5&6

 DEMAND, SUPPLY
AND EQUILIBRIUM
 WHAT YOU WILL LEARN

 What a competitive market is and how it is described by the supply and demand model.

 What the demand curve is.

 What the supply curve is.

 How the supply and demand curves determine a market’s equilibrium price and equilibrium quantity.

 In the case of a shortage or surplus, how price moves the market back to equilibrium.

 The difference between movements along the demand/supply curve and changes in demand/supply.

 The factors that shift the demand/supply curve.

2
 COMPETITIVE MARKETS

 A perfectly competitive market has many buyers and sellers of the same good or
service with perfect information, none of whom can influence the price.

 The supply and demand model is a model of how a competitive market behaves.

 Price and Quantity are the only variables (they are endogenous, anything else is
exogenous). call as endogenous
variable
 COMPETITIVE MARKETS

 Market for agricultural produce is usually

perfect competition
product differentiation 이 없어야한다.
가격을 자기 맘대로 결정하지 못함

no market power,
ex) international oil

4
 DEMAND

 Demand represents the behavior of buyers.

 A demand curve shows the quantity demanded at various prices.
➢ Quantity Demanded: The maximum amount of the good or service consumers are
willing and able to purchase at a given price.
➢ What the consumer is willing and able to buy NOT what the consumer wants to buy.
 Demand curve also shows willingness to pay (WTP): maximum amount of money
a consumer is willing and able to pay for each additional unit of the product.
➢ WTP = Marginal Benefit
 Demand
• Consider Darren who was surveyed
how much gas on average he would
buy per week, at different prices.
• The demand curve shows the
quantity demanded at different
prices:
• When the price of gas is $5 per
gallon, he is willing to buy only 1
gallon of gas per week.
• The demand curve shows
willingness to pay at different
quantities:
• For the first quantity, Darren’s
willingness to pay is $5
• Darren’s willingness to pay for the
second gallon of gas is $4.
 • In a follow-up
interview, Darren
provided some
insight into his
preferences.
• Each row shows one
of Darren’s uses for
each additional
gallon of gas.
• He’s listed them in
order of his
priority—from the
uses that deliver the
largest benefit to
him to those that
deliver the least
benefit

Quantity Marginal Benefit

1st gal $5
2nd gal $4
3rd gal $3
4th gal $2.5
5th gal $2
6th gal $1.5
7th gal $1
 Quantity Marginal Benefit
• Draw the Marginal Benefit (MB) curve for
this table and compare it with the last 1st gal $5
demand curve: $4
2nd gal
• Your demand curve is your marginal $3
benefit curve, 3rd gal
(MB curve shows your WTP) 4th gal $2.5
5th gal $2
6th gal $1.5
7th gal $1
 THE DEMAND SCHEDULE & THE DEMAND CURVE
The Law of demand: Ceteris paribus, as price rises, the quantity demanded falls.
➢ prices and quantity demanded move in the opposite direction, holding everything
else constant.
Price of cotton
(per pound)

$2.00

1.75

1.50

1.25 ❑ Quantity demanded: one

1.00 value that depends on
0.75 As price falls, the
the price.
Demand
quantity
curve, D
0.50 demanded rises
❑ Demand: the whole curve
0 7 9 11 13 15 17
Quantity of cotton
(billion pounds)
 ACTIVE LEARNING
Below is a demand curve for a bucket of golf balls at the
local driving range. Use the graph below to illustrate
graphically the effects of a decrease in price from $6 per
bucket to $3 per bucket.
Describe the relationship you observed in your answer on
the graph.

a. P and Qd move in the same direction.

b. P and Qd move in the opposite direction.
c. P and demand move in the same direction.
d. P and demand move in the opposite direction. 12
INDIVIDUAL DEMAND CURVE AND THE MARKET DEMAND
CURVE

The market demand curve is the horizontal sum of the individual

demand curves of all consumers in that market.

14
ACTIVE LEARNING

Let’s assume that each person in the United States consumes an average of 36 gallons of
soft drinks (non-diet) at an average price of $2.00 per gallon, and that the U.S.
population is 291 million. At a price of $1.50 per gallon, each consumer would demand
54 gallons of soft drinks. From this information about the individual demand schedule,
calculate the market demand schedule for soft drinks for prices of $1.50 and $2.00 per
gallon.
 When price is $1.50, the market quantity demanded is _____________ million gallon.

 When price is $2.00, the market quantity demanded is _____________ million
gallons.


16
 SUPPLY

 Supply represents the behavior of sellers.

 A supply curve shows the quantity supplied at various prices.
 The quantity supplied: the quantity that producers are willing to sell at a
particular price.
 Supply curve also shows willingness to accept (WTA): minimum amount
of money that а producer is willing to accept for selling each additional
unit of the product.
 WTA: Marginal (opportunity) cost of seller.
 THE SUPPLY SCHEDULE AND THE SUPPLY CURVE
Law of Supply: Ceteris paribus, prices and quantity supplied move in the same direction.

✓ An increase (decrease) in the price leads to an increase (decrease) in the quantity supplied,
holding everything else constant.

Price of positive slope

cotton
(per pound) Supply curve,
S
11.6 ❑ Quantity supplied one
$2.00
11.5 value that depends on
1.75 As price rises, the the price.
1.50
quantity supplied 11.2
rises.
1.25 10.7 ❑ Supply: the whole curve
1.00 10.0
0.75 9.1
0.50 8.0
0 7 9 11 13 15 17
Quantity of cotton (billion pounds)
INDIVIDUAL SUPPLY CURVE AND
THE MARKET SUPPLY CURVE

The market supply curve is the horizontal sum of

the individual supply curves of all firms in that market.
sum of individual
supply curve

12
 ACTIVE LEARNING
The supply schedule contains individual supply curves for the only two firms in a hypothetical
market for miniature musical daiquiri umbrellas. Use the schedule to answer the questions.
A third firm would mean
a. market supply increases.
b. market supply decreases.
c. Firm 1 and Firm 2 would lower output to accommodate the new supplier in order to keep
market supply constant.
d. higher prices of stuffed animals.

Drinkin' in the Rain Co. Umbrellas Co.

Price
quantity quantity
23
$0.50 100 80
$0.60 125 100
$0.70 150 120 23

$0.80 175 140

 ACTIVE LEARNING
With two firms in the market, the market quantity supplied at $0.7 is: _________ umbrellas

Answer:

Drinkin' in the Rain Co. Umbrellas Co.

Price
quantity quantity
24
$0.50 100 80
$0.60 125 100
$0.70 150 120 24

$0.80 175 140

 EQUILIBRIUM

 Equilibrium is the point at which there is no tendency for change.

(Opposing forces are in balance.)
 Analyze how markets bring supply and demand into balance.
 Market Equilibrium • Equilibrium: Quantity supplied equals quantity
demanded. Where on the graph?
• Intersection!
Price of cotton
(per pound) • Equilibrium price: The price at which the
$2.00
Supply market is in equilibrium, AKA market-clearing
price
1.75
• Equilibrium quantity: The quantity demanded
1.50
and supplied at equilibrium.
1.25
Equilibrium
• 𝑄𝐷 = 𝑄𝑆 = 𝑄 ∗ ⇒ 𝑃∗
1.00 Equilibrium
price
0.75
• Markets have a tendency to move towards
equilibrium;
0.50 Demand
• i.e., the market will set a price & quantity where
0 7 10 13 15 17
there is no excess demand or supply
Quantity of cotton • Once they find it, prices and quantities stop
(billions of pounds)
Equilibrium changing (until something disturbs the market)
quantity
 WHY DO ALL SALES AND PURCHASES IN A MARKET TAKE
PLACE AT THE SAME PRICE?
 Where consumers don’t have time to compare prices (like a tourist trap), different stores
have different prices.
 In well-established markets, there is a uniform price.

 Cheap jewelry
on eBay

27
• If QD > QS ⇒ Shortage or Excess Demand
• Shortages do not last: sellers will increase
price to increase revenue
• The market corrects itself

• At the price of $0.75, the stores run out of

the good quickly and there may be long
queues of desperate customers.
• As a seller, by raising your price to
$0.8, you can still sell all of your
cotton (there is still a shortage) =>
higher profit

• Raising the price to $0.9 still

increases your profit (you can still
sell all of your good due to the
shortage)

• Demanders also play a critical role.

As a buyer who is concerned about
running out of cotton, you may
offer the seller a higher price

• Prices continue to rise until market

reaches equilibrium.
• If QD > QS ⇒ Shortage or Excess Demand
• Shortages do not last: sellers will increase
price to increase revenue
• Law of Demand: 𝑃 ↑⇒ 𝑄𝐷 ↓
• Law of Supply: 𝑃 ↑⇒ 𝑄𝑆 ↑
• Until the equilibrium is reached.
• The market corrects itself
• If QD < QS ⇒ Surplus or Excess Supply

• Surpluses do not last: sellers will reduce price

so they can move goods off the shelves.
• Sellers trying to sell off their unsold goods, will
charge lower prices in the hopes of attracting
more customers. With enough competition,
repeated rounds of discounting will push the price
down to $1 per pound, eliminating this surplus.

• Law of Demand: 𝑃 ↓⇒ 𝑄𝐷 ↑

• Law of Supply: 𝑃 ↓⇒ 𝑄𝑆 ↓

• Prices continue to fall until market reaches

equilibrium.
SURPLUSES AND SHORTAGES TELL THE STORY

 If the market is not in equilibrium, it moves towards equilibrium → markets will correct
themselves.
 Once a market is in equilibrium, it remains in equilibrium (unless outside forces
change).
ACTIVE LEARNING

Price
At $5, quantity supplied is ______ and
Supply
quantity demanded is ______, leading to a
$7.00 _______.
6.00

5.00
a. 13; 6; shortage of 7 units
4.00
b. 6; 13; surplus of 7 units
3.00 E
c. 13; 6; surplus of 7 units
2.00
d. 6; 13; shortage of 7 units
1.00 Demand

0 4 6 10 13 18 22 27
Quantity
ACTIVE LEARNING

You are responsible for a concert on campus and have sold out all the tickets at $20
apiece. Unfortunately, there are 100 students outside the concert who still want to get
in and are angry and frustrated, most of them are willing to pay more than $20 to get in.
1. Is $20 the equilibrium price?
a. No, because there’s a shortage of 100 tickets.
b. No, because there’s a surplus of 100 tickets.
c. Yes, because all the available tickets were sold.

34
Movement along the curve =>
Change in Quantity Demanded or Supplied
• Changes in the price will lead to a movement along the curves.
• Price and Quantity are the two variables (endogenous). By the Law of Demand or
Supply, a change in price leads to an increase (decrease) in Quantity Demanded (QD)
or Supplied (QS).
Market for RC Cola
4.00
S
Price of Quantity of RC Quantity of RC 3.50

Price ($ per can)

3.00
RC Cola Cola Cola
2.50
(Demand) (Supply) 2.00
1.00 100 60 1.50
1.00
1.50 90 70 0.50 D
-
2.00 80 80 0 20 40 60 80 100 120
2.50 70 90 Quantity (millions of cans per day)

3.00 60 100
3.50 50 110
 REMINDER- LAW OF DEMAND:

GLOBAL COMPARISON: PAY MORE, PUMP LESS

 Higher gas prices in Europe have a
predictable effect:
 less consumption.

37
SHIFTS IN DEMAND
 A shift of the demand curve is a change in the quantity demanded at any given price, represented
by the change of the original demand curve to a new position—a new demand curve.
o An increase in
demand is a rightward
shift.
o A decrease in demand
is a leftward shift.
 AN INCREASE IN DEMAND
o An increase in demand is a rightward shift, higher quantity demanded at each price
o A decrease in demand is a leftward shift, lower quantity demanded at each price

Price of cotton Supply

(per pound)
$2.00
curve, S ▪ If Demand shifts and Supply
1.75 remains constant, then there is a
1.50 movement along the Supply curve,
1.25 a change in Quantity Supplied.
1.00
0.75
0.50 D1 D2

0 7 9 11 13 15 17 39
Quantity of cotton (billions
of pounds)
GRAPHING SHIFTS OF THE DEMAND CURVE
Any event that increases demand shifts the
demand curve rightward and vice versa.

40
DEMAND AND SUPPLY SHIFTERS

 What shifts Demand curve?

➢ Outside forces → Exogenous Variables.

WHAT SHIFTS DEMAND?

▪ Factors that shift both individual and market demand curves include the following:
1. prices of related goods.
2. income.
3. preferences.
4. expectations.
▪ Factors that shift only market demand curves include the following:
6. the type and number of buyers.
 UNDERSTANDING SHIFTS OF THE DEMAND CURVE

1. Changes in the prices of related goods

 Substitutes: Goods that replace each other. Substitute goods have similar functions;
 e.g.: muffins and doughnuts, cereal and oatmeal. Coffee and tea
 e.g.,: driving, walking, cycling, ride-sharing, taking the bus are all substitutes for each other
 If two goods are substitutes, then an increase in the price of one good makes consumers
more willing to buy the other good, ceteris paribus.
 If there is an increase in price of muffins, the demand for donuts increases.
 Q: What happens to the demand for travel in Hawaii if the perceived risk (“cost”) of traveling
to the Caribbean increases?
 demand for travel in Hawaii increases
 UNDERSTANDING SHIFTS OF THE DEMAND CURVE

1. Changes in the prices of related goods

 Complements: Complement goods are goods usually consumed together.
 e.g.: iPod and earphones. Coffee and sugar. Hamburgers and fries
 If two goods are complements, then a fall in the price of one good makes people
more willing to buy the other good.
 Alternatively, we can say: your demand for a good will decrease if the price of
complementary goods rises.
 If there is an increase in the price of coffee, the demand for sugar declines.
 Example: An increase in price of gasoline will decrease the demand for SUVs.
 UNDERSTANDING SHIFTS OF THE DEMAND CURVE

1. Changes in the prices of related goods

 Your demand for a good will decrease if the price of complementary goods rises.
 hotel room in a resort & adventure tours, Rental climbing shoes & climbing
gyms
 Examples, houses & property taxes: “An increase in the tax payment per unit of
housing stock was found to reduce the housing consumption of both black and
white central city homebuyers (Ihlanfeldt, K. R. (1984). Property taxation and the demand for housing: An
econometric analysis. Journal of Urban Economics, 16(2), 208-224.)
ACTIVE LEARNING

When the price of petroleum goes up, the demand for natural gas ______,
the demand for coal ______, and the demand for solar power ______.
(Assume these goods are substitutes for petroleum.)
a) increases; increases; increases
b) increases; increases; decreases
c) decreases; decreases; increases
d) decreases; decreases; decreases
 UNDERSTANDING SHIFTS OF THE DEMAND CURVE

2. Changes in income
 The effect of changes in income on demand depends on the nature of the good in question.
 Normal goods: When a rise in income increases the demand for a good, we say that the good
is a normal good.
 Inferior goods: When a rise in income decreases the demand for a good, it is an inferior good
(e.g., high fat meat)
 E.g., As Talya’s income goes up, she buys less instant noodles and more meat. Instant noodles
is an inferior good for Talya and meat is a normal good for her.
DIFFERENT MODELS OF CARS & HOUSING

48
 ACTIVE LEARNING

 Walmart sells mostly inferior goods (in the economist’s sense) while Target sells
mostly normal goods.
 Which retailers do you think did better during the 2008–2009 recession (the Great
Recession)?
a. Walmart
b. Target
WHICH RETAILERS DO WELL IN A RECESSION?

 The Great Recession increased the

demand for Walmart’s goods, led its
stock price to rise.
 Meanwhile, Target, which sells mainly
normal goods, experienced a decrease
in demand.
 Target’s stock fall by about 40%.
UNDERSTANDING SHIFTS OF THE DEMAND CURVE

3. Changes in tastes
 Tastes and preferences are subjective and vary among consumers.
 Individuals’ taste or preference for a good may change, and this change affects the
demand for that good.
 Advertising, fashion trends, social pressure, news, new studies and research about
the effects of something
 News: tomato is good for cancer prevention=> increase in demand for tomato

 Seasonal changes or fads have a predictable effect on demand.

 Q: What happens to demand for (winter) boots in October?
 Q: What happens to demand for chocolate before Valentine's Day?
 3. Changes in tastes
 Tastes and preferences are subjective and vary among consumers.
 Advertising
 Nike’s Just Do It campaign

 Nike sales booming after Colin Kaepernick ad

➢ https://time.com/5390884/nike-sales-go-up-kaepernick-ad/, “Nike Sales Increased 31% After Kaepernick Ad”
➢ https://abcnews.go.com/Business/nike-sales-booming-kaepernick-ad-invalidating-critics/story?id=59957137,
➢ https://www.marketwatch.com/story/nikes-online-sales-jumped-31-after-company-unveiled-kaepernick-campaign-
2018-09-07

 "It looks like a real rebuke for folks who said, 'We’ll boycott Nike,'" University of Michigan business school
professor Jerry Davis told ABC News. "It turns out Democrats buy a lot more sneakers than Republicans”.
 UNDERSTANDING SHIFTS OF THE DEMAND CURVE

4. Changes in expectations
 If consumers have a choice about the timing of a purchase, they buy according to
expectations.
 Expectation of future prices: Buyers adjust current spending in anticipation of the
direction of future prices in order to obtain the lowest possible price.
 Buyers will postpone purchases if they think prices will fall and will accelerate their
purchases if they think prices will rise.
 Q: If prices for the newest Xbox consoles are expected to drop right before Christmas, what will
happen to sales during November?
 Expectation of future income
 Suppose your boss tells you that you are going to get a raise. How do you change
your basket of goods and services?
UNDERSTANDING SHIFTS OF THE DEMAND CURVE

5. Changes in the Number of Consumers

o As the population of an economy changes, the number of
buyers of a particular good also changes (thereby changing its
demand).
o Q: What happens to the demand for diapers in Russia as birth rates
drop?
 ACTIVE LEARNING

Which of the following will cause an increase in the demand for

automobiles?
a. Price of car tires increases because of a Malaysian rubber shortage.
b. Concrete steel reinforcing rods are replaced by aluminum along the Atlantic
coast to prevent rusting.
c. Gasoline prices drop by 50% when OPEC nations increase production.
d. McDonald’s increases its hamburger production in response to consumer trends.
 Sort the following scenarios according to whether they would cause a shift in the
demand curve or movement along a demand curve.
Shift of the demand curve Movement along the demand curve

1. In-N-Out Burger sells more burgers as the price of chicken increases nationally.
2. Pepsi observes a tremendous increase in sales after its epic We Will Rock You Ad (feat. Britney, Beyonce, Pink
& Enrique) (Check https://www.youtube.com/watch?v=ofICNgc8lqU )
3. Tide raises its price for its laundry detergents, which results in less sales and strange scents around college
dorm floors.
4. Varidesk offers a one-weekend clearance sale on its old model of desks which causes students to rush to
upgrade their dorm furniture.
5. Red Bull, an energy drink company notices students are desperate during finals and change their buying
behavior.
6. After hearing about new competitors planning to enter the market, in order to deter entry, Netflix lowers its
U.S. Subscription Prices, and more college students subscribe to Netflix.
 REMEMBER: A MOVEMENT ALONG VS. A SHIFT IN DEMAND
When price alone changes, there is movement along a demand curve.
When the demand shifts, people are buying more (or less) at EVERY price.

59
MOVEMENT ALONG THE SUPPLY CURVE VERSUS SHIFT OF THE
SUPPLY CURVE

60
 SHIFTS IN SUPPLY
 A shift of the supply curve is a change in the quantity supplied of a good at
any given price, or a change in supply represented by a new supply curve
 SHIFTS IN SUPPLY
Price of cotton
beans (per pound)
 A shift of the supply curve is a change in S1 S2
the quantity supplied of a good at any $2.00
1.75
given price, or a change in supply 1.50
represented by a new supply curve 1.25
1.00
An increase in supply means a 0.75 D
rightward shift of the supply curve. 0.50

0 7 9 11 13 15 17
A decrease in supply means a leftward Quantity of cotton
shift of the supply curve. (billions of pounds)

If Supply shifts and Demand remains constant,

then there is a movement along the Demand
curve, a change in Quantity Demanded.
 SHIFTS IN SUPPLY
An increase in supply means a rightward shift of the supply curve.

A decrease in supply means a leftward

shift of the supply curve.
DEMAND AND SUPPLY SHIFTERS

 What shifts Supply curve?

➢ Outside forces → Exogenous Variables.

WHAT SHIFTS THE SUPPLY CURVE?

▪ The following shift individual AND market supply curves:

1. prices of related outputs.
2. input prices.
3. productivity and technology.
4. expectations.
▪ The following shifts ONLY the market supply curve:
5. the type and number of sellers.
 UNDERSTANDING SHIFTS OF THE SUPPLY CURVE
1. Changes in the prices of related goods and services
➢ There are substitutes and complements in production processes.
➢ Substitutes: producing one good prevents sellers from using resources to
produce another
o Substitute in tangerine production? Orange.
➢ Complements-in-production are goods produced jointly from the same
resource or input
o Complement in pork processing? Lard.
➢ If the price of a substitute in production goes up, the supply curve for the good
decreases. If the price of a complement in production goes up, the supply curve for
the good increases.
 UNDERSTANDING SHIFTS OF THE SUPPLY CURVE

2. Changes in input prices:

 A decrease in the price of an input (all else equal) increases profits and encourages
more supply (and vice versa).
 When the price of cotton drops, the supply of blue jeans increases.

 Q: What will happen to the number of new businesses if the government

reduces the fees associated with new business licenses? What happens if
the fees rise?
 UNDERSTANDING SHIFTS OF THE SUPPLY CURVE

3. Changes in technology
 A technological innovation lowers costs and increases supply, shifts the whole
supply curve to right.
 New, better technology makes sellers willing to offer more at a given price or sell the
same quantity at a lower price.
UNDERSTANDING SHIFTS OF THE SUPPLY CURVE

4. Changes in expectations
 Sellers will adjust their current offerings in anticipation of the direction of future prices
in order to obtain the highest possible price.
 The expectation of a higher price for a good in the future decreases current supply of
the good – if they can store the good (and vice versa).
UNDERSTANDING SHIFTS OF THE SUPPLY CURVE

5. Changes in the number of producers

 As producers enter and exit the market, the overall supply changes.
 Entry implies more sellers in the market, increasing supply.
 Exit implies fewer sellers in the market, decreasing supply.

As more firms enter the solar

installation market, the number of
solar installations available for sale
increases.
Decide whether the following examples indicate a shift of the supply curve or a
movement along the supply curve. Mark the correct column.

Example Movement along the A shift in the

supply curve supply curve
1. As home prices rise, more people put out a For Sale sign.
-

2. Personal bankruptcies rise with the recession, forcing

-
homeowners to sell.
3. College grads avoid teaching jobs as starting salaries fall.
-

4. The price of jet fuel drops and airlines expand the number of
-
flights
5. As the price of airline tickets rises, airlines add more flights.
-

6. Worsening working conditions in urban schools chase away

-
prospective teachers.
ACTIVE LEARNING

Milk is an important ingredient in the production of ice cream. If the price

of milk increases, then one would expect, holding all other things constant:
a. the supply curve for ice cream to shift left
b. the supply curve for ice cream to shift right.
c. no change in the supply curve for ice cream.
d. a movement along the supply curve for ice cream curve, resulting in more ice
cream supplied.
68
Active Learning
In the following three situations, the market is initially in equilibrium. Explain the changes
in either supply or demand that will result from each event. After each event described
below, does a surplus or shortage exist at the original equilibrium price? What will happen
to the equilibrium price as a result?
a)2015 was a very good year for California wine-grape growers, who produced a bumper
crop. Increase in supply of grapes.
Supply curve will shift to the right.
Surplus will be exist at the original equilibrium price.
• => prices will goes down until the new equilibrium.

b)After a hurricane, Florida hoteliers often find that many people cancel their upcoming
vacations, leaving them with empty hotel rooms.
Decrease in demand of vacation trips, hotel room reservations
• Demand curve will shifting to the left.
Surplus will be exist because there are empty hotel rooms exist.
Hoteliers will drop the price of the hotel rooms.
c)After a heavy snowfall, many people want to buy second-hand snowblowers at the local
tool shop.
• shortage. price will increase. And the quantities will be increase

74
SHIFT IN EITHER DEMAND OR SUPPLY
A SHIFT IN DEMAND
(MOVEMENT ALONG THE SUPPLY CURVE)

Price of
cotton An increase in
demand…
Supply
… leads to a movement
E2 along the supply curve due
P2 to a higher equilibrium
price and higher
Price E1 equilibrium quantity.
rises
P1

D2

D1

Q1 Q2
Quantity rises Quantity of cotton
A SHIFT IN SUPPLY
(MOVEMENT ALONG THE DEMAND CURVE)
Price of
cotton S2 S1 A decrease
in supply…

E2
P2

Price … leads to a movement

rises along the demand
curve due to a higher
P1 E1 equilibrium price and
lower equilibrium
quantity.

Demand

Q2 Q1
Quantity of
Quantity falls cotton