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Determinants of Demand

FACTORS THAT SHIFT THE DEMAND CURVE-Change in Demand

• Change in consumer tastes

• Change in the number of buyers

• Change in consumer incomes

• Change in the prices of complementary

and substitute goods

• Change in consumer expectations

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Change in Quantity Demanded

• Movement from one point to another on the demand curve.

• Cause is an increase or decrease in price.

• Demand does not change.

• Demand is the entire curve.

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Inverse Relationship

• Price is an obstacle-higher price less product purchased; lower price more product purchased. Sales represent this law of demand.

• Diminishing Marginal Utility- in a specific time-each buyer will derive less satisfaction from each successive unit.

• Income Effect-lower price increases purchasing power of buyer’s money-leads to more items purchased. Higher price opposite effect.

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Substitution Effect

• Suggests that at a lower price buyers have incentive to substitute what is now a less expensive product for a relatively more expensive one. It is a better deal.

• Example-decline in price of chicken will increase purchasing power of consumer incomes-therefore we will buy more chicken. The Income Effect.

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Changes in Supply and Quantity Supplied

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Determinants of Supply

FACTORS THAT SHIFT THE SUPPLY CURVE-Change in Supply

• Change in resource prices or input prices

• Change in technology

• Change in taxes and subsidies

• Change in the prices of other goods

• Change in producer expectations

• Change in the number of suppliers

• Any factor that increases the cost of production decreases supply.

• Any factor that decreases the cost of production

increases supply.

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Equilibrium

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Equilibrium• Price where intentions of buyers and sellers match.• Price where quantity demanded=quantity supplied.• Quantity-the quantity demanded=quantity

supplied at the equilibrium price in a competitive market.

• Equilibrium=no shortage or surplus• Competition among buyers and sellers drives price

to equilibrium price-it remains there unless it is disturbed by changes in demand or supply (shifts in curves)

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Surplus

• Look at text page 55• Quantity Supplied > Quantity Demanded at

any price above equilibrium• Surplus-the $4 price encourages sellers to

offer lots of corn but discourages many consumers from buying it.

• What does a surpluses do to price? Up or Down

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Shortage

• Any price below equilibrium is shortage• Quantity demanded>quantity supplied• The $2 price discourages sellers from

devoting resources to corn and encourages consumers to desire more than what is available.

• Competition among buyers does what to price? Up or down

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A Price Ceiling

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Price Ceiling

• Price ceiling-maximum legal price a seller may charge for a product/service. Any price above this is illegal. Any below is legal.

• Rationale-enables consumers to obtain some “essential” good or service that they could not afford at equilibrium.

• Prevents mkt adj where competition bids up price.

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A Price Floor

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Price Floor• Minimum price fixed by government.

• Price at or above floor is legal. Price below is not.

• Price floors above equilibrium-when mkt system has not provided sufficient income for certain group of resource suppliers or producers.

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Shifts in Demand and Supply

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Qualities That Affect Elasticity of Demand

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Tax Incidence and Elasticity of Demand

The more inelastic the

demand for a good, the

more the incidence of an

excise tax can be shifted

to the consumer.

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Elasticity Coefficients

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Summarizing Price Elasticity of Demand

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Tax Incidence and Elasticity of Demand