CHANGE IN DEMANDCHANGE IN DEMAND

vsvs

CHANGE IN QUANTITY CHANGE IN QUANTITY DEMANDEDDEMANDED

Krugman Section 2, Module 5, 6

The Basic Determinants of DemandDeterminants of Demand are:

(M.E.R.I.T.)

1) consumer tastes and preferences

2) number of consumers in the market

3) consumers’ money incomes

4) prices of related goods

5) consumer expectations about future prices and incomes

1) Change in consumer tastesA favorable change in consumer tastes means that more of it will be demanded and shift the demand curve rightward.

Conversely, an unfavorable change in consumer tastes means that less will be demanded and shift the demand

curve left.

Changes may occur because:

*a new product comes to the market

*health concerns

*fads

2) Number of buyersAn increase in the number of consumers in a market means that more “stuff” will be demanded and shift the demand

curve rightward. Conversely, a decrease change in consumers in a market means that less “stuff” will be

demanded and shift the demand curve to the left.

Factors affecting numbers include:

*improvements in communication

*aging baby boomers

*increased life expectancy

3) Consumer IncomeFor most commodities, a rise in income causes an increase

in demand. Conversely, demand will decline as incomes fall.

Commodities whose demand varies directly with money income are called superior, or NORMAL GOODSNORMAL GOODS..

Similarly, rising incomes may cause demand for hamburger and charcoal grilles to decline as wealthier consumers

switch to T-bones and gas grilles. Goods whose demand varies inversely with money income are called INFERIOR INFERIOR

GOODSGOODS.

4) Prices of related goodsA change in the price of a related good may increase or

decrease the demand depending upon whether the related good is a substitute goodsubstitute good or a complementary goodcomplementary good.

*When two products are substitutes the price of one and the demand for the other move in the same direction.

*When two products are complements, the price of one good and the demand for the other good move in opposite

directions.

5) Expectations of the futureConsumer expectations of higher future prices may prompt them to buy now to “beat” the anticipated price rise, thus

increasing today’s demand.

Conversely, expectations of lower prices may delay purchases.

QUANTITYQUANTITY

PRICEPRICES S

E0 P0

Q0

P1

Q1

E1

DD0 0 DD1 1

P2

Q2

DD2 2

A change in the demand schedule or, graphically, a shift in the location of the demand curve is called a CHANGE IN CHANGE IN

DEMANDDEMAND. This is caused by a change in one or more of the determinents of demand.

QUANTITYQUANTITY

PP

RRII

CCEE

D (demand)D (demand)

$80

$70

$60

$50

$40

$30

$20

$10

0100 200 300 400 500 600

By contrast, a CHANGE IN QUANTITY DEMANDEDCHANGE IN QUANTITY DEMANDED designates the movement of one point to another--from one price quantity to another--on a fixed demand curve, resulting

from (I.e.) a change in priceprice.

0

D

Price of Ice-Cream Cones

Quantity of Ice-Cream Cones

A tax that raises the price of ice-cream cones

results in a movement along the demand curve.

A

B

8

1.00

$2.00

4

Changes in Quantity Demanded

CHANGE IN SUPPLYCHANGE IN SUPPLY

vsvs

CHANGE IN QUANTITY CHANGE IN QUANTITY SUPPLIEDSUPPLIED

The Determinants of SupplyDeterminants of Supply are:

(T.R.I.C.E.)

1) resource prices

2) technique of production

3) taxes and subsidies

4) prices of other goods

5) price expectations

6) number of sellers in the market.

1) Resource Prices

An increase in the price of resources used in production will increase production costs and squeeze profits. This

reduction in profits reduces the incentive for firms to supply output at each product price.

2) Technology

Improvements in technology enable firms to produce units of output with fewer resources. Since resources are costly, using fewer of them lowers production costs and increases

supply.

3) Taxes and subsidies

An increase in sales or property taxes will increase production costs and reduce supply.

4) Prices of Other Goods

Firms that produce one good can sometimes use their plant and equipment to produce alternative goods. Higher prices of these “other goods” can sometimes entice producers to switch production to them in order to make more profit.

5) Expectation of future

Expectations of future prices can affect the willingness of a producer to supply that product.

6) Number of sellers

The larger the number of sellers, the larger the supply. As more firms enter an industry, the curve moves to the right.

As firms leave an industry the curve shifts to the left.

QUANTITYQUANTITY

PP

RRII

CCEE

SS0 0

D D

E0 P0

Q0

P1

Q1

E1

SS11

P2

Q2

E1

SS11

A CHANGE IN SUPPLYCHANGE IN SUPPLY means a change in the entire schedule and a shift of the entire curve, which is caused by

a change in one or more of the determinants of supply.

QUANTITYQUANTITY

PP

RRII

CCEE

S (supply)S (supply)$80

$70

$60

$50

$40

$30

$20

$10

0 100 200 300 400 500 600

In contrast, a CHANGE IN QUANTITY SUPPLIEDCHANGE IN QUANTITY SUPPLIED is a movement from one point to another on a fixed supply

curve. The cause of which is a change in price price of a specific product.

1 5

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones0

S

1.00A

C$3.00 A rise in the price of

ice cream cones results in a

movement along the supply curve.

Change in Quantity Supplied

In 1993, Congress was expected to pass more stringent gun control laws. How would consumer expectations affect supply and demand?

If freezing weather were to destroy most of Florida’s citrus crop, how might consumers react? What would be their rationale?

The price of beef rises. How will this affect the price of chicken?

International trade agreements such as NAFTA and GATT have reduced foreign trade barriers on American farm products. How does this affect supply and demand? What determinant shifts the curve?

The local grocer lowers the price of grapes. Is this a change in demand or a change in quantity demanded?

The price of coffee decreases. What happens to the demand for cream? These two products are called _____________.

Farmers anticipate the price of corn will rise in a few months. What is likely to happen affecting supply and demand?

The price of gasoline falls and, as a result, you drive your car more. How will this affect demand for complementary goods? What kinds of goods are affected?