How long does it take to reach the long run? Well, it depends. Focus on the time that elapses between the quantity supplied on a market day and the quantity the suppliers would have been willing to offer at that mar- ket-day price.
Consider the babysitting market of panela. If the market-day price was $3 per hour on January 1, 2011, and on that day 100 hours had been supplied, baby- sitters would be less than ecstatic because $3 is a very unattractive price. How long will it take babysitters to find alternative employment? Not long, don’t you think? Within a month or so, the quantity supplied of babysitters at $3 would fall from 100 to 30 hours, from pointato pointbon the graph. On the other hand, if the market-day price was $20 per hour, then baby- sitters supplying those 100 hours would be delighted and it wouldn’t take long—a month perhaps—for other people to switch from whatever else they were doing to babysitting. The quantity supplied would jump to 400 hours, from pointcto pointd.
Now think about Illinois farmers in the corn market of panelb. Suppose the price of corn was $20 per bushel and the market-day supply was 100 bushels. Farmers would be ecstatic, not having seen such a high price
before! They would love to produce 400 bushels—
but how do you supply more corn when the planting season was last spring? In order to increase the quantity sup- plied, they must wait for the next planting season to adjust their supply to the
$20 price. That is, it takes them a full year to move
from pointxto pointyon the graph.
How long do you suppose it takes California wine producers to increase their quantity supplied of 20-year wine from the market-day 100 bottles to the long-run 400 bottles—from pointrto pointson the graph in panelc—when the market-day price is an attractive
$20 per bottle? Think about it. How can you produce 20-year wine in less than 20 years? You see the picture, don’t you? The length of time it takes to get from market-day supply to long-run supply depends on the character of the good. It takes little time for babysitting, and a much, much longer time for aged wine.
After 20 years, it better be good!
©Image100/Royalty-Free/CORBIS
PANEL b 0
100 200 BUSHELS
x y
PRICE ($)
300 400 500 ONE
YEAR
20 20
3 0
100
30 200
HOURS PANEL a b a
c d
PRICE ($)
300 400 500 ONE
MONTH
PANEL c 0
100 200 BOTTLES
r s
PRICE ($)
300 400 500 20
YEARS
20
(column 3) is drawn from the table in Exhibit 4. Now suppose that the demand for fish changes from the schedule shown in column 3 to the one shown in column 4.
60 PART 1 Find more at http://www.downloadslide.comTHE BASICS OF ECONOMIC ANALYSIS
Note what happens. At each price, 1,000 morefish are demanded. Prior to the change in demand, the quantity demanded atPẳ$10 was 3,500fish. It increases now to 4,500. It increases at Pẳ$9 from 4,000 to 5,000, and so on.
The graph in Exhibit 6 depicts the change in demand shown in the table.
Demand curve D, graphing the initial demand schedule (column 3), shifts out- ward to the right toD0, graphing the new demand schedule (column 4). Look at the impact on the equilibrium price offish of the change in demand from D to D0. The old equilibrium price, Pẳ$5, is no longer tenable. Now, at that price, an excess demand of 1,000 fish emerges. The pressure of this excess demand forces the equilibrium price up to P ẳ$6, where the 6,500 quantity offish demanded equals the 6,500 quantity supplied.
What could cause such a change in demand? There are a number of reasons why people change the quantity they demand at the same price. The principal reasons are changes in income, changes in taste, changes in other prices, changes in expectations about future prices, and changes in population size. Let’s consider each.
Changes in Income
You don’t suppose, do you, that when Lady Gaga dines out in one of New York’s finest restaurants, she checks the price of fish to see whether she’s willing to make the purchase? Wouldn’t you be surprised if she orders the fish at Pẳ$5 but passes atPẳ$10?
The more income people have, the more they can afford to buy more of everything. If Claudia Preparata’s income were to increase by 25 percent, she might be more willing to buy thatfirst fish at $10. Before, she passed it up. It isn’t surprising, then, that when people’s incomes increase, the quantity demanded of fish at P ẳ$10 increases from 3,500 to 4,500. It increases as well at every other price level.
On the other hand, what do you suppose happens to the demand for fish when incomes fall? You would expect that the quantity demanded at Pẳ$10 would fall from 3,500 fish to something less and that the quantity demanded at
EXHIBIT 6 Change in Demand
INITIAL INCREASE IN DECREASE IN QUANTITY QUANTITY QUANTITY QUANTITY PRICE SUPPLIED DEMANDED DEMANDED DEMANDED
$10 8,500 3,500 4,500 2,500 9 8,000 4,000 5,000 3,000 8 7,500 4,500 5,500 3,500 7 7,000 5,000 6,000 4,000 6 6,500 5,500 6,500 4,500 5 6,000 6,000 7,000 5,000 4 5,500 6,500 7,500 5,500 3 5,000 7,000 8,000 6,000 2 4,500 7,500 8,500 6,500 1 4,000 8,000 9,000 7,000 FISH MARKET WITH CHANGE IN DEMAND
5 6 7 8 9 10
4 3 2 1 0
QUANTITY (1,000s) SUPPLY
INITIAL DEMAND a
D D' D"
PRICE ($) b
3 5 7 9
2
1 4 6 8 10 12 14
INCREASE IN DEMAND
DECREASE IN DEMAND b
a
Ceteris paribus, an increase in demand fromDtoD0raises the equilibrium price from $5 to $6, pointaon the graph. The quantity bought and sold increases from 6,000 to 6,500. A decrease in demand fromDtoD00lowers the equilibrium price from $5 to $4, pointbon the graph, and reduces the quantity bought and sold from 6,000 to 5,500.
Change in demand A change in quantity demanded of a good that is caused by factors other than a change in the price of that good.
Pẳ$9 would fall from 4,000 to something less, and so on. To economists,fish is a normal good—that is, a good whose demand increases (or decreases) when people’s incomes increase (or decrease).
Changes in Taste
Tastes seldom change overnight, but they do change. Suppose that the surgeon general reports that the consumption of red meat is detrimental to health. If enough people worry about the quantity of meat they consume and make a conscious effort to cut down, the demand forfish would increase.
Sometimes, tastes are learned or cultivated. Advertising has much to do with it. Suppose McDonald’s came to the island and introduced its filet of fish.
Wouldn’t some people, tasting McDonald’s fish for the first time, switch from meat to fish? Can you picture the McDonald’s fish commercials? If a McDonald’s commercial pushed fish, people on the island would probably end up buying morefish at each price. At Pẳ$10, for example, quantity demanded might increase from 3,500 to 4,500fish.
A generation or two ago, the millinery industry—women's hats—flourished.
Most women owned hats of many shapes and styles, bedecked with feathers, bows or ribbons. Nowadays, to the chagrin of milliners, few women wear hats.
Tastes change. Easter Sunday aside, how many hats have you seen lately?
Changes in the Prices of Other Goods
You don’t have to be frightened by the surgeon general’s warning about red meat to substitutefish for meat. Prices alone can do it. For example, if the price of hamburger jumped suddenly from $1.89 to $2.45 per pound, that might be incentive enough for many people to switch from hamburger tofish. After all, fish and hamburger are substitute goods. When the price of one increases, the demand for the other increases.
Suppose people on the island typically eat fish with fries. And suppose, as well, that the price of potatoes increases from $0.75 to $2.75 a pound. What happens to the demand forfish? It decreases. People demand less fish at each price because the “fish ’n’ fries” combo is now more expensive. Fish and fries are complementary goods. When the price of one of the complementary goods increases, the demand for the other decreases.
Can you think of other complementary goods? How about coffee and donuts, milk and cookies, peanut butter and jelly, bagels and cream cheese? Coca-Cola once advertised that“Things go better with Coke.” What happens to the demand for Coke when the prices of those“things” increase? It decreases, doesn't it?
Changes in Expectations About Future Prices
The demand for fish may change just because people change their expectations about tomorrow’s fish price. If you thought that the price of fish would increase tomorrow, you might be willing to buy morefish today; that alone could explain why, atPẳ$10, the quantity demanded increases from 3,500 to 4,500 (and increases at every price level) in the table in Exhibit 6. Of course, if you had a notion that tomorrow’s price would be lower, you might delay consumption by reducing the quantity demanded today. In such a case, the demand forfish decreases.
Changes in Population Size
Suppose an immigration wave increases the island’s population by 10 percent.
How would such an increase affect the demand for fish? With more mouths to Normal good
A good whose demand increases or decreases when people’s incomes increase or decrease.
Substitute goods Goods that can replace each other. When the price of one increases, the demand for the other increases.
Complementary goods Goods that are generally used together. When the price of one increases, the demand for the other decreases.
62 PART 1 Find more at http://www.downloadslide.comTHE BASICS OF ECONOMIC ANALYSIS
feed, the quantity offish demanded at each price increases. A baby boom on the island would have the same effect.
A Change in Demand or a Change in Quantity Demanded?
Changes in quantity demanded and changes in demand may seem to be two ways of expressing the same idea, but they are not. What’s the difference?
Economists define change in quantity demanded to mean only the change in quantity demanded of a good that is brought about by a change in the price of that good. They define change in demand to mean a shift in the entire demand curve.
Look at demand curveD in Exhibit 7. When price falls from Pẳ$10 toPẳ$7, the quantity demanded increases from 4,500 to 5,000. Economists describe this increase as “a change in quantity demanded.” It traces out a movement along the demand curve from point a to point b.
When demand increases for other reasons, such as population growth, the entire demand curve shifts from D to D0. Economists call this shift “a change in demand.” At the same price, Pẳ$10, the quantity demanded increases from 4,500 onD to 6,000 on D0. The shift in the demand curve fromD to D0—point a to point c atPẳ$10—occurs because the demand for the good is influenced by things other than the price of the good, such as a change in people’s tastes or income.