 g% 2)(

Market Qd

at $7.00

,X _yaB2)(

Indiv Qd

at $7.00

Ca` w 2)(

3 + 3 + 3 + 3 ..... 1000 times = 3000 litres

"{` j_E2)(

At the price of $7.00 the market quantity demanded is the horizontal sum of

the 1000 individual quantity demands. Click on Point c below to proceed.

8(  C2)(

In Figure 3 we assume that the market for Canadian red table wine consists

of 1000 housesholds, each with an individual demand curve identical to the one

shown for the Adams Family in the previous Figure 2.

 @  y\UsOB ^0 i1.Kx2)JXiF-G.b9ͤ4ggӳb0`˾NF3Q@`F\푛Hw9N#GkQ@` ]9N#GkQ@`Fb#69N#GkQ@` e>3i16yj=h6sL3lz10mFm 0.bq9N#gցj3iG4Fvy< F @69N#gցh+dfcg3h j=h6sM3lz10mFm 0.b9xͤ4ggӳb0`G8Fvy< F @69N#gցh1fcg3lz10m#7@#@ lv};F-G   퀭2)(

At the price of $6.00 per litre Point c below indicates an individual quantity

demanded of 4 litres. If you click on Point c, the market quantity demanded

of (4 litres x 1000 firms) = 4000 litres per month will display at Point C.

 8 k_b`2)(

$8.00

A  k_b`2)(

$7.00

B`  k_b`2)(

$6.00

B  fWf{ 2)(

4

c٠(  mW{ 2(

A

ls( mW{ 2(

B

@  yXűO\ ^0 i1.Kx2)JFéHNI%N-)"W2 B\<] eѠ 1S%.` `./ZLgӇQK@cD4"* J\"h#f䤹)ӇaI}Ӌsrqȕ̃#?$@yNI%N-)"W2 R$ 6z뤺JL,n+GKhgx+J'|  ϫ.Fm 6s;>F֣ցh>fs;>F֣ցj3i1s˶Fm 6s;>gցh.Fvy<ZϩF @vv};<GfcN#69N#GkQ@` lggӳb0`ڌ@#@ `^dfcg3lz10m)E#69N#GkQ@` sl@#@ lv}:=-gԣ ^xfs;>F֣ցj3i1z푛Hw9N#GkQ@` ]9N#gցj3i1zâ푛HhϧgQ@` #gցj3i1^8Fy<ZϩF QHhϧf޳h j=h669 fzϧg5b0`ڌ@#@ lp/T]>F-Gfcg3zvy< F QHh zϧg5b0`ڌ@#@ lp/Rl]9NF3Y(j3i1zY4x F QHhg3h j=h66 0/P ]>F-Gfcg3zzY4x F QHh gӳz10mFm 6s8.ٜϧG`b0`ڌ@#@ `^}:=-Gfcg3zabvy<ZZ# ͤ; ֏#GkQ@`Fp/Z]3i14x F @h{ͤ;ϧg5b0`GL Fm lv};<G/Yt^"=-Gfcg3h釈ͤ;ϧg5b0`GLnFm lv};<G/Z:e3ig3h j=h6zҳ8z10mFm lv};< ֎@3vy<ZZ# ^tdfggӳz10m#6 6s;>F֣ցh96iϧg5b0`ڌ@3iɹv};<GfJgq4x F QH/Z:q3ig3h j=h6zӘHw9N#GkQ@` ֎(@3vy<ZZ# ^fs;>F֣ցj3igzvy<ZZ# ͤ<gq4x F @e#69N#GkQ@` ]3i1lF-G.b9ͤ4ggӳb0`U2?ϧgQ@`F¹xe(ͤ4ggӳb0`˟.ٜϧg5b0`ڌ@#@ `\푛Hhϧg5b0`-.Ftz6ZZ# \s0lfcg3lz10m#@#@ lv};F-G.b98ͤ4ggӳb0`U=/ϧgQ@`F  k_b`2)(

$8.00

 A  k_b`2)(

$7.00

B`  k_b`2)(

$6.00

B  fWf{ 2)(

4

c٠ j_Q`2)(

4000

( mW{ 2(

A

ls( mW{ 2(

B

.  j_E2)(

At the price of $6.00 the market quantity demanded is the horizontal sum of

the 1000 individual quantity demands. Click on Point d below to proceed.

8 mW{ 2(

C

 w 2)(

4 + 4 + 4 + 4 ..... 1000 times = 4000 litres

Z2͓O @ Ay\UO\ ^0 i1.Kx2)Ji$I nJK =ts+W 'ˣ@cD4"* J\2Eĺ -4%%Ѡ 1S%.` b] ErƧaI}Ӌsrqȕ̃#?$RIrSr0]$Ź9JAJDf䤹)m. ܔ%8pLI}Ӌsrqȕ̃#?$O ϧg5b0`ڌ@#@ lp.ev};<GfַFvy<ZZ# \{4x F QHhӹc0mFm 6s;>F֣ց\{4x F QHhN#GkQ@`F\;fcg3h j=h缃N#GkQ@`F\kHhϧg5b0`YFvy<ZZ# \;evy< F QHh l>F֣ցj3i134x F QHh l>gցj3i1wγyj=h669 l3ig3h j=h6rg3h j=h66,^dfcg3h j=h6  k_b`2)(

$8.00

 A  k_b`2)(

$7.00

B`  k_b`2)(

$6.00

B  k_b`2)(

$5.00

CR fWf{ 2)(

5

٠ mW{ 2(

A

ls( mW{ 2(

B

 mW{ 2(

C

 "퀭2)(

At the price of $5.00 per litre Point d below indicates an individual quantity

demanded of 5 litres. If you click on Point d, the market quantity demanded

of (5 litres x 1000 firms) = 5000 litres per month will display at Point D.

!8@ !C9Hӟ1 P ?ိ2)(

The Market Demand Curve can be constructed by joining points A, B, C, D.

Click here to create the Market Demand Curve for Canadian Red Wine.

3 ;oO0)(Click here to exit Figure 3 8 yZ#O\ ^0 i1.Kx2)Ji$I nJK =ts+W'$Ј@1)sP/|h.o%%Ѡ 1S%.` b] AzgZMS%.` b]7]YK@Qw Ots+FI)HNSӇaI}Ӌsrqȕ̃#?$RIrS ^K 8}\$Ź9JAJDf %6YFm 6s;>F֣ցh8fs;>F֣ցj3i1spMFm 6s;>F-G.lyͤ4ggӳb0`]6YFvy<ZZ# \ӓetz6ZϩF QHh l3i14x F Bv};<Gfc j,4x F QHwW3NK0mFm 6s;>F֣ց\{4x F QHhֹGFvy<ZZ# \{4x F QHhN#GkQ@`F\;fcg3h j=h缃N#GkQ@`F\;Աfcg3h j=hϵ6YFm lv};<G.|v};<Gfc稛,@#@ lv};<G.xͤ4ggӳz10mv,@#@ lv}:=-G.vIv};F֣ցh^6YFvy< F @Ѳͤ4ggӳz10mF34x F QHh ,@#@ lv}:=-G.v}:=-GfcF#69N#gցhb6YϧgQ@`F'ͤ4ggӳ}J0`Fm 6s;>F֣ցh6YFvy<ZZ# ^Hfs;>F-GfcjF#69N#gցh 6Yϧg5b0`ڌ@#@ `^(dfcg3h j=h6z#etz6ZZ# ͤ4Fm 6s;>gցh6Ygq4x F @9Ѳͤ4ggӳz10mF34x F QHh 9,@#@ lv};<G/LTl9NF3Q@`F`avy< F QHh荖g3lz10mFm 0/Vl>F֣ցj3i1Uͤ4ggӣѰ }J0`ꖍFm 6s;>F֣ցh6Yϧg5b0`ڌ@3Lͤ4ggӳb0`Rg3h j=h66*6yN#gցj3i1vv};<Gfc69N#gցh7%Fvy< F @s!tz6ZZ# ͤ4gγlz10mFm 6s8$8ϧgQ@`FxAͤ4ggӳb0`g gӳb0`ڌ@#@ lp/Zdl9N#GkY(j3i1zCgY4x F QHhg3h j=h66*:aN#gցj3i1xAިͤ4ggӳb0`Fm 6s;>F-G/^Hy;9N#gցj3i1rMFm 6s;>F֣ցh+Dz6ZZ# ͤ4ggӁs%MFm 6s;>F-G.cv};<Gfc,@#@ lv};<G._ͤ4ggӣѰ z10m,@#@ lv}:=-G.]Iv};<Gfi6YFvy<ZZ# \seHhϧg5b0`  k_b`2)(

$8.00

 A  k_b`2)(

$7.00

B`  k_b`2)(

$6.00

B  k_b`2)(

$5.00

CZ  fWf{ 2)(

5

٠ j_Q`2)(

5000

( w 2)(

5 + 5 + 5 + 5 ..... 1000 times = 5000 litres

m mW{ 2(

A

ls( mW{ 2(

B

 mW{ 2(

C

:͓O mW{ 2(

D

@ ?.<0&OOB22  ?倭2)(

The Market Demand Curve can be constructed by joining points A, B, C, D.

The Market Demand Curve relates all the buyers' quantity demanded to

different possible prices. Click here to continue.

1` ;oO0)(Click here to exit Figure 3 y`#o">ǿ99LhDT (eIt\Se12Ƚ/`ĥC/ZLIRas8-Tđ<[JH%)sPdHoy%BK_贘σ\Idt3یil=ts偑&%Z>._✁nr%s <||22IrS_Ǽy_✁nr%s D#&Fȭ8}&k88 w\23IH@5 ܖxp[k3#?$RipnI14MRu෫&\.K.&Bw^{'^4ge` 0bS҇~k׋ .#挚 D`ćZGW~{nM\ED[$JSŹBFI)Ht;w 6YFm 6s;>F-GЮfŴw:cg3h j=h%lK=Gfcg38w. f669N#GkQ@.g= vy<ZZ# ͤ4gs܄ϧg5b0`ڌ@#@ lp.fͨͤ4ggӳz10msLϧg5b0`ڌ@#@ lp.fj3i14x sϧg5b0`ڌ@#@ lp.g%v};<Gfci܌669N#GkQ@Zz\6@#@ lv}:=-G/RZ>3ig3h j=h6zvy<ZZ# ͤ; ԝcg3h j=h66^lfggӳz10m%Lc6 6s;>F֣ցh-#+gq4x F @JIv};<GfN+q4x F QH/RZK3ig3h j=h6zdHw9N#GkQ@` ըggӣѰ z10mFm 0/VM9NF3Q@`FZ?Xl< F QHhϧfc69NF3Q@` ՚@#@ lv}:=-G/VjT3i1l< F @Ii8ͤ;ϧg5b0`KIm lv};<G/RZQF3ig3h j=h6zҖHw9N#GkQ@` Ԗ@3vy<ZZ# ^fggӳz10m%xc6 6s;>F֣ցh-,gq4x F @Iijͤ;ϧg5b0`KKm lv};<G/VjU3i1l< F @Z^l< F QHhϧhe@ lv}:=-Gf ՚@#@ lv}:=-G/Vj[3i1l< F @Zuv}:=-Gfcj%cѰ z10mFm 6s;> ա1l< F QH/Vjb&3i1l< F @Yͤ4ggӣѰ z10m%c6 6s;>F֣ցh-/gq4x F @Iiͤ;ϧg5b0`NKq4x F QH/RZd3ig3h j=h6z,Hw9N#GkQ@` ԖɌ@3vy<ZZ# ^lfggӳz10m'fvy<ZZ# ͤ-5gq4x F @Yͤ4ggӣѰ z10mj&tcѰ z10mFm 6s;> ա1l< F QH/Vji3i1l< F @Yͤ4ggӣѰ z10mj&sl< F QHh ՚@#@ lv}:=-G/Vpo>gցj3i1Yͤ4ggӣѰ z10mf5c69NF3Q@` ԖY@3vy<ZZ# ^fggӳz10m%c6 6s;>F֣ցh;8ggӳz10mFm IiΘͤ;ϧg5b0`KNm lv};<G/RZv3ig3h j=h6z¹vy<ZZ# ͤ; Ԗy@3vy<ZZ# ^fcg3yj=h6zSHhϧG`b0`ӣѰ z10mFm 6s85<Ftz6ZZ# ^Lfcg3yj=h6zՒ9tz6ZZ# ͤ4OKFm 6s;>gցh_0NF3Q@`F^ds;>gցj3i1z HhϧG`b0`OLFm 6s;>gցh=3Ftz6ZZ# ^|}:=-Gfcg3zՓRtz6ZZ# ͤ4OMzFm 6s;>gցh*6ɟN#gցj3i1xj3i16yj=hʎgӳb0`ڌ@#@ lp/^Hr 9N#gցj3i1zћHhϧgQ@` ֞X@#@ lv}:=-G/Zzn3i1l< F @jtz6ZZ# ͤ4g'!3l< F QHh ֞@#@ lv}:=-G/Zzu23i1l< F @iͤ4ggӣѰ z10m'3l< F QHh ֞x@#@ lv}:=-G/^Tuc>F-Gfcg3z#fcg3lz0 ו ϧgQ@`F^ fcg3lz10m69N#gցhW,z}3Fvy<ZZ# \4x F QHh%cg3h j=h66\QHhϧg5b0`%acg3h j=h66\3QHhϧg5b0`,ϧg5b0`ڌ@#@ `\Oh j=h669N%cg3h j=h66\eQHhϧg5b0`ˮmgցj3i1\ ћHhϧG`b0`Fvy<ZZ# \~Yvy<ZZ# ͤ4/ɟN#GkQ@`F\Z6s;>F֣ցj3i=Fvy<ZZ# \yj=h669N˧cg3yj=h66\ QHhϧG`b0`˱9NF3Q@`F\ QHhϧG`b0`Fvy<ZZ# \ʼvy<ZZ# ͤ4,͞F֣ցj3i1\Z6s;>F֣ցj3i%Fvy<ZZ# \Qyj=h669Nˠ=Ftz6ZZ# \ QHhϧG`b0`G.Fvy< F @ﳙ6yj=h6618hϧgQ@`#@#@ lv}; AdJ3i1l< F @t+69NF3Q@` cf>gցj3i1tv69NF3Q@` =e3i14x F @es4x F QHh Yi;<Gfcg3d#@ lv};<Gf Yk9N#GkQ@`Fu֖Ѱ z10mFm 6s;> Ol4ggӣѰ z10mFm t69NF3Q@` e:3i16yj=h6sLg3lz10mFm 0.bq9N#gցj3iG4Fvy< F @淣69N#gցh1fcg3lz10m#@#@ lv};F-G.]tz6ZZ# ͤ4g[Ό@#@ lv}:=-G.Y-9N#GkQ@`[ggӳz10mFm 0.Xhͤ4ggӳz10m\#GkQ@`Fp.Xͤ4ggӳz10m\NF3Q@`Fp.]=H9NF3Q@`\@#@ lv}:=-G.]tz6ZZ# ͤ4g]Œ@#@ lv}:=-G.Y-9N#GkQ@`]ggӳz10mFm 0.Xͤ4ggӳz10m^~ggӳz10mFm 0.]u(l< F QHhϧ1l< F QH.]ͤ4ggӣѰ z10m#6@#@ lv};F-G.b9hͤ4ggӳb0`˱NF3Q@`F^eN#gցj3i1xj3i16yj=hʐ gӳb0`ڌ@#@ lp/^0`ڌ@#@ lv};gցhW@NF3Q@`F^ hϧG`b0`ڌ@zTHhϧG`b0`羀ӳz10mFm 6s83N$`Fvy<ZZy4x F QHhrP/g3h j=h66  k_b`2)(

$8.00

 A  k_b`2)(

$7.00

B`  k_b`2)(

$6.00

B  k_b`2)(

$5.00

CZ  j_Q`2)(

5000

 mW{ 2(

A

ls( mW{ 2(

B

 mW{ 2(

C

 mW{ 2(

D

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3000

 X j_Q`2)(

4000

! j_Q`2)(

2000

" fW_ 2)(

2

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4

$c` fW_ 2)(

5

%e g&/<2)(

Market

Demand

Curve:

All buyers

quantity

demanded

&,} g+<2)(

Individual

Demand

Curve:

One family's

quantity

demanded

'Ł` fW_ 2)(

3

(c`@      !"#$%&'( ;oO0)(Click here to exit Figure 3  w}X2(

PRODUCT DEMAND

Quantity Demanded and Price

We have just examined one household's (Adams Family) demand schedule and demand curve for Canadian Red Table Wine. This is called "Individual Demand".

When we examine how the amount purchased by all the households (in total) in one market is related to different prices we call this "Market Demand."

In Figure 3 we illustrate that, for each price, the market demand curve for a product is found by totalling the individual quantity demanded by all households in the market.

In other words, the market demand curve is the horizontal sum of all individual demand curves.

# /om0)(End of Figure 3 m@)*? ;E oO2)(

Click here to exit Figure 4

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Figure 4: Change in Demand: Increase in Demand

 l  b d92)(

The market demand curve for Canadian Red Wine developed in Figure 3 is

displayed below as D1. Now, suppose a new study conclusively shows that

red wine significantly reduces the risk of heart disease. At each price,

households will increase their monthly purchases of red wine, as shown below.

   w}蠭2(

PRODUCT DEMAND

Demand and Non-price factors

The Price of Product A is not the only factor that affects the amount of Product A purchased by households.

For most products, non-price factors affecting household demand include: Income, Price of Related Goods, Number of Buyers, and Tastes. When a change in a non-price factor changes household purchases, we say a "Change in Demand" has occurred.

In Figure 4 we illustrate that when non-price factors change, the entire market demand curve for Product A will shift. More specifically, we illustrate an "Increase in Demand," a situation where the market demand curve shifts to the right. At each price, demand is increased.

 #KrϺVh%oϻ=7\KˆzO3b✁nr_g_g$j@,^1gF'=7x.dUmS/o1ϧgQ@`F\HhϧgQ@` @*3i14x F @D6yj=h662N};F֣ցh,8Vs;>F֣ցj3i1s ӳb0`ڌ@#@ lp.dF-GE$slz10mFm 6s81ħF-Gfcg3s3lz10mFm 0.cqj3i16yj=ĥ4۟N#gցj3i1ƴc ͤ4ggӳ`2ٮ};F-Gfcg3sN[m 6s;>F-G.dҜvy< F QHhq:Fvy< F @'x69N#gցh2};2000

  k_[`2)(

$8.00

A T8E2)(

If the price of wine was $8.00, D1 shows 2000 litres being demanded. If you

click on Point A, you will see demand increase to 6000 litres due to the study.

!L W| 0)(A  W{ 0(A  W| 0)(A *!i nW{ 02(

D1

@  oO2)(

Click here to exit Figure 4

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2000

  k_b`2)(

$8.00

A %wX2)(

After the study the demand has increased to 6000 litres, at the $8.00 price

Click on Point A again, to continue.

!L gW{ 2)(

A2

hv j_K`2)(

6000

 nW{ 02(

D1

Nz&X-z}.a0  3D10%ED!4 B  so 0)(At the same $8.00 price the demand is more due to the study favouring red wine. ,$-DPůF-Gfc@#@ lv};<G.g6ͤ4ggӳb0`ͦќϧg5b0`ڌ@#@ `\Hhϧg5b0`])N#GkQ@`F\¦Hhϧg5b0`S+%cg3h j=h66\բvy<ZZ# ͤ4L,Fvy<ZZ# \բh j=h669NS.Ecg3h j=h66\2Ѡ6s;>F֣ցj3iZ/ϧg5b0`ڌ@#@ `\ Hhϧg5b0`Z1F֣ցj3i1\3"Ѡ6s;>F֣ցj3iS2cg3h j=h66\գF֣ցh.Fs;>F֣ցj3i1riFm 6s;>gցh,Fs;>gցj3i1sWOgӳz10mFm 6s85Lhϧg5b0`ڌ@sSFm 6s;>F֣ցh  j_K`2)(

2000

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6000

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2000

 k_b`2)(

$7.00

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If the price of wine was $7.00, D1 shows 3000 litres being demanded. If you

click on Point B, you will see demand increase to 7000 litres due to the study.

!L$i gW{ 2)(

A2

w W| 0)(B  W{ 0(B  W| 0)(B *!Y j_K`2)(

3000

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$8.00

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D1

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  j_K`2)(

6000

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2000

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A2

w %wX2)(

After the study the demand has increased to 7000 litres, at the $7.00 price

Click on Point B again, to continue.

!L j_K`2)(

7000

 j_K`2)(

3000

` k_b`2)(

$8.00

 A k_b`2)(

$7.00

!BY nW{ 02(

D1

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B2

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  gW{ 2)(

B2

  j_K`2)(

6000

 j_K`2)(

2000

 gW{ 2)(

A2

w$Y j_K`2)(

7000

 j_K`2)(

3000

` T8E2)(

If the price of wine was $6.00, D1 shows 4000 litres being demanded. If you

click on Point C, you will see demand increase to 8000 litres due to the study.

!L k_b`2)(

$7.00

 BY k _b`2)(

$8.00

! A k _b`2)(

$6.00

"   W{ 0)(C   W{ 0(C   W{ 0)(C *!   #䂽 j_K`2)(

4000

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D1

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2000

  gW{ 2)(

B2

  j_K`2)(

6000

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2000

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A2

w j_K`2)(

7000

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3000

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$8.00

 k_b`2)(

$7.00

 [  k_b`2)(

$6.00

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C2

"T 0o 2)(

At the same

$6.00 price the

demand is more

due to the study

favouring red

wine.

%̭ %wX2)(

After the study the demand has increased to 8000 litres, at the $6.00 price

Click on Point C again, to continue.

&!L j_K`2)(

4000

's j _K`2)(

8000

(  n!W{ 02(

D1

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2000

 $ g%W{ 2)(

B2

%  j&_K`2)(

6000

& j'_K`2)(

2000

' g(W{ 2)(

A2

(w j)_K`2)(

7000

) j*_K`2)(

3000

*` k+_b`2)(

$8.00

+ k,_b`2)(

$7.00

 ,[  k-_b`2)(

$6.00

!-` g.W 2)(

C2

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The new demand curve, D2, resulting from the study, is formed by joining points A2, B2, C2. Note that an "increase in demand" is displayed as a

rightward shift in the demand curve. Click here to continue.

%0!L j1_K`2)(

4000

&1s j2_K`2)(

8000

'2 n3W{ 02(

D2

(3X n4W{ 02(

D1

)4N5z|#֌-@DzsBT,MPڀɀ&XX|U *&XTTBtU*5 l6o 0)(An increase in demand is shown as a rightward shift in the demand curve. +6(@     !"%&'()+ŧB= 7rů υ% 22) ypqMgMQ XvXͼ*dJM(Z-@%JRkR&L d?P q!%9rd^PcE %RN7 (Ib$YdX"H#(X\@͹@#@ lv};Fȼ֣ցj3iʣ|7 fcg3h j=h6slIFm 6s;>F֣ցh6Ls;>FֳQfcԌ@3vy<ZZ# \4xl{GfccKY\jvy<ZZ# ͤ4 F-Gfcg3 69N#GkY(h3|s;>F֣ցj3i1s2Fm lv};<G.f8ͤ;ϧg5b0`W!Fvy<ZZ# \i6s;>F֣ցj3iͷ&+^&9N#gsY(j3i1sr m 6s;>F֣ցh6>}:=-Gfcg3s3-Fm 6s;>gQ.fehͤ4ggӣѰ }J0`̹Ftz6ZϩF @;69NF3Y(h32fcg3yk>0mm]ggӣѰ }J0`ڌ@#@ `\QHhϧG`` y3i1l0mFm 07 8w `2(

Figure 4: Change in Demand: Increase in Demand

8 l  >9w}X2(

PRODUCT DEMAND

Demand and Non-price factors

Household Income

What specific factors or non-price determinants can cause an increase in demand? One important factor is average household income.

If Product A is a normal good, then an increase in income would cause an increase in demand for Product A. A normal good is one that households switch to when they get richer - better cuts of meat, more extravagant vacations, higher quality clothes etc.

If Product A is an inferior good, then a decrease in income would cause an increase in demand for Product A. An inferior good is one that households turn to when they get poorer- cheaper cuts of meat, camping vacations, used clothes etc.

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2000

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B2

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6000

= j>_K`2)(

2000

> g?W{ 2)(

A2

?w j@_K`2)(

7000

@ jA_K`2)(

3000

A` kB_b`2)(

$8.00

B kC_b`2)(

$7.00

 C[  kD_b`2)(

$6.00

!D` gEW 2)(

C2

"ET F;2)(

If this wine is a normal good (higher quality wine) , an increase in household income would cause the rightward shift in the demand curve. On the other hand, if this type of red wine is an inferior good, a decrease in income would cause the rightward shift. Click here to continue.

%F!"` jG_K`2)(

4000

&Gs jH_K`2)(

8000

'H nIW{ 02(

D2

(IX nJW{ 02(

D1

)J lKo 0)(An increase in demand is shown as a rightward shift in the demand curve. +K(@    !"%&'()+ ӡDT\ Lw `2(

Figure 4: Change in Demand: Increase in Demand

L l  CMw}X2(

PRODUCT DEMAND

Demand and Non-price factors

Price of Related Products

If the price of a Product B, that is related to Product A, changes, this can cause an increase in demand for A.

Product B could be a substitute product (competing product) to Product A. As an example, white wine would be a substitute to red wine. In this case an increase in the price of the substitute (white wine) would cause an increase in demand for red wine.

Product C could be a complement product to A. An example would be red meat and red wine, where the two products are consumed together. In this case a decrease in the price of the complement product (red meat) would cause an increase in demand for red wine.

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2000

 O gPW{ 2)(

B2

 P  jQ_K`2)(

6000

Q jR_K`2)(

2000

R gSW{ 2)(

A2

Sw jT_K`2)(

7000

T jU_K`2)(

3000

U` kV_b`2)(

$8.00

V kW_b`2)(

$7.00

 W[  kX_b`2)(

$6.00

!X` gYW 2)(

C2

"YT Z;2)(

An increase in the price of a substitute product like white wine would cause the rightward shift in the demand curve. Also, if the price of a complement, red meat, decreases, this would shift the demand for red w ine rightward.

Click here to continue.

%Z! j[_K`2)(

4000

&[s j\_K`2)(

8000

'\ n]W{ 02(

D2

(]X n^W{ 02(

D1

)^ l_o 0)(An increase in demand is shown as a rightward shift in the demand curve. +_(@    !"%&'()+?ӡDT\  `w `2(

Figure 4: Change in Demand: Increase in Demand

` l  Gaw}`2(

PRODUCT DEMAND

Demand and Non-price factors

Other non-price determinants

Other non-price determinants that can increase the demand for a product include- population, tastes, and factors specific to the product under analysis.

If the population grows, the number of families purchasing Product A will likely increase. This will lead to an increase in demand.

Tastes refers to fads and trends that favour Product A and increase the demand for Product A.

Other factors specific to the product red wine may include: a recent government policy that bans the import of U.S wine. This would increase the demand for Canadian red wine.

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2000

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B2

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6000

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2000

f ggW{ 2)(

A2

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Click here to continue.

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PRODUCT DEMAND

Demand and Non-price factors

Other non-price determinants

Other non-price determinants that can increase the demand for a product include- population, tastes, and factors specific to the product under analysis.

If the population grows, the number of families purchasing Product A will likely increase. This will lead to an increase in demand.

Tastes refers to fads and trends that favour Product A and increase the demand for Product A.

Other factors specific to the product red wine may include: a recent government policy that bans the import of U.S wine. This would increase the demand for Canadian red wine.

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Figure 5: Change in Demand: Decrease in Demand

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The original market demand curve for Canadian Red Wine is shown below

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The market demand curve will shift leftward to D3, as explained in this Figure.

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PRODUCT DEMAND

Demand and Non-price factors

The non-price determinants discussed in Figure 4 can also change in ways that can cause a decrease in demand for Product A.

The following non-price determinants can cause a decrease in demand for A

- A decrease in income and A is a normal good (high quality red wine)

- An increase in income and A is an inferior good (generic brand red wine)

- A decrease in the price of B, a substitute of A. Price of white wine, a substitute of red wine decreases.

- An increase in the price of B, a complement of A. Price of red meat, a complement of red wine increases.

Figure 5 describes a decrease in demand graphically, as a shift leftward in the market demand curve.

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PRODUCT DEMAND

Demand and Non-price factors

The non-price determinants discussed in Figure 4 can also change in ways that can cause a decrease in demand for Product A.

The following non-price determinants can cause a decrease in demand for A

- A decrease in income and A is a normal good (high quality red wine)

- An increase in income and A is an inferior good (generic brand red wine)

- A decrease in the price of B, a substitute of A. Price of white wine, a substitute of red wine decreases.

- An increase in the price of B, a complement of A. Price of red meat, a complement of red wine increases.

Figure 5 describes a decrease in demand graphically, as a shift leftward in the market demand curve.

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Click here to exit Figure 6

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Figure 6A: Change in Quantity Demanded

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Figure 6B: Increase in Demand

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Figure 6B: Decrease in Demand

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PRODUCT DEMAND

Demand and Non-price factors

Economists typically use two different phrases to distinguish between changes in consumer purchases caused by price changes vs. non-price factors

Change in Quantity Demanded

The phrase "Change in Quantity Demanded" is used to refer to a change in consumer purchases caused by a change in the Price of A. Graphically, this is shown as a movement along the same demand curve.

Change in Demand

The phrase "Change in Demand" is used to refer to a change in consumer purchases caused by a change in a Non-price factor. Graphically, this is a shift in the entire demand curve.

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PRODUCT DEMAND

Demand and Non-price factors

Economists typically use two different phrases to distinguish between changes in consumer purchases caused by price changes vs. non-price factors

Change in Quantity Demanded

The phrase "Change in Quantity Demanded" is used to refer to a change in consumer purchases caused by a change in the Price of A. Graphically, this is shown as a movement along the same demand curve.

Change in Demand

The phrase "Change in Demand" is used to refer to a change in consumer purchases caused by a change in a Non-price factor. Graphically, this is a shift in the entire demand curve.

# /om0)(End of Figure 6 m$ DPůClick here to exit Figure 7

  22(

Figure 7: Individual Supply Schedule & Supply Curve: Red Table Wine

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In Figure 7 we will examine Rouge Winery's (small firm) Supply Schedule

and Supply Curve for Canadian Red Table Wine. Both the schedule (table)

and the supply curve describe how Rouge's willingness to supply red table

wine to the market is related to different possible prices of wine.

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Figure 7A Supply Schedule

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Figure 7B Supply Curve

0;E *w}蠭2(

PRODUCT SUPPLY

Quantity Supplied and Price

To understand how prices are determined in a typical product market, we now turn to the "supply" side of the market for Product A.

This means that we will study firms' or sellers' behaviour. Here we study how product price affects firms' willingness to supply Product A.

The Law of Supply states that there is a direct relation between Price of A (PA) and Quantity Supplied of A (QsA). When PA increases, QsA increases. When PA decreases, QsA decreases.

In Figure 7 we illustrate the Law of Supply with a Supply Schedule (table) and a Supply Curve for the product, Canadian Red Table Wine.

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Point a in the Supply Schedule below illustrates that when the price of wine

is $4.00 per litre, Rouge is willing to supply 200 litres per month.To show

Point a as one point on a supply curve, click on Point a in the table below.

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$4.00 200

 # @ m!Wl 2(

a

! "逭2(

Point b in the Supply Schedule below illustrates that when the price of wine

is $5.00 per litre, Rouge is willing to supply 300 litres per month.To show

Point b as one point on a supply curve, click on Point b in the table below.

"L!ʠ'#' w#oE2)(

$5.00 300

$4.00 200

%## 4$5DPůPoint c in the Supply Schedule below illustrates that when the price of wine

is $6.00 per litre, Rouge is willing to supply 400 litres per month.To show

Point c as one point on a supply curve, click on Point c in the table below.

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$6.00 400

$5.00 300

$4.00 200

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Point d in the Supply Schedule below illustrates that when the price of wine

is $7.00 per litre, Rouge is willing to supply 500 litres per month.To show

Point d as one point on a supply curve, click on Point d in the table below.

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c

)+`H m,Wt 2(

b

*,IJ` m-Wl 2(

a

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$7.00 500

$6.00 400

$5.00 300

$4.00 200

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Point e in the Supply Schedule below illustrates that when the price of wine

is $8.00 per litre, Rouge is willing to supply 600 litres per month.To show

Point e as one point on a supply curve, click on Point e in the table below.

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d

+1Dx m2Wl 2(

c

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b

-3IJ` m4Wl 2(

a

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$8.00 600

$7.00 500

$6.00 400

$5.00 300

$4.00 200

/5# @ )+,-./+C_++C_+  C_+ 6oO2)(

Click here to exit Figure 7

 6C_-o+ 7wl 2)(

Click here to create the Individual Supply Curve for Canadian Red Wine

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If you draw a line that connects Points a, b, c, d, e in Figure 7B below, you

will have created Rouge Winery's Individual Supply Curve for Red Wine.

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e

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d

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c

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b

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a

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$8.00 600

$7.00 500

$6.00 400

$5.00 300

$4.00 200

+?# @    +? ,P^8Ⰼ, @o2(

Click here to continue.

@a` AoO2)(

Click here to exit Figure 7

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$8.00 600

$7.00 500

$6.00 400

$5.00 300

$4.00 200

+C#  mDWl 2(

e

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d

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c

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b

/GIJ` mHWl 2(

a

0Hl IIB2)(

If you draw a line that connects Points a, b, c, d, e in Figure 7B below, you

will have created Rouge Winery's Individual Supply Curve for Red Wine.

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Rouge Winery's

Supply Curve is

upward sloping, indicating that PA

and Qsa are directly related.

3K^@!#%')+,-./0123 LoO2)(

Click here to exit Figure 7

L *Mw}蠭2(

PRODUCT SUPPLY

Quantity Supplied and Price

To understand how prices are determined in a typical product market, we now turn to the "supply" side of the market for Product A.

This means that we will study firms' or sellers' behaviour. Here we study how product price affects firms' willingness to supply Product A.

The Law of Supply states that there is a direct relation between Price of A (PA) and Quantity Supplied of A (QsA). When PA increases, QsA increases. When PA decreases, QsA decreases.

In Figure 7 we illustrate the Law of Supply with a Supply Schedule (table) and a Supply Curve for the product, Canadian Red Table Wine.

M# /Nom0)(End of Figure 7 Nm@45?O  Oa.;@E PoO2)(

Click here to exit Figure 8

P Qw+ `2(

Figure 8: Individual Supply vs Market Supply Red Table Wine

Q l  Rိ2)(

In Figure 8 we assume that the market for Canadian red table wine consists

of 10 firms, each with an individual supply curve identical to the one

shown for Rouge Winery in the previous Figure 7.

R  b8 Sw} 2(

PRODUCT SUPPLY

Quantity Supplied and Price

We have just examined one firm's (Rouge's) supply schedule and supply curve for Canadian Red Table Wine. This is called "Individual Supply".

When we examine how the amount supplied by all the firms (in total) in one market is related to different prices we call this "Market Supply."

In Figure 8 we illustrate that, for each price, the market supply curve for a product is found by totalling the individual quantity supplied by all firms in the market.

In other words, the market supply curve is the horizontal sum of all individual supply curves.

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At the price of $4.00 per litre, Point a shows an individual quantity supplied of 200 litres. If you click on Point a below, the market quantity supplied

of (200 litres x 10 firms) = 2000 litres per month will display at Point A.

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$4.00

 VWP`. hWW 2)(

200

WC@   XoO2)(

Click here to exit Figure 8

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$4.00

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At the price of $4.00 the market quantity supplied is the horizontal sum of

the 10 individual quantity supplies. Click on Point b below to proceed.

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2000

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200

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200+200+....10 times = 2000 litres

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A

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$4.00

 aW jb_Q`2)(

2000

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200

cC d>퀭2)(

At the price of $5.00 per litre, Point b shows an individual quantity supplied of 300 litres. If you click on Point b below, the market quantity supplied

of (300 litres x 10 firms) = 3000 litres per month will display at Point B.

d8 heW{ 2)(

300

e^9X kf_b`2)(

$5.00

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A

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2000

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200

kC hlW{ 2)(

300

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$5.00

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At the price of $5.00 the market quantity supplied is the horizontal sum of

the 10 individual quantity supplies. Click on Point c below to proceed.

n8 moW{ 2(

B

ohh jp_Q`2)(

3000

p0 qo2)(

300+300+....10 times = 3000 litres

qS@(B1 mrW{ 2(

A

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2000

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200

vC hwW{ 2)(

300

ws kx_b`2)(

$5.00

x  myW{ 2(

B

yhh jz_Q`2)(

3000

z0 {>퀭2)(

At the price of $6.00 per litre, Point c shows an individual quantity supplied of 400 litres. If you click on Point c below, the market quantity supplied

of (400 litres x 10 firms) = 4000 litres per month will display at Point C.

{8 k|_b`2)(

$6.00

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400

}̳ m~W{ 2(

A

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2000

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200

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300

s k_b`2)(

$5.00

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B

h j_Q`2)(

3000

0 k_b`2)(

$6.00

  hW{ 2)(

400

̳ mW{ 2(

C

 f B2)(

At the price of $6.00 the market quantity supplied is the horizontal sum of

the 10 individual quantity supplies. Click here for the market supply curve.

 8 j_Q`2)(

4000

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400+400+....10 times = 4000 litres

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A

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$4.00

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2000

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200

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300

s k_b`2)(

$5.00

  mW{ 2(

A

h mW{ 2(

B

h j_Q`2)(

3000

0 k_b`2)(

$6.00

  hW{ 2)(

400

̳ mW{ 2(

C

 j_Q`2)(

4000

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The market supply curve can be formed by joining points A, B, C.

The market supply curve is the total supply of all firms at each price.

Click here to continue.

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Market

Supply

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quantity

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Individual

Supply

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quantity

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PRODUCT SUPPLY

Quantity Supplied and Price

We have just examined one firm's (Rouge's) supply schedule and supply curve for Canadian Red Table Wine. This is called "Individual Supply".

When we examine how the amount supplied by all the firms (in total) in one market is related to different prices we call this "Market Supply."

In Figure 8 we illustrate that, for each price, the market supply curve for a product is found by totalling the individual quantity supplied by all firms in the market.

In other words, the market supply curve is the horizontal sum of all individual supply curves.

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Click here to exit Figure 9

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Figure 9: Increase vs. Decrease in Supply

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The original market supply curve for Canadian Red Wine is shown below

as S1. Now, suppose one of the non-price factors, described below changes.

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PRODUCT SUPPLY

Supply and Non-price factors

Non-price factors or determinants can shift the entire market supply curve.

If the number of firms supplying Product A increase or if factors such as a decrease in the cost of inputs, technology, and government subsidies increase the profitability of Product A, then there will be "An Increase in Supply." In this case the entire market supply curve will shift rightward.

If a non-price factor causes a "Decrease in Supply" then the entire market supply curve will shift leftward. This can be caused by a decrease in the number of firms supplying Product A or an increase in cost of inputs or an increase in taxes imposed on Product A. Figure 9 displays shifts in the market supply curve.

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Suppose the price of red grapes, used to produce red table wine, decreases.

This non-price factor will (increase or decrease) _________ the profitability

of supplying red table wine. This will cause an (increase or decrease)

__________ in supply of red table wine. Click here for the answer.

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This non-price factor will (increase or decrease) increase the profitability

of supplying red table wine. This will cause an (increase or decrease)

increase in supply of red table wine. Click here to continue.

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If there is an "Increase in Supply" of red wine due to a decrease in the price

of grapes, then the original supply curve, S1, will shift (leftward or rightward)

________ to (S3 or S2) __. At a price of $7.00, instead of the market supply

being at 5000 litres it is now ______ litres. Click here for the answer.

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x@  =80 -?2)(

If there is an "Increase in Supply" of red wine due to a decrease in the price

of grapes, then the original supply curve, S1, will shift (leftward or rightward)

rightward to (S3 or S2) S2. At a price of $7.00, instead of the market supply

being at 5000 litres it is now 7000 litres. Click here to continue.

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Suppose the government imposes a $.20 tax per litre of red wine produced

by the Canadian wineries. This will (increase or decrease) _________ the

profitability of supplying red table wine. This will cause an (increase or decrease)

__________ in supply of red table wine. Click here for the answer.

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Suppose the government imposes a $.20 tax per litre of red wine produced

by the Canadian wineries. This will (increase or decrease) decrease the

profitability of supplying red table wine. This will cause an (increase or decrease)

decrease in supply of red table wine. Click here to continue.

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If there is an "Decrease in Supply" of red wine due to a new tax imposed on

wineries, then the original supply curve, S1, will shift (leftward or rightward)

________ to (S3 or S2) __. At a price of $4.00, instead of the market supply

being at 2000 litres it is now ____ litres. Click here for the answer.

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If there is an "Decrease in Supply" of red wine due to a new tax imposed on

wineries, then the original supply curve, S1, will shift (leftward or rightward)

leftward to (S3 or S2) S3. At a price of $4.00, instead of the market supply

being at 2000 litres it is now 1000 litres. Click here to continue.

!$@     w}2(

PRODUCT SUPPLY

Supply and Non-price factors

Non-price factors or determinants can shift the entire market supply curve.

If the number of firms supplying Product A increase or if factors such as a decrease in the cost of inputs, technology, and government subsidies increase the profitability of Product A, then there will be "An Increase in Supply". In this case the entire market supply curve will shift rightward.

If a non-price factor causes a "Decrease in Supply" then the entire market supply curve will shift leftward. This can be caused by a decrease in the number of firms supplying Product A or an increase in cost of inputs or an increase in taxes imposed on Product A. Figure 9 displays shifts in the market supply curve.

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Click here to exit Figure 10

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Figure 10A: Change in Quantity Supplied

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Figure 10B: Increase in Supply

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Figure 10C: Decrease in Supply

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PRODUCT SUPPLY

Supply and Non-price factors

Two different phrases are used to distinguish between changes in amounts supplied caused by price changes vs. non-price factors.

Change in Quantity Supplied

The phrase "Change in Quantity Supplied" is used to refer to a change in firms' amount supplied caused by a change in the Price of A. Graphically, this is shown as a movement along the same supply curve.

Change in Supply

The phrase "Change in Supply" is used to refer to a change in firms' supply caused by a change in a Non-price factor. Graphically, this is a shift in the entire supply curve.

Figure 10 illustrates these two different types of changes.

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The "Increase in Supply or "Decrease in

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Click here to continue.

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PRODUCT SUPPLY

Supply and Non-price factors

Two different phrases are used to distinguish between changes in amounts supplied caused by price changes vs. non-price factors.

Change in Quantity Supplied

The phrase "Change in Quantity Supplied" is used to refer to a change in firms' amount supplied caused by a change in the Price of A. Graphically, this is shown as a movement along the same supply curve.

Change in Supply

The phrase "Change in Supply" is used to refer to a change in firms' supply caused by a change in a Non-price factor. Graphically, this is a shift in the entire supply curve.

Figure 10 illustrates these two different types of changes.

6# 07oa0)(End of Figure 10  7m $ DPůFigure 11: Market Equilibrium: Canadian Red Table Wine Market

9 l b >:2)(

The Canadian Red Table Wine market will settle where the market demand

curve intersects the market supply curve, at point e. The price will settle at

an equilibrium price of Pe= $6.00. The market quantity will be Qe=4000.

 :  ;E \;w}萭2(

MARKET EQUILIBRIUM

In any competitive market demand and market supply jointly determine the market price and quantity.

Equilibrium is where the market "tends towards" or "settles at." This is where:

Market Demand = Market Supply.

At equilibrium, the price is called equilibrium price, "Pe". The quantity is called equilibrium quantity, "Qe."

We call the "equilibrium price" the "market clearing price" as that is the only price where shortages and surpluses can be avoided or cleared.

Figure 11 illustrates an equilibrium situation in the Canadian Red Wine market.

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Why will the price not end up at a level higher than $6.00, such as $8.00?

At the $8.00 price, the market quantity demanded will be ____. At the

$8.00 price, the market quantity supplied will be ____. There will be a

(shortage, surplus) ______ of ____ litres. Click here for the answer.

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6000

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At the $8.00 price, the market quantity demanded will be 2000. At the

$8.00 price, the market quantity supplied will be 6000. There will be a

(shortage, surplus) surplus of 4000 litres. Click here to continue.

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Pe =

$6.00

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S

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Qe=4000

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$8.00

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2000

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6000

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Qd

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Qs

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Surplus = Qs - Qd =

6000 -2000 = 4000

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If, at the $8.00 price,there is a surplus of 4000 litres, the price of red wine

will have to (increase or decrease or stay the same) ________ in order

to eliminate or clear the surplus. Click here for the answer.

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Pe =

$6.00

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S

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Qe=4000

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$8.00

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2000

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6000

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Qd

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Qs

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Surplus = Qs - Qd =

6000 -2000 = 4000

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Why will the price not end up at a level higher than $6.00, such as $8.00?

If, at the $8.00 price,there is a surplus of 4000 litres, the price of red wine

will have to (increase or decrease or stay the same) decrease in order

to eliminate or clear the surplus. Click here to continue.

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Pe =

$6.00

c"  fdW| 2)(

S

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Qe=4000

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6000

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Qd

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Surplus = Qs - Qd =

6000 -2000 = 4000

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Why will the price not end up at a level higher than $6.00, such as $8.00?

As the price decreases, the surplus, or the black horizontal distance

between the demand & supply curves, gets smaller. The surplus will end up

being eliminated at the $6.00 equilibrium price. Click here to continue.

 p!$ q_bau2)(

Pe =

$6.00

q"  frW| 2)(

S

r0z msg! 2)(

Qe=4000

s; ftW{ 2)(

D

tP8 fuWl 2)(

e

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$8.00

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2000

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6000

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Qd

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Qs

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Surplus

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Surplus

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Why will the price not end up at a level higher than $6.00, such as $8.00?

As the price decreases, the surplus, or the black horizontal distance

between the demand & supply curves, gets smaller. The surplus will end up

being eliminated at the $6.00 equilibrium price. Click here to continue.

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Pe =

$6.00

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S

0z mg! 2)(

Qe=4000

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D

P8 fWl 2)(

e

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$8.00

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2000

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6000

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8sjvrshsi n_o`2)(

Surplus

F n_o`2)(

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 "  fW| 2)(

S

0z _KaB2)(

4000

= Qe

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P8 k_b`2)(

$5.00

  j_K`2)(

3000

` j_K`2)(

5000

 w22)(

Why will the price not end up at a level lower than $6.00, such as $5.00?

At the $5.00 price, the market quantity demanded will be ____. At the

$5.00 price, the market quantity supplied will be ____. There will be a

(shortage, surplus) ______ of ____ litres. Click here for the answer.

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Pe =

$6.00

 "  fW| 2)(

S

0z _KaB2)(

4000

= Qe

` fW{ 2)(

D

P8 k_b`2)(

$5.00

  _KaB2)(

3000

=Qs

` _KaB2)(

5000

=Qd

 w32)(

Why will the price not end up at a level lower than $6.00, such as $5.00?

At the $5.00 price, the market quantity demanded will be 5000. At the

$5.00 price, the market quantity supplied will be 3000. There will be a

(shortage, surplus) shortage of 2000 litres. Click here to continue.

!$ gW{ 2)(

Qd

 gW{ 2)(

Qs

֠ g/_(2)(

Shortage

= Qd - Qs

= 5000 -3000

= 2000

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Pe =

$6.00

 "  fW| 2)(

S

0z _KaB2)(

4000

= Qe

` fW{ 2)(

D

P8 k_b`2)(

$5.00

  _KaB2)(

3000

=Qs

` _KaB2)(

5000

=Qd

 gW{ 2)(

Qd

 gW{ 2)(

Qs

֠ g/_(2)(

Shortage

= Qd - Qs

= 5000 -3000

= 2000

C*`S oE`0)(At $5.00 a shortage of 2000 litres, equal to the black horizontal distance between the demand & supply curves, will occur. ̖ )2)(

Why will the price not end up at a level lower than $6.00, such as $5.00?

If, at the $5.00 price, there is a shortage of 2000 litres, the price of red wine

will have to (increase or decrease or stay the same) ________ in order

to eliminate or clear the shortage. Click here for the answer.

!$ fWl 2)(

e

"@  _bau2)(

Pe =

$6.00

 "  fW| 2)(

S

0z _KaB2)(

4000

= Qe

` fW{ 2)(

D

P8 k_b`2)(

$5.00

  _KaB2)(

3000

=Qs

` _KaB2)(

5000

=Qd

 gW{ 2)(

Qd

 gW{ 2)(

Qs

֠ g/_(2)(

Shortage

= Qd - Qs

= 5000 -3000

= 2000

C*` )2)(

Why will the price not end up at a level lower than $6.00, such as $5.00?

If, at the $5.00 price, there is a shortage of 2000 litres, the price of red wine

will have to (increase or decrease or stay the same) increase in order

to eliminate or clear the shortage. Click here to continue.

!$S o_0)(If the price rises this will decrease quantity demanded, & increase quantity supplied in the next monthly period, reducing the shortage ܎XrXsl3 fWl 2)(

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$6.00

 "  fW| 2)(

S

0z _KaB2)(

4000

= Qe

` fW{ 2)(

D

P8 fWl 2)(

e

" _KaB2)(

3000

=Qs

` _KaB2)(

5000

=Qd

 gW{ 2)(

Qd

 gW{ 2)(

Qs

 ` ")2)(

Why will the price not end up at a level lower than $6.00, such as $5.00?

As the price increases, the shortage, or the black horizontal distance

between the demand & supply curves, gets smaller. The shortage will end up

being eliminated at the $6.00 equilibrium price. Click here to continue.

!$XrXs+ k_b`2)(

$5.00

  og! 2)(

Shortage

C*` og! 2)(

Shortage

@    2s2lݽ | ӽ1lMARKET EQUILIBRIUM

In any competitive market demand and market supply jointly determine the market price and quantity.

Equilibrium is where the market "tends towards" or "settles at".This is where:

Market Demand = Market Supply.

At equilibrium, the price is called equilibrium price, "Pe". The quantity is called equilibrium quantity, "Qe".

We call the "equilibrium price" the "market clearing price" as that is the only price where shortages and surpluses can be avoided or cleared.

Figure 11 illustrates an equilibrium situation in the Canadian Red Wine market.

 # 0o0)(End of Figure 11  m@   !"?  MC9zCDM <oc0)(Click here to exit Figure 12 7 w `2(

Figure 12: Changes in Equilibrium: Canadian Red Table Wine

 l b Fw2)(

For each of the types of changes below, we always start with D1, S1 with

the original equilibrium: P1 = $6.00 and Q1 = 4000 litres.

   ;E {w}2(

CHANGES IN EQUILIBRIUM

If a non-price factor changes, this can change the market equilibrium.

Generally speaking, there are four distinct types of equilibrium changes that can occur:

1. An increase in demand causes "Pe" to increase and "Qe" to increase.

2. A decrease in demand causes "Pe" to decrease and "Qe" to decrease.

3. An increase in supply causes "Pe" to decrease and "Qe" to increase.

4. A decrease in supply causes "Pe" to increase and "Qe" to decrease.

Figure 12 describes each change with a practical example.

 #y[COx+ΪJsU?ΞΥV5JR4=1~e=%UwzuisK{}F֣ցj3i169N#GkQ@` s0`ڌ@#@ lv};<GO69N#GkQ@` v9N#GkQ@`Fׁ4x F QHh y9N#GkQ@`F69N#GkQ@` X"0`ڌ@#@ lv}:=-gԁrJFm 6s;>F֣ցh.fcg3h j=h6rg3lz10mFm 0.^_ͤ4ggӳz10m塕@#@ lv};FֳQ  @Ȁ2)(

Suppose that consumer income increases and red table wine is a normal good.

Predict the effect on the equilibrium price and quantity. Solution:

In the first instance, (households or firms) _________ will be affected, causing

an (increase or decrease) ______ in (demand or supply) ______ .

Click here for the answer.

  ` _TaB2)(

$6.00

=P1

 gW 2)(

S1

0z fW_ 2)(

1

 mg! 2)(

Q1=4000

 gW{ 2)(

D1

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Suppose that consumer income increases and red table wine is a normal good.

Predict the effect on the equilibrium price and quantity. Solution:

In the first instance, (households or firms) households will be affected, causing

an (increase or decrease) increase in (demand or supply) demand.

Click here to continue.

  ` fW_ 2)(

1

 gW{ 2)(

D2

9@t@Nz餀- #sccVtSՠSc)`3:2e0Y+{mA0n.( o`2)(

An increase in demand will

show as a shift

rightward in the

market demand

curve (to D2).

ܛ _TaB2)(

$6.00

=P1

 gW 2)(

S1

0z gW{ 2)(

D1

I` mg! 2)(

Q1=4000

$DPůSuppose that consumer income increases and red table wine is a normal good.

Predict the effect on the equilibrium price and quantity. Solution continued:

An increase in demand will cause Pe to (increase or decrease) ________ and

Qe to (increase or decrease) ________. Click here for the answer.

  ` fW_ 2)(

1

 o`2)(

An increase in demand will

show as a shift

rightward in the

market demand

curve (to D2).

ܛ gW{ 2)(

D2

9 _TaB2)(

$6.00

=P1

 gW 2)(

S1

0z gW{ 2)(

D1

I` mg! 2)(

Q1=4000

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Predict the effect on the equilibrium price and quantity. Solution continued:

An increase in demand will cause Pe to (increase or decrease) increase and

Qe to (increase or decrease) increase. Click here to continue.

  ` fW_ 2)(

2

ܑ fW_ 2)(

1

 gW{ 2)(

D2

9 _TaB2)(

$6.00

=P1

¨ gW 2)(

S1

0z gW{ 2)(

D1

I` mg! 2)(

Q1=4000

@AxА@ gW 2)(

P2

Bb` gW{ 2)(

Q2

NzU$ #- }5h)` }lLc0Lc` L[665h o2)(

If you find the new equilibrium

with S1 and D2,

at point "2", you

see that Pe has

increased to P2 and Qe has now increased to Q2.

|8@   9zC:x w `2(

Figure 12: Changes in Equilibrium: Canadian Red Table Wine

 l  Fw2)(

For each of the types of changes below, we always start with D1, S1 with

the original equilibrium: P1 = $6.00 and Q1 = 4000 litres.

   {w}2(

CHANGES IN EQUILIBRIUM

If a non-price factor changes, this can change the market equilibrium.

Generally speaking, there are four distinct types of equilibrium changes that can occur:

1. An increase in demand causes "Pe" to increase and "Qe" to increase.

2. A decrease in demand causes "Pe" to decrease and "Qe" to decrease.

3. An increase in supply causes "Pe" to decrease and "Qe" to increase.

4. A decrease in supply causes "Pe" to increase and "Qe" to decrease.

Figure 12 describes each change with a practical example.

 #  )2)(

Suppose that the population drinking red table wine decreases.

Predict the effect on the equilibrium price and quantity. Solution:

In the first instance, (households or firms) ________ will be affected, causing

an (increase or decrease) ________ in (demand or supply) ______ .

Click here for the answer.

  ` fW_ 2)(

1

 _TaB2)(

$6.00

=P1

¨ gW 2)(

S1

0z gW{ 2)(

D1

I` mg! 2)(

4000=Q1

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Suppose that the population drinking red table wine decreases.

Predict the effect on the equilibrium price and quantity. Solution:

In the first instance, (households or firms) households will be affected, causing

an (increase or decrease) decrease in (demand or supply) demand.

Click here to continue.

  ` fW_ 2)(

1

 _TaB2)(

$6.00

=P1

¨ gW 2)(

S1

0z gW{ 2)(

D1

I` o`2)(

A decrease in demand will

show as a shift

leftward in the

market demand

curve (to D3).

ܚx mg! 2)(

4000=Q1

: gW{ 2)(

D3

j6@ =;X0  &_2)(

Suppose that the population drinking red table wine decreases.

Predict the effect on the equilibrium price and quantity. Solution continued:

A decrease in demand will cause Pe to (increase or decrease) ________ and

Qe to (increase or decrease) ________. Click here for the answer.

  ` f W_ 2)(

1

  _TaB2)(

$6.00

=P1

 ¨ g W 2)(

S1

 0z g W{ 2)(

D1

 I` mg! 2)(

4000=Q1

 gW{ 2)(

D3

j6 o`2)(

A decrease in demand will

show as a shift

leftward in the

market demand

curve (to D3).

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Predict the effect on the equilibrium price and quantity. Solution continued:

A decrease in demand will cause Pe to (increase or decrease) decrease and

Qe to (increase or decrease) decrease. Click here to continue.

  ` fW_ 2)(

1

 _TaB2)(

$6.00

=P1

¨ gW 2)(

S1

0z gW{ 2)(

D1

I` mg! 2)(

4000=Q1

 gW{ 2)(

D3

j6 o@2)(

If you find the new equilibrium

with S1 and D3,

at point "3", you

see that Pe has

decreased to P3 and Qe has now decreased to Q3.

<8 fW_ 2)(

3

" gW 2)(

P3

 gW{ 2)(

Q3

z;@   9zC: w `2(

Figure 12: Changes in Equilibrium: Canadian Red Table Wine

 l  Fw2)(

For each of the types of changes below, we always start with D1, S1 with

the original equilibrium: P1 = $6.00 and Q1 = 4000 litres.

   {w}2(

CHANGES IN EQUILIBRIUM

If a non-price factor changes, this can change the market equilibrium.

Generally speaking, there are four distinct types of equilibrium changes that can occur:

1. An increase in demand causes "Pe" to increase and "Qe" to increase.

2. A decrease in demand causes "Pe" to decrease and "Qe" to decrease.

3. An increase in supply causes "Pe" to decrease and "Qe" to increase.

4. A decrease in supply causes "Pe" to increase and "Qe" to decrease.

Figure 12 describes each change with a practical example.

 # y[Ox+ΪJsU?ΞΥyJxk"̒4=0B,5,3UWq)֋נ0,%N M-y@5@#@ lv};<G.ov};<Gfc曕@#@ lv};<G.hal4x F QHhϧ洕@3vy<ZZ# \2QHhϧg5b0`̯+ϧG`b0`ڌ@#@ `\QHhϧg5b0`,-gցj3i1\QHhϧg5b0`͛+Ftz6ZZ# \rQHhϧg5b0`Σ,-F֣ցj3ig3%~69NF3Y(h9fcg3lz10mΕggӳb0`ڌ@#@ `\QHhϧg5b0`++Fvy<ZZ# \ҿQHhϧgQ@` ]3i14x F @53h j=h669 `9N#GkQ@`F#69N#GkQ@` d0`ڌ@#@ lv};<GU69N#GkQ@` f9N#GkQ@`F#5b0`ڌ@#@ lv};< j 3i14x F @69N#GkQ@` m*3i14x F @볙4x F QHh p>F֣ցj3i169N#GkQ@` s0`ڌ@#@ lv};<GO69N#GkQ@` v9N#GkQ@`Fׁ4x F QHh y9N#GkQ@`F69N#GkQ@` X"0`ڌ@#@ lv}:=-gԁrJFm 6s;>F֣ցh.fcg3h j=h6rg3lz10mFm 0.^_ͤ4ggӳz10m塕@#@ lv};FֳQ  !0Ȁ2)(

Suppose that the price of grapes used to produce red wine decreases.

Predict the effect on the equilibrium price and quantity. Solution:

In the first instance, (households or firms) _________ will be affected, causing

an (increase or decrease) ________ in (demand or supply) ______ .

Click here for the answer.

 ! ` "_TaB2)(

$6.00

=P1

" f#W_ 2)(

1

# m$g! 2)(

Q1=4000

$ g%W{ 2)(

D1

%I` g&W 2)(

S1

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Suppose that the price of grapes used to produce red wine decreases.

Predict the effect on the equilibrium price and quantity. Solution:

In the first instance, (households or firms) firms will be affected, causing

an (increase or decrease) increase in (demand or supply) supply.

Click here to continue.

 ( ` )_TaB2)(

$6.00

=P1

) f*W_ 2)(

1

* m+g! 2)(

Q1=4000

+ g,W{ 2)(

D1

,I` -o`2)(

An increase in supply will

show as a shift

rightward in the

market supply

curve (to S2).

-ܛ g.W 2)(

S1

.`؏@IS2

/x@ =:0 0)2)(

Suppose that the price of grapes used to produce red wine decreases.

Predict the effect on the equilibrium price and quantity. Solution continued:

An increase in supply will cause Pe to (increase or decrease) ________ and

Qe to (increase or decrease) ________. Click here for the answer.

 0 ` 1_TaB2)(

$6.00

=P1

1 f2W_ 2)(

1

2 m3g! 2)(

Q1=4000

3 g4W{ 2)(

D1

4I` g5W 2)(

S1

5` g6W 2)(

S2

6x 7o`2)(

An increase in supply will

show as a shift

rightward in the

market supply

curve (to S2).

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Suppose that the price of grapes used to produce red wine decreases.

Predict the effect on the equilibrium price and quantity. Solution continued:

An increase in supply will cause Pe to (increase or decrease) decrease and

Qe to (increase or decrease) increase. Click here to continue.

 9 ` :_TaB2)(

$6.00

=P1

: f;W_ 2)(

1

; m<g! 2)(

Q1=4000

< g=W{ 2)(

D1

=I` g>W 2)(

S1

>` g?W 2)(

S2

?x @o2)(

If you find the new equilibrium

with D1 and S2,

at point "2", you

see that Pe has

decreased to P2 and Qe has now increased to Q2.

@|8 fAW_ 2)(

2

A̻ gBW 2)(

P2

B ` gCW{ 2)(

Q2

C8@B\wz@   9zC: Dw `2(

Figure 12: Changes in Equilibrium: Canadian Red Table Wine

D l  FEw2)(

For each of the types of changes below, we always start with D1, S1 with

the original equilibrium: P1 = $6.00 and Q1 = 4000 litres.

 E  {Fw}2(

CHANGES IN EQUILIBRIUM

If a non-price factor changes, this can change the market equilibrium.

Generally speaking, there are four distinct types of equilibrium changes that can occur:

1. An increase in demand causes "Pe" to increase and "Qe" to increase.

2. A decrease in demand causes "Pe" to decrease and "Qe" to decrease.

3. An increase in supply causes "Pe" to decrease and "Qe" to increase.

4. A decrease in supply causes "Pe" to increase and "Qe" to decrease.

Figure 12 describes each change with a practical example.

 F#  G_TaB2)(

$6.00

=P1

 G gHW 2)(

S1

H0z fIW_ 2)(

1

I mJg! 2)(

4000=Q1

Js` gKW{ 2)(

D1

KI` L2_Ȁ2)(

Suppose government imposes a $.50 tax per litre on the wineries for red wine.

Predict the effect on the equilibrium price and quantity. Solution:

In the first instance, (households or firms) _________ will be affected, causing

an (increase or decrease) ______ in (demand or supply) ______ .

Click here for the answer.

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$6.00

=P1

 N gOW 2)(

S1

O0z fPW_ 2)(

1

P mQg! 2)(

4000=Q1

Qs` gRW{ 2)(

D1

RI` 2S2_Ȁ2)(

Suppose government imposes a $.50 tax per litre on the wineries for red wine.

Predict the effect on the equilibrium price and quantity. Solution:

In the first instance, (households or firms) firms will be affected, causing

an (increase or decrease) decrease in (demand or supply) supply.

Click here to continue.

S ` To`2)(

A decrease in supply will

show as a shift

leftward in the

market supply

curve (to S3).

Tܛ gUW 2)(

S3

UuX@ =;Xp V_TaB2)(

$6.00

=P1

 V gWW 2)(

S1

W0z fXW_ 2)(

1

X mYg! 2)(

4000=Q1

Ys` gZW{ 2)(

D1

ZI` [2_)2)(

Suppose government imposes a $.50 tax per litre on the wineries for red wine.

Predict the effect on the equilibrium price and quantity. Solution continued:

A decrease in supply will cause Pe to (increase or decrease) ________ and

Qe to (increase or decrease) ________. Click here for the answer.

[ ` g\W 2)(

S3

\uX ]o`2)(

A decrease in supply will

show as a shift

leftward in the

market supply

curve (to S3).

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$6.00

=P1

 _ g`W 2)(

S1

`0z faW_ 2)(

1

a mbg! 2)(

4000=Q1

bs gcW{ 2)(

D1

cI` d2_)2)(

Suppose government imposes a $.50 tax per litre on the wineries for red wine.

Predict the effect on the equilibrium price and quantity. Solution continued:

A decrease in supply will cause Pe to (increase or decrease) increase and

Qe to (increase or decrease) decrease. Click here to continue.

d ` geW 2)(

S3

euXSfzU$ #- }5h)` }l #vv)bi u;g)0n.,ՠf go@2)(

If you find the new equilibrium

with D1 and S3,

at point "3", you

see that Pe has

increased to P3 and Qe has now decreased to Q3.

g|8 fhW_ 2)(

3

h=  giW 2)(

P3

ib_ gjW{ 2)(

Q3

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CHANGES IN EQUILIBRIUM

If a non-price factor changes, this can change the market equilibrium.

Generally speaking, there are four distinct types of equilibrium changes that can occur:

1. An increase in demand causes "Pe" to increase and "Qe" to increase.

2. A decrease in demand causes "Pe" to decrease and "Qe" to decrease.

3. An increase in supply causes "Pe" to decrease and "Qe" to increase.

4. A decrease in supply causes "Pe" to increase and "Qe" to decrease.

Figure 12 describes each change with a practical example.

 k# 0loa0)(End of Figure 12  lm@   ?`^C9|^ moc2)(

Click here to exit Figure 13

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Figure 13: Industry Forecast: Oil Industry

Problem: Predict the combined effect of the following two non-price factors on the world oil industry. That is, industry "Pe" will __ and "Qe" will __

Factor 1: New large oil wells start production in Saudi Arabia.

Factor 2: Terrorist threats have caused a world recession.

Solution:

Step 1: Begin by analyzing each factor separately.

 n l  ;E ow}2(

APPLICATIONS

Industry/Occupation Outlook

The four types of equilibrium changes presented in Figure 12 can be applied to forecast future prices and quantities in any Canadian industry. As well, this theory can be used to predict the future direction of wages and employment in any occupation.

In developing an industry or occupation forecast, one has to be able to determine the effects of a series of non-price factors (not just one) on the industry equilibrium price and quantity.

To do this we suggest predicting the effect of each individual non-price factor on "Pe" and "Qe," one at a time. Then, at the end, review all the combined price effects and then all the combined quantity effects. Figure 13 provides an example.

o# po2(

Click here to continue.

pa@`_`_ C=,A_ q逭2(

Factor 1: New large oil wells come into production in Saudi Arabia.

In the first instance, Factor 1 will cause an (increase or decrease) ________

in (demand or supply) ______ of oil. Click here for the answer.

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Factor 1: New large oil wells come into production in Saudi Arabia.

In the first instance, Factor 1 will cause an (increase or decrease) increase

in (demand or supply) supply of oil. Click here to continue

s tgo22)(

Price

per

barrel

of

oil

tb`#uy333%X;w.bq;u vw 2)(

Quantity in millions of barrels per day

vhX vwg< 2)(

Crude Oil Market

wg` fxW_ 2)(

1

x"@ir gyW 2)(

S1

yX gzW{ 2)(

D1

zB g{W 2)(

S2

{x l|_r`2)(

P1=$25

|` g}W{ 2)(

Q1

}`N~zoV- sccVtNՠSc)$ gGSt1d`XV~ dg320)(An increase in supply means that the supply curve shifts rightward 쬘@ =O@ 1逭2(

Factor 1: New large oil wells come into production in Saudi Arabia.

An increase in supply will cause "Pe" to (increase or decrease) __________

and "Qe" to (increase or decrease) _________? Click here for the answer.

 go22)(

Price

per

barrel

of

oil

b` w 2)(

Quantity in millions of barrels per day

hX vg< 2)(

Crude Oil Market

g` fW_ 2)(

1

" gW 2)(

S1

X gW{ 2)(

D1

B gW 2)(

S2

x l_r`2)(

P1=$25

` gW{ 2)(

Q1

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Factor 1: New large oil wells come into production in Saudi Arabia.

An increase in supply will cause "Pe" to (increase or decrease) decrease

and "Qe" to (increase or decrease) increase? Click here to continue.

 go22)(

Price

per

barrel

of

oil

b` w 2)(

Quantity in millions of barrels per day

hX vg< 2)(

Crude Oil Market

g` fW_ 2)(

1

" gW 2)(

S1

X gW{ 2)(

D1

B gW 2)(

S2

x l_r`2)(

P1=$25

2` gW{ 2)(

Q1

` eg;20)(An increase in supply causes "Pe" to decrease and "Qe" to increase. l fW_ 2)(

2

 gW 2)(

P2

*` gW{ 2)(

Q2

 `!s(,"_A9L@ !" =+@ 逭2(

Factor 2: Terrorist threats have caused a world recession.

In the first instance, Factor 2 will cause an (increase or decrease) ________

in (demand or supply) ______ of oil. Click here for the answer.

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Factor 2: Terrorist threats have caused a world recession.

In the first instance, Factor 2 will cause an (increase or decrease) decrease

in (demand or supply) demand of oil. Click here to continue.

 go22)(

Price

per

barrel

of

oil

b`u w 2)(

Quantity in millions of barrels per day

hX vg< 2)(

Crude Oil Market

g` fW_ 2)(

1

"~ gW 2)(

S1

X gW{ 2)(

D1

< l_r`2)(

P1=$25

2` gW{ 2)(

Q1

`~ eg9w20)(An decrease in demand means that the demand curve shifts leftward. l gW{ 2)(

D2

@ =P '3逭2(

Factor 2: Terrorist threats have caused a world recession.

An decrease in demand will cause "Pe" to (increase or decrease) __________

and "Qe" to (increase or decrease) _________? Click here for the answer.

 go22)(

Price

per

barrel

of

oil

b` w 2)(

Quantity in millions of barrels per day

hX vg< 2)(

Crude Oil Market

g` fW_ 2)(

1

" gW 2)(

S1

X gW{ 2)(

D1

< l_r`2)(

P1=$25

2` gW{ 2)(

Q1

` eg9w20)(An decrease in demand means that the demand curve shifts leftward. l gW{ 2)(

D2

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Factor 2: Terrorist threats have caused a world recession.

A decrease in demand will cause "Pe" to (increase or decrease) decrease

and "Qe" to (increase or decrease) decrease. Click here to continue.

 go22)(

Price

per

barrel

of

oil

b` w 2)(

Quantity in millions of barrels per day

hX vg< 2)(

Crude Oil Market

g` fW_ 2)(

1

" gW 2)(

S1

X gW{ 2)(

D1

< l_r`2)(

P1=$25

2` gW{ 2)(

Q1

 gW{ 2)(

D2

 fW_ 2)(

2

C gW 2)(

P2

" gW{ 2)(

Q2

Ks#,h Y_A9G!~ eg;20)(An decrease in demand causes "Pe" to decrease and "Qe" to decrease. "l@   !"?#a!a- VL?[2(

Figure 13: Industry Forecast: Oil Industry

Problem: Predict the combined effect of the following two non-price factors on the world oil industry. That is, industry "Pe" will __? and "Qe" will __?

Factor 1: New large oil wells start production in Saudi Arabia.

Factor 2: Terrorist threats have caused a world recession.

Solution:

Step 2: Combine the changes in "Pe" from Step 1. Then combine the changes

in "Qe" from Step 1. Then, make your prediction or forecast.

  l  w}2(

APPLICATIONS

Industry/Occupation Outlook

The four types of equilibrium changes presented in Figure 12, can be applied to forecast future prices, and quantities in any Canadian industry. As well, this theory can be used to predict the future direction of wages and employment in any occupation.

In developing an industry or occupation forecast, one has to be able to determine the effects of a series of non-price factors (not just one) on the industry equilibrium price and quantity.

To do this we suggest predicting the effect of each individual non-price factor on "Pe" and "Qe", one at a time. Then, at the end, review all the combined price effects and then all the combined quantity effects. Figure 13 provides an example.

# }wp2(

Combined effects on Oil Price:

Factor 1 causes "Pe" to decrease

Factor 2 causes "Pe" to decrease

Combined effect: "Pe" will decrease (quite a bit!)

Combined effects on Oil Quantity:

Factor 1 causes "Qe" to increase

Factor 2 causes "Qe" to decrease

Combined effect: "Qe" unpredictable

Conclusion: Forecast is that oil price will decrease, but oil quantity

prediction is uncertain.

Click here to continue.

@  w}2(

APPLICATIONS

Industry/Occupation Outlook

The four types of equilibrium changes presented in Figure 12, can be applied to forecast future prices, and quantities in any Canadian industry. As well, this theory can be used to predict the future direction of wages and employment in any occupation.

In developing an industry or occupation forecast, one has to be able to determine the effects of a series of non-price factors (not just one) on the industry equilibrium price and quantity.

To do this we suggest predicting the effect of each individual non-price factor on "Pe" and "Qe", one at a time. Then, at the end, review all the combined price effects and then all the combined quantity effects. Figure 13 provides an example.

# 0oa0)(End of Figure 13 m@