LECTURE 2

The Gains from Trade (Ch. 3) /

Supply and Demand (Ch. 4)

Prepared for Econ 200 M, Autumn 2017

Announcements
Required Readings
✓ Week 2: Ch. 1, 2, 3, 4
✓ Week 3: Ch. 4
Homework 1 posted
✓ Due by Oct. 13th
✓ Hand in before the class (Hardcopy only)
Today
< Review >
< Chapter 3 > The Gains from Trade
I. The Gains from Trade
II. Comparative Advantage
III. International Trade
< Chapter 4 > Supply and Demand
IV. Market
V. Demand
VI. Supply
Review of Chapter 1
What is Economics?
✓ Fundamental economic problem: Resources are scarce
- Scarcity: society has limited resources and therefore cannot
fulfill all human wants and needs.
✓ Economics is the study of
how society manages its scarce resources.
Review of Chapter 1
Ten Principles of Economics
< How People Make Decisions >
1. People face trade-offs
- Efficiency vs. Equality
2. The cost of something is what you give up to get it
- Opportunity cost
3. Rational people think at the margin
- Marginal benefit vs. Marginal cost
- Water-diamond paradox
4. People respond to incentives
- Price as an incentive
- Incentive design
Review of Chapter 1
Ten Principles of Economics
< How People Interact >
5. Trade can make everyone better off
- Specialization and trade, gains from trade
6. Market are usually a good way to organize economic activity
- Market: a group of buyers and sellers
- Market economy, invisible hand, price system
7. Government can sometimes improve market outcomes
- Market failure: Externalities, market power
Review of Chapter 1
Ten Principles of Economics
< How the Economy as a Whole Works >
8. A country's standard of living depends
on its ability to produce goods and services
9. Prices Rise When the Government Prints Too Much Money
10. Society Faces a Short-Run Trade-off
between Inflation and Unemployment
※ Note
• How People Make Decisions → Microeconomics
• How People Interact → Microeconomics
• How the Economy as a Whole Works → Macroeconomics
Review of Chapter 1
Opportunity cost
✓ Opportunity cost:

※ Note: Opportunity cost vs. Sunk cost

✓ How to find opportunity cost
① Bygone is bygone! (Sunk cost)
② What are the alternatives?
Which is best-valued among them?
③ What is the (net) benefit of the alternatives?
Review of Chapter 1
※ Review Question
During winter break, Jason considers quitting college to accept a
job. Which of the following should he include when calculating
the opportunity cost of leaving college to take on a new job?
a. the amount of income he can earn from his new job
b. the net benefits of completing the rest of his college education
c. the value of books he has already purchased for next semester
d. All of these choices
Review of Chapter 1
※ Review Question
Micah has spent $30 for a taxi ride to attend a Colts game. When
he arrives at the stadium, he discovers that he left his ticket at
home. He doesn’t have time to return home to get it. He paid
$60 for his ticket, but can buy another one for $80. In deciding
whether he should buy another ticket, Micah should compare the
value he places on attending the game to
a. $30 b. $80 c. $90 d. $170

➢ Answer: b
Review of Chapter 1
※ Review Question: Baby-sitting job 1
You have a baby-sitting job on Saturday night earning $10 an
hour; you will baby-sit for 4 hours. On Friday before, your friend
(who has nothing better to do) asks you to come over to watch a
series of wrestling matches on TV on Saturday for the same 4
hours. You value the enjoyment of watching the matches at $50
but refuse your friend’s invitation. What is the opportunity cost
of doing the baby-sitting?

➢ Answer: $50
- Decided: baby-sitting / Alternative: watching TV
- (Net) benefit forgone?
The value of watching TV = $50
Review of Chapter 1
※ Review Question: Baby-sitting job 2
You have a baby-sitting job on Saturday night earning $10 an
hour; you will baby-sit for 4 hours. Your friend asks you to join
her at a local bar --where your favorite local artist is singing—on
the same night. You value the enjoyment of attending the
performance by the local artist at $70. The cost of entrance fee
and drinks at the bar is $30. What is your opportunity cost of
doing the baby-sitting?

➢ Answer: $40
- Decided: baby-sitting / Alternative: going to the bar
- Net benefit forgone?
Benefit forgone($70) – Cost avoided($30) = $40
Review of Chapter 2
The Economist as Scientist
✓ Assumption simplify the world, make it easier to understand.
✓ Economists use Economic Models to explain the world.
- Most models are composed of diagrams and equations.
- The goal of a model is to simplify reality in order to increase
our understanding

The Economist as Policy Adviser

✓ Positive vs. Normative Analysis
- Positive statements: claims that attempt to describe the world
as it is. → Economist as scientist
- Normative statements: claims that attempt to prescribe how
the world should be. → Economist as policy adviser
Review of Chapter 2
The Production Possibility Frontier
✓ Definition:

The meaning of the PPF

✓ All combinations of goods on the curve are efficient.
✓ All combinations of goods inside the curve are feasible,
but inefficient.
✓ All combinations of goods outside the curve are infeasible.
Review of Chapter 2
The slope of the PPF: Opportunity cost
✓ Moving along a PPF involves shifting resources from the
production of one good to the other (trade-off).
- Getting more of one good → Sacrificing some of the other.
→ The slope of PPF tells you the opportunity cost
of one good for the other
The shape of the PPF
✓ Constant opportunity cost → A straight line
✓ Increasing opportunity cost → Bow-shaped
Economic growth and the PPF
✓ The PPF shifts if resource availability or technology changes.
→ Economic growth: illustrated by an outward shift of the PPF
Review of Chapter 2
※ Review Question
a. Refer to the figure below. At which point is the opportunity cost
of butter lowest?

➢ Answer: D
- Slope is the steepest, compared
to A, B, C
- Less units of gun production
forgone for an additional unit of
butter production.
Review of Chapter 2
※ Review Question
b. Refer to the figure below. At which point is the opportunity cost
of butter lowest?
Review of Chapter 2
※ Review Question
c. Using the points A, B and C, explain the concept of increasing
opportunity cost.

➢ Answer
- Opportunity cost of guns in terms
of butters rises as you produce more
guns, moving from B, C, A,
as shown by the slope.
- Opportunity cost increases as more
of one good is produced because
not all resources are equally
suitable for producing every good.
Review of Chapter 2
※ Review Question
d. Suppose a technological innovation increased how much guns
can be built with current resources. Depict graphically the effect
this will have on the PPF.
Review of Chapter 2
※ Review Question
a. Suppose there are five workers who can each work up to 200
hours each week to produce either iPads or iPhones; it takes
each worker 4 hours to produce one iPad, and 2 hours to produce
one iPhone. What is the opportunity cost of iPhones in terms of
iPads?

➢ Answer
- In order to produce 1 iPhones, you use 2 hours and forgo 1/2
iPad.
- Opportunity cost of iPhones = 1/2 iPad
Review of Chapter 2
※ Review Question
b. 5 workers who can each work up to 200 hours each week.
4 hours to produce one iPad, 2 hours to produce one iPhone.
Depict graphically the PPF of iPads and iPhones.
Review of Chapter 2
※ Review Question
c. 5 workers who can each work up to 200 hours each week.
4 hours to produce one iPad, 2 hours to produce one iPhone.
Suppose someone invents a way to produce an iPad using only 2
hours. Depict graphically the effect on the PPF.
Chapter 3. The Gains from Trade

➢ How can trade make everyone better off?

➢ What is absolute advantage?

What is comparative advantage?

➢ How does comparative advantage explain

the gains from trade?
I. The Gains from Trade

Why do people or nations trade each other?

✓ Because there is a positive gain from trade!
※ Principle 5: Trade can make everyone better off
✓ Example
- Two goods: Meat and Potatoes
- Two people: Farmer and Rancher
- One resource: labor, each can work 8 hours per day
- Farmer: producing one oz. of meat requires 60 min.
Producing one oz. of potatoes requires 15 min.
- Rancher: producing one oz. of meat requires 20 min.
Producing one oz. of potatoes requires 10 min.
I. The Gains from Trade
The Production Possibility Frontier
✓ The Production Possibility Frontier
- Assume the farmer's and the rancher's can switch between
producing meat and potatoes at a constant rate.
(The PPF is a straight line)
- Find the amount of meat and potatoes produced in 8 hours
when producing only one good by each person.
(The intercepts of the PPF)
Minutes needed Amount produced
to make 1 ounce of: in 8 hours
Meat Potatoes Meat Potatoes
Farmer 60 min/oz 15 min/oz
Rancher 20 min/oz 10 min/oz
I. The Gains from Trade
The Production Possibility Frontier
✓ Draw the PPF of the farmer and the rancher.

< The farmer’s PPF > < The rancher’s PPF >
Meat Meat
(oz.) (oz.)
24 = 8× 3
8 = 8× 1

Potatoes Potatoes
32= 8× 4 (oz.) 48= 8× 6 (oz.)
I. The Gains from Trade
Consumption without and with Trade
✓ Case 1: Consumption without trade (Autarky)
- Assume that the farmer and rancher divide their time equally
between raising cattle and growing potatoes
- How much do the farmer and rancher produce and consume
respectively?
< The farmer’s PPF > < The rancher’s PPF >
Meat Meat
(oz.) (oz.)
24
8
B
A 12 = 4× 3
4 = 4× 1

Potatoes Potatoes
16= 4× 4 32 (oz.) 24= 4× 6 48 (oz.)
I. The Gains from Trade
Consumption without and with Trade
✓ Case 2: Consumption with trade
- Suppose they specialize and trade:
The rancher produces 18 oz. of meat and 12 oz. of potatoes,
the farmer produces 32 oz. of potatoes.
Then the rancher trades 5 oz. of meat for 15 oz. of potatoes.
- Do both people gain from specialization and trade?
I. The Gains from Trade
Consumption without and with Trade
✓ Case 2: Consumption with trade
- The rancher produces 18 oz. of meat and 12 oz. of potatoes,
the farmer produces 32 oz. of potatoes.
- The rancher trades 5 oz. of meat for 15 oz. of potatoes.
Farmer Rancher
Meat Potatoes Meat Potatoes
Without Trade
Production and Consumption 4 oz. 16 oz. 12 oz. 24 oz.
With Trade
Production 0 oz. 32 oz. 18 oz. 12 oz.
Trade +5 oz. -15 oz. -5 oz. +15 oz.
Consumption 5 oz. 17 oz. 13 oz. 27oz.
Gains from Trade
Increase in consumption
I. The Gains from Trade
Consumption without and with Trade
✓ Case 2: Consumption with trade
- The gains from trade

< The farmer’s PPF > < The rancher’s PPF >
The rancher’s
The farmer’s production production
Meat and consumption Meat with trade
(oz.) without trade (oz.) The rancher’s production and
The farmer’s 24 consumption
consumption 18 without trade
8 with trade
13 B’ The rancher’s
5 A’
The farmer’s 12 B consumption
4 A production with trade
with trade

16 17 32 Potatoes 12 24 27 48 Potatoes
(oz.) (oz.)
II. Absolute Advantage vs. Comparative Advantage

Who should specialized in which?

✓ One should specialize in the goods in which he/she has a
comparative advantage!
Absolute advantage vs. Comparative advantage
✓ : the ability to produce a good using
fewer inputs than another producer
= the ability to produce more of goods than another producer
with a given inputs
✓ : the ability to produce a good at a lower
opportunity cost than another producer
- Opportunity cost: whatever must be given up to obtain some item
II. Absolute Advantage vs. Comparative Advantage
Absolute advantage vs. Comparative advantage
✓ Example
Minutes needed Amount produced Opportunity
to make 1 ounce of: in 8 hours Cost
Meat Potatoes Meat Potatoes Meat Potatoes
60 15 4 oz. of ¼ oz. of
Farmer 8 oz. 32 oz. potatoes meat
min/oz min/oz
20 10 2 oz. of ½ oz. of
Rancher 24 oz. 48 oz. potatoes meat
min/oz min/oz

- Rancher has an absolute advantage in producing both goods.

* fewer inputs to produce a good(min/oz),
more of goods with a given inputs(oz/8 hours)
- Farmer has a comparative advantage in producing potatoes,
Rancher has a comparative advantage in producing meat.
* lower opportunity cost
II. Absolute Advantage vs. Comparative Advantage

Comparative advantage and trade

✓ As long as the opportunity cost of producing the goods differs
across the two individuals, both can gain from specialization
and trade.
- Specialize in a good with a comparative advantage (lower
opportunity cost)
→ Total output increases
- How do they trade after specialization? At which price?
II. Absolute Advantage vs. Comparative Advantage

The price of trade

✓ For both parties to gain from trade, the price at which they
trade must lie between the opportunity costs
✓ Example
- Farmer’s opp. cost of producing 1 meat = 4 potatoes.
- Rancher’s opp. cost of producing 1 potatoes = 1/2 meat.
- If they trade 5 meat with 15 potatoes,
the price of each good is lower than each producer’s opp. cost
(the price of meat = 3 potatoes, the price of potato = 1/3 meat)
→ Both gain from trade.
III. International Trade

Why do countries trade with other countries?

✓ Because there is a positive gain from specialization and trade
as long as the opportunity cost of producing the goods differs
across the two countries!
✓ The country with a lower opportunity cost of production
of a good has comparative advantage in that good.
→ Export the goods in which it has a comparative advantage,
Import the goods in which it has a comparative disadvantage.
→ Through specialization and trade,
countries can have more of all goods to consume.
I-III. Review Questions
※ Review Question
a. Refer to the figures below. What is the opportunity cost of a
kilogram of cheese in Denmark?.
36
Bread (loaves) Bread (loaves)
36
32 Danish Worker's PPF 32 Finnish Worker's PPF
28 28
24 24
20 20
16 16
12 12
8 8
4 4

4 8 12 16 20 24 28 32 36 40 4 8 12 16 20 24 28 32 36 40
Cheese (kilogram s) Cheese (kilogram s)

✓ The slope of the PPF is the opportunity cost

✓ The opportunity cost of a kilogram of cheese in Denmark
= ½ loaves of bread
I-III. Review Questions
※ Review Question
b. Which country has the absolute advantage in producing cheese
and which has the comparative advantage producing cheese?
36
Bread (loaves) Bread (loaves)
36
32 Danish Worker's PPF 32 Finnish Worker's PPF
28 28
24 24
20 20
16 16
12 12
8 8
4 4

4 8 12 16 20 24 28 32 36 40 4 8 12 16 20 24 28 32 36 40
Cheese (kilogram s) Cheese (kilogram s)

✓ Absolute advantage: more output with a given input

→Denmark
✓ Comparative advantage: lower opportunity cost
→Denmark (1/2 loaves of bread) < Finland (3/2 loaves of bread)
I-III. Review Questions
※ Review Question
c. Suppose these two countries trade only with each other. With no
trade restrictions in effect, what kind of trade, if any would
occur?
36
Bread (loaves) Bread (loaves)
36
32 Danish Worker's PPF 32 Finnish Worker's PPF
28 28
24 24
20 20
16 16
12 12
8 8
4 4

4 8 12 16 20 24 28 32 36 40 4 8 12 16 20 24 28 32 36 40
Cheese (kilogram s) Cheese (kilogram s)

✓ Export the goods in which it has a comparative advantage,

Import the goods in which it has a comparative disadvantage
→ Denmark would sell cheese to and buy bread from Finland.
I-III. Review Questions
※ Review Question
d. If these two countries were to trade, a possible exchange rate
would be 1 loaf of bread for
36
Bread (loaves) Bread (loaves)
36
32 Danish Worker's PPF 32 Finnish Worker's PPF
28 28
24 24
20 20
16 16
12 12
8 8
4 4

4 8 12 16 20 24 28 32 36 40 4 8 12 16 20 24 28 32 36 40
Cheese (kilogram s) Cheese (kilogram s)

✓ Opportunity cost of a loaf of bread

- (Denmark) 2 kg of cheese, (Finland) 2/3 kg of cheese
✓ Any price b/w 2/3 and 2 kg of cheese
I-III. Review Questions
※ Review Question
a. Refer to the table below. The opportunity cost of a pound of
coffee in Argentina is
OUTPUT PER WORKER PER YEAR
Coffee Wheat
Argentina 20lbs 60 bu.
Brazil 50 lbs 100 bu.

✓ In Argentina,
in order to produce 1 pound of coffee,
3 bushels of wheat must be forgone.
→ The opportunity cost of a pound of coffee = 3 bu. of wheat
I-III. Review Questions
※ Review Question
b. Which country has the absolute advantage in wheat and which
has the comparative advantage in wheat?
OUTPUT PER WORKER PER YEAR
Coffee Wheat
Argentina 20lbs 60 bu.
Brazil 50 lbs 100 bu.

✓ Absolute advantage: more output with a given input

→ Brazil has the absolute advantage in wheat
✓ Comparative advantage: lower opportunity cost
→ Argentina (1/3 lbs of coffee) < Brazil (1/2 lbs of coffee)
→ Argentina has the comparative advantage in wheat
I-III. Review Questions
※ Review Question
c. Suppose these two countries trade with each other but no other
countries. With no trade restrictions in effect, what kind of trade
if any would occur?
OUTPUT PER WORKER PER YEAR
Coffee Wheat
Argentina 20lbs 60 bu.
Brazil 50 lbs 100 bu.

✓ Export the goods in which it has a comparative advantage,

Import the goods in which it has a comparative disadvantage
→ Argentina would export wheat and import coffee.
I-III. Review Questions
※ Review Question
d. If these two countries were to trade, a possible exchange rate
would be 1 lb. of coffee to
OUTPUT PER WORKER PER YEAR
Coffee Wheat
Argentina 20lbs 60 bu.
Brazil 50 lbs 100 bu.

✓ Opportunity cost of a pound of coffee

- (Argentina) 3 bu. of wheat, (Brazil) 2 bu. of wheat
✓ Any price b/w 2 and 3 bu. of wheat
I-III. Review Questions
※ Review Question
Pat and Chris find themselves on a deserted island. Pat can
produce either 6 fish or 12 coconuts in a day (or any combination
in between). Chris can produce either 3 fish or 9 coconuts (or any
combination in between).
Consider each individual alone. Assume that alone each person
decides to consume 3 fish.

a. How many coconuts can each person consume, acting alone?

✓ Acting alone, Pat consumes 3 fish which takes 1/2 of his day.
With the remaining 1/2 of his day, Pat can consume 6 coconuts
✓ Similarly, Chris consumes 3 fish which takes his whole day. day,
Chris can consume 0 coconut.
I-III. Review Questions
※ Review Question
b. What are each individual’s opportunity costs of producing fish
and coconuts? Which person has an absolute advantage in
producing fish and coconuts? Which person has a comparative
advantage in producing fish and coconut?

<Production> <Consumption> <Opportunity Cost>

Fish Coconuts Fish Coconuts Fish Coconut
Pat 6 12 3 6 2 Coconut 1/2 fish
Chris 3 9 3 0 3 Coconut 1/3 fish

✓ Pat has an absolute advantage in producing both goods.

✓ Pat has a comparative advantage in production of fish since the
opportunity cost of producing fish is lower. Similarly, Chris has
a comparative advantage in producing coconut.
I-III. Review Questions
※ Review Question
c. Explain how Pat and Chris can improve their standard of living
through specialization. If they decide to continue to consume 3
fish each, what is their gain from specialization and trade?

✓ Pat should specialize in producing fish and Chris should

specialize in producing coconuts (due to lower opp. costs)
✓ After a day’s work, the total amount available for consumption
is 6 fish and 9 coconut.
→ So, when comparing to the case a) 6 fish and 6 coconuts,
they are better off by 3 more coconuts.
I-III. Review Questions

Before Specialization After Specialization

# of # of
Fish Fish

Pat’s PPF
6 Chris’ PPF
3

9 12 # of # of
Coconuts Coconuts
Chapter 4. Supply and Demand

➢ What is a competitive market?

➢ What determines the demand for a good?
➢ What determines the supply of a good?
➢ How do supply and demand determine the price of a
good and the quantity sold?
➢ How do changes in the factors that affect demand or
supply affect the market price and quantity of a good?
IV. Market and Competition

Market and Competition

✓ Market:
a group of buyers and sellers of a particular good or service
- Buyer(Consumer) determine the demand for the product
- Seller(Producer) determine the supply of the product
✓ Competitive market:
a market in which there are many buyers and sellers
so that each has a negligible impact on market price
※ Monopoly, Oligopoly, Monopolistic competition
IV. Market and Competition

We assume Perfectly Competitive Market

✓ The goods offered by the sellers are exactly the same.
(homogeneous, identical)
✓ The buyers and sellers are so numerous that no single buyer
or seller has any influence over the market price
- Buyers and sellers must accept the market price as given
→ “Price takers”
※ Monopoly: The only producer in the market.
CAN set the price as the monopolist wants.
→ “Price setter”
V. Demand
Demand Curve
✓ Quantity demanded: amount of a good that buyers are willing
and able to purchase
※ Note: Demand vs. Quantity demanded
✓ Law of demand: other things being equal, the quantity
demanded of a good falls when the price of the good rises.
(vice versa)
- Quantity demanded is negatively related to price.
※ Principle 4: People respond to incentives
V. Demand
Demand Curve
✓ Demand schedule: a table that shows the relationship
between the price of a good and the quantity demanded.
✓ Example: Helen’s demand for lattes
Quantity
Price
of lattes
of lattes
demanded
$0.00 6
1.00 5
2.00 4
3.00 3
4.00 2
5.00 1
6.00 0
V. Demand
Demand Curve
✓ Demand curve: a graph of the relationship
between the price of a good and the quantity demanded.
✓ Example: Helen’s demand for lattes
Price of lattes
Quantity
Price (P)
of lattes
of lattes
demanded
6 Helen’s
$0.00 6 Demand Curve
5
1.00 5 for lattes
4
2.00 4
3
3.00 3
4.00 2 2

5.00 1 1
$0 Quantity
6.00 0 0 1 2 3 4 5 6 of lattes (Q)
V. Demand

Market demand vs. Individual demand

✓ Market demand:
the sum of all individual demands for a good or service.
- The demand curves are summed horizontally
→ The quantities demanded are added up
for each level of price
V. Demand

Market demand vs. Individual demand

✓ Example:
Helen and Ken are the only two buyers in the Latte market
Price
Helen’s QD Ken’s QD Market QD
of lattes
$0.00 6 12
1.00 5 10 15
2.00 4 8
3.00 3 6
4.00 2 4 6
5.00 1 2
6.00 0 0 0
V. Demand

Market demand vs. Individual demand

✓ Example:
Helen and Ken are the only two buyers in the Latte market
P P P
Helen’s Ken’s Market
6 D Curve 6 D Curve 6 D Curve
for lattes for lattes for lattes
5 5 5

4 4 4

3 3 3

2 2 2

1 1 1

1 2 3 4 5 6 Q 2 4 6 7 10 12 Q 3 6 9 12 15 18 Q
V. Demand
Shift in the demand curve
✓ The demand curve shows how price affects quantity
demanded, other things being equal.
- What if “other things” changes?
→ Change in demand; Shift in the demand curve
※ Change in quantity demanded vs. Change in demand
- When the price of a good changes (keeping all other things
constant), the quantity demanded changes.
→ Movements along the demand curve!
- When a force other than the price of the good changes,
the demand behavior changes.
→ Shift of the whole demand curve!
V. Demand
Shift in the demand curve
✓ Change in demand
- Increase in demand: Any change that increases the quantity
demanded at every price → Demand curve shifts to the right
- Decrease in demand: Any change that decreases the quantity
demanded at every price → Demand curve shifts to the left
✓ Variables that can shift the demand curve (Demand shocks)
① Income
② Prices of related goods
③ Number of buyers
④ Tastes
⑤ Expectations
V. Demand
Shift in the demand curve
① Income < Demand for Normal Good >
- Normal good:
P
other things being constant,
an increase in income leads
to an increase in demand.
(e.g. computer, jewel)
- Inferior good:
other things being constant,
an increase in income leads
to a decrease in demand. D1

(e.g. fastfood) Q
V. Demand
Shift in the demand curve
② Prices of related goods < Demand for Coffee >
- Substitutes:
P Price of tea
two goods for which,
falls
other things equal,
an increase in the price of Price of tea
rises
one leads to an increase
in the demand for the other.
* Examples:
Tea and coffee, D3
Pizza and hamburger, D2 D1

Laptop and Desktop Q

V. Demand
Shift in the demand curve
② Prices of related goods < Demand for Car >
- Complements:
P
two goods for which,
other things equal,
an increase in the price of
one leads to a decrease
in the demand for the other.
* Examples:
Gasoline and cars,
Left and right shoe, D1

computer and software Q

V. Demand
Shift in the demand curve
③ Number of buyers
- If a number of buyer increase, market demand also increases.
* Example: Huge influx of immigrants to the U.S. such as
refugees → Increase in demand
④ Tastes
- Anything that causes a shift in tastes toward a good
will increase demand for that good (vice versa)
* Example: Tuna produced in Japan after the nuclear accident
→ Decrease in demand
V. Demand
Shift in the demand curve
⑤ Expectations
- If one expect an increase in income, this leads to an increase
in current demand
* Examples: Future promotion → Expected income increases
→ Increase in demand form meals at expensive restaurants.
- If one expect higher prices, current demand increases
* Example: Events in the Middle East
→ Oil price is expected to rise → Increase in demand for oil
V. Demand
※ Review Question
a. Changes in the price of cake cause the demand curve for cake to
shift, whereas changes in income cause a movement along the
demand curve for cake. True or False?
V. Demand
※ Review Question
b. A movement along the downward-sloping demand curve for
frozen margaritas can be caused by a change in weather. True or
False?
V. Demand
※ Review Question
c. Which of the following would not cause the demand curve for
peaches to shift?
1. an increase in the price of apricots
2. a decrease in the price of nectarines
3. an increase in the price of peaches
4. a decrease in the income of peach buyers
V. Demand
Application: Two ways to reduce smoking
① Reduce the taste for cigarettes
- Public service announcements, mandatory health warnings on
cigarette packages, prohibition of cigarette advertising on TV
- Reduce the taste for cigarettes
→ Decrease in demand (Demand curve shifts to the left)
② Raise the price of cigarettes (through tobacco taxes)
- An increase in price of cigarettes lowers the quantity of
cigarettes demanded
→ Movement along the demand curve
※ Note
- 10% increase in price → 4 % decrease in quantity demanded
(For teens, 12% decrease in quantity demanded)
V. Demand

< Shift in Demand Curve > < Movement along the Demand Curve>
P P

$15
$10 $10

D2 D1 D1
Q Q
20 20
Thank you

Questions?