[MUSIC] Okay, so far, we've learned why demand curves slope downward and why supply curves slope upward. We've also demonstrated how the demand and supply curves can shift as factors like income and technology change. In this module, we want to begin by making an important distinction between these two possibilities. Possibility one, a change in demand reflected in a shift in the demand curve. And possibility two, a change in the quantity demanded as reflected in the movement along the demand curve. [SOUND] To draw this distinction, consider this figure. It illustrates a movement along the demand curve for one of the four main food groups for starving students, pizza. In the figure, we go from point A to point B, as the price of pizza falls from P1 to P2. And quantity demanded goes from Q1 to Q2. Note that this change in the quantity demanded is due simply to a price change. In contrast, this figure illustrates a change in demand due to a shift factor. In this case, an increase in demand for gluten free bread. Prior to the change in demand, consumers demand a quantity of Q1 at a price of P1 at point A. However, news from a scientific study comes out that gluten free bread actually helps reduce problems of indigestion, many gluten sensitive consumers. After this news breaks, the demand curve shifts outward from D1 to D2. In this case, consumers will now be willing to buy Q2 at the same price of P1. As to why this distinction between the change in demand and a change in the quantity demanded is so important, I'll talk more about this in a bit. For now, the key point is simply this. Distinguishing clearly between shifts in the demand curve versus movements along the demand curve helps us pinpoint the source of any given change in the market and intended prices. [MUSIC] Now, the last point I want to make about the market demand curve is that it is actually the horizontal sum of the individual demand curves. That's both a mouthful and a mindful. So let me repeat what I just said and highlight it as a key definition. The market demand curve is the horizontal sum of the individual demand curves. Now here's what this key definition means in the real world of business. Marketing executives cannot simply build an advertising strategy based on the total demand curve. Instead, they must carefully analyze the market data to better tailor their advertising messages to different market segments. Let's let our business toon team explain how this might work for a company operating nationally, but in many different regional markets. >> Our market segment analysis just came in, and it shows that demand for our product is very seasonal in certain colder parts of the overall market. >> I saw that, but what does that mean for our advertising strategy? >> It means that we cannot simply rely on a national advertising budget that provides the same message to all segments of the market. >> Of course, I see that now. We must adopt a more regional advertising strategy that takes into account seasonal variations in market segment demand. >> Yes, one size does not fit all. [MUSIC] >> Okay, we've given a fair amount of attention to the demand curve. So let's switch gears now and focus for a bit on the equally critical supply curve. Take a look at this supply schedule for the cornflakes market. Now, see if you can draw a nice supply curve from this data, either on paper or on your computer, and pause the presentation so you can do this. [MUSIC] Okay, does your cornflakes supply curve look like this? And here, be sure that you have labeled price on the vertical axis and quantity on the horizontal axis. And know that I'm bugging you about this because I found that students often forget to label not only their axes, but the demand and supply curves, as well. More often than not, that kind of sloppiness just leads to confusion and maybe a lower grade. So here's my key point, always, always, always label everything in your graphs. And you will be way ahead of the game. Anyway, in this figure, you can see that firms will produce no cornflakes at all if the price is only 1. If, however, the price is 5, firms will produce 20. And of course, from the data, you can see that the supply curve is sloping nicely upward as expected. In other words, the lower the price, the less firms will produce. And the higher the price, the more firms will produce. [MUSIC] Now just as with shifts of the demand curve, we have to look more closely at the other things that we're holding constant. So we can come to understand why the supply curve might shift as well. It might shift out, indicating more supply at any given price, or the supply curve might shift in, indicating less supply at any given price. So just one of the most important shift factors for the supply curve. One of these is the state of production technology itself. The more advanced the production, the more a society will be able to produce. Another shift factor includes the prices of the various factors of production, the land, labor, capital, energy, and other natural resources that might be needed to produce any given product. The key idea here is that any rise in factor prices, for example, wages, rents, or interest rates, make it more costly for industries to produce. [MUSIC] And still the third important shift factor, there is also government regulation. Here, a new government regulation to improve the environment or worker health and safety can often increase the costs of doing business, which is why one of the favorite expressions of economists is that there is no free lunch. Meaning that social goods, like cleaner air or safer work places, always come with some cost. It is precisely because of the importance such factors of production in determining things like the shape and slope and location of the supply curve in market space. That we will spend several lessons just studying how wages and rents and interest rates are set in the labor, land, and capital markets. And also study the role government regulation in shaping the business environment. For now, let's see if you are fully grasping the concept of supply curve shifts. So suppose, for example, that your company comes up with a new cost saving computerized process for making cornflakes. What do you think will happen to the supply curve in this figure? That's right, the supply curve will shift outwards, meaning that for a given price, say, at point B, supply increases. Now what about a rise in labor costs due to a tightening labor market? Which way will the supply curve shift now? That's right, with a rise in a key factor input price, like that for labor, the supply curve shifts inward, meaning less supply at any given price. Now, what about a new government regulation limiting corn use in cornflakes to only corn that is not genetically modified? What happens to the supply curve for cornflakes then? Again, this regulatory shock would result in an inward shift of the supply curve. Because corn cost will go up for cornflakes manufacturers. So do you see now how these supply curves work and how important they might be in determining the profitability of a business? [MUSIC] Okay, let's finish up this module with a moderated debate between our duelling politicians in Toon Town over the effects of government regulation on business. The idea as an economist is not to take any given side, but help identify the possible costs and competing benefits. >> Our next set of questions in this debate deal with the effects of government regulation on businesses. Where do you stand on the new clean air initiative, sir? >> I am all for cleaner air, but this initiative will result in an inward shift of the supply curve. This will raise the costs of key manufacturing industries vital to our economy. >> Sir, clean air is not free anymore. If we have to pay a bit more for the products we buy, that will be worth it to our society. >> But what about the impact of these newer regulations on the ability of our domestic industries to compete with foreign nations with more lax regulations? >> That is exactly the problem. All we will do is export our pollution to other countries. They will produce the products we once did and sell them to us. That means fewer jobs. >> I agree with my opponent. But the real solution is to require other countries that wish to sell us products to abide by the same tough environmental laws we do. >> Well, at least the voters will have a clear choice in this election. [MUSIC]
