No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Five: Supply & Demand: Markets at Work 119 In economic terms, the prices of the factors of production have risen for Apple. What will this do to our example? Obviously it will affect supply, and since input prices have risen, we will have a reduction in supply as seen Figure 5.8 . The decrease in supply (not quantity supplied—why not?—see chapter 4) is reflected in the shift from S 1 to S 2 , and results in a further decrease in quantity, while raising the price. Just to make sure you have this, we’ll do the opposite in the next two short examples; we’ll increase demand and supply and trace out the effects as the market process unfolds to create a new equilibrium. There is a whole host of reasons demand could increase; perhaps due to Apple having new camera features that are unmatched and screen resolutions that are amazing compared to its competitors. As seen in Figure 5.9 , this increased demand leads to increases in both price and quantity. Similarly, supply could increase; perhaps sales of older iPhones went drastically down, and it was possible for Apple to shift production over to the latest version. See Figure 5.10 . Figure 5.10, Increase in Supply. An increase in supply could occur due to 1) a reduction in the prices of factors of production, 2) a drop in demand for a substitute in production, 3) producer expectations that future prices will drop, 4) increase in # of suppliers. An increase in supply results in lower prices and higher quantities. P ($) Q (#) Q 1 P 1 P 2 Q 2 D S 1 S 2 Figure 5.8, Drop in demand, followed by a decrease in Supply. From our final equilibrium in Figure 5.7 @ P 2 and Q 2 , we’ve added a decrease in supply (S 2 ) due to increased factor prices. The result will be a further reduction in quantity, but the price will increase (conveniently for our graph, but not usually the case) to exactly the same price as our initial equilibrium. P ($) Q (#) Q 1 P 1, 3 P 2 Q 2 D 1 D 2 S 1 S 2 Q 3 Figure 5.9, Increase in Demand. An increase in demand (which could be due to any of a number of variables changing {anything other than price changes} such as consumer preferences, expectations, price changes in substitutes or complements, etc.) will result in a higher price and quantity. P ($) Q (#) Q 1 P 1 P 2 Q 2 S D 1 D 2