And by the way, for those of you that are following the PDF version of the text. We're going to be finishing off chapter two of the PDF version with the sessions this week. Let's look first at figure 2.6a, what happens when determinant of demand shifts the entire demand curve rightward? Let's say for whatever reasons, surgeon general says look, watching more DVD's will reduce your chance of having a heart attack. That'll increase people's preferences for purchasing DVD's. It'll shift at each price, the entire demand curve rightward. And it will have an upward pressure on price and a rightward pressure on the equilibrium quantity. The initial equilibrium was $30 per unit, and 475,000 units were sold each time period. As demand shifts to the right to the surgeon general's findings, if the price remains at $30. Quantity demanded would be greater than quantities supplied at $30. So there'll be upward pressure, there'll be a shortage that promotes that upward pressure and price. And the prediction is will end up at a $40 equilibrium price, and at a 600,000 unit sale per period due to the shift in demand. The shift in demand will both increase equilibrium price and increase quantity. And remember from last week, we also said it's important to at times look at demand or supply curves. Not just from the vertical axis to the right, but also from the horizontal axis upward. When we have a rightward shift in demand, let's say we are looking at quantity of 600,000. That's surgeon general's finding also means that at the margin at the 600,000 unit, consumers now value that unit higher at $40 a unit than they did before. The height of the demand curve D at 600,000. So at each quantity, the marginal value consumer associate with that quantity is higher when we have a rightward shift in demand. Let's now look with what happens when we have a shift in the supply curve, and that's figure 2.6b. Let's say the technology improves or input cost get lowered to producing DVDs. Either of those two factors would shift the supply curve rightward. At each price quantity supplied would be greater than it was before. So if we start with an equilibrium price of $30 per unit and 475,000 units sold. The quantity supplied at that same $30 price would now be 625,000 units. Quantities supplied along the s prime curve, well a $30 a unit be greater than quantity demanded a long the unchanged demand curve of 475,000 units. So this will result in a surplus, it will also result in downward pressure than price. We'll end up at an equilibrium pricing of $25 lower than before. And an equilibrium quantity greater than before due to this improvement in technology or lowering input costs, an equilibrium quantity of 550,000. And let's also look at supply curves from the bottom up as opposed to from the vertical axis rightward. What the improvement in technology or lowering input costs means, let's say if we pick a quantity and shoot that question up to the supply curve. A quantity of 475,000 with the improvement in technology at the margin the cost of producing that incremental unit has now become lower. It used to be $30, but now it's lower, now it's the height of the s prime curve at 475,000. So improvements in technology, decreases in input costs will at any quantity also decrease the opportunity cost of having that unit come on the market from the supply side. And before I switch to the next PowerPoint, the markets work this way. Let me just give you a few examples. It's been documented that Americans are getting fatter. What's driving that? The leading research indicates that the supply curve for fast food has been shifting rightward. It's become easier to produce potato chips. We used to eat potatoes in the form of baked potatoes 30-40 years ago. Now the most common way for the American consumer to eat them as potato chips. We've figured out a way to improve the technology and to lower input cost. As the price of fast food and it's prevalence that the convenience has increased, people buying more of it. To the detriment of their health of course, and to detriment of the average weight of consumers. Recently too there was some debate when it came time to extending student loans that are provided by the federal government. President Obama at the same time that he was chastising universities for raising tuition advocated very strongly for congress to extend the student loan program. What will the extension do to the price of college tuition? If you think about it, we have a situation like figure 2.6a. Extending the student loan program makes it easier for consumers to pursue college. It will end up shifting the demand curve for college to the right and it will end up driving up tuition. So contrary to the assertions that we need to lower the tuition costs. The actual actions of congress and President Obama through the student loan program were serving to drive up the price of college tuition. Just a couple more examples of let's say figure 2.6B. I had the chance a few years ago to travel to Mumbai, India. We were recruiting new students for the Simon School. And we were struck staying at a Marriott in Mumbai how expensive the rooms were, $350 a night. Similar to what we'd pay to go recruit students in New York City. When we dug through it, what we found out was that as the Indian economy has grown, annual rates of growth and GNP are 6 to 7%. There are 300 million people in this country of 1.1 billion that are now in the middle class, supply hasn't been keeping pace with demand. So the supply curve, when we look in India or in a place like Mumbai relative to New York City, instead of being S prime in figure 2.6b, it's actually closer to S. New York City as a city of about 15 million has the same number of hotel rooms as there are in all of India. So that leftward shift in India is what generates a higher, if anything equilibrium price. And lower quantity of hotel room sales in a place like India versus a place like New York City. And it turns out, Orlando has more total hotel rooms than all of India as of a recent accounting. Now let's cover the last item for the session. How can we use the supply demand framework and looking at equilibrium in reverse? We take an initial equilibrium pice P star and Q star, where the underlying demand and supply curve intersect. And let's we have a change of the equilibrium that change would be in one of four different possible quadrants. We could end up to the northeast of the original equilibrium, higher price and higher equilibrium quantity. We could end up to the southwest, lower equilibrium price and lower quantity. We could end up to the northwest of higher equilibrium price and lower equilibrium quantity. Or to the southeast, higher equilibrium quantity and lower equilibrium price. Let's say we observe a change into one of these quadrants. And how can the supply and demand framework then help us determine what's going on in this market? Let me give you two examples to see how this framework can be put to good use. If you've ever driven in Europe, one of the things you'll notice is how high the cost of gasoline is. To tank up a car is 2 to 3 times what it costs to tank up that same car in the United States. And when you look at per capita consumption, it's a lower equilibrium per capita than we find in the United States. So the gasoline equilibrium is to the northwest in Europe relative to the US equilibrium. Higher equilibrium price, low equilibrium quantity. What's driving that? Fundamentally while both supply and demand curves maybe changing across these two market settings of Europe and the US. The supply curve has to be doing more of the shifting, and specifically more of the shifting to the left. To end up producing a higher equilibrium price and a lower equilibrium quantity. And that gives us a clue that we need to look at one of the determinates behind the supply curve to explain why we've ended up with this market outcome in Europe. And for those folks who have investigated it, it turns out that the culprit is government taxes. They're much heavier on gasoline sales in Europe than they are in United States. Another example, health care cost in the United States. The equilibrium price and quantity have been moving to the northeast since the 1940s. The price has been increasing in real terms and the equilibrium quantity of health care services consumed has been increasing in the American public. So what that indicates is that we've been shifting to the northeast. So while both supply and demand curves may be shifting, the demand curve is doing relatively more work to push us into the northeast. And specifically it's been shifting rightward to induce that increase in equilibrium price and quantity. What could be at work behind the demand curve? As we'll see in later weeks, it's a much more complicated story. But part of it is income, rising income levels and health care being a normal good. The other key driver though is how we pay for healthcare costs. It used to come out of consumer's own pocket book. Nowadays, it largely comes from third party sources. Either insurance companies, benefits provided by companies or the government through programs like Medicare and Medicaid. And that induces the further important rightward shift in the demand curve driving up equilibrium price of healthcare and the quantity of healthcare consumed.
