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Dr. Westerhold
Econ 232
Ch. 3 Handout: Partial List of Factors Shifting Demand and Supply
Demand: Factors that Shift the Demand Curve
“positive relationship” means that an increase in the factor will increase demand (shift to the right) or a decrease
in the factor will decrease demand (shift to the left)
“negative relationship” means that an increase in the factor will decrease demand (shift to the left) or a decrease
in the factor will increase demand (shift to the right)

Income or wealth (positive relationship with a normal good)
As income increases, increase the demand (buy more)
As income decreases, decrease the demand (buy less)

Income or wealth (negative relationship with an inferior good)
As income increases, decrease the demand (buy less)
As income decreases, increase the demand (buy more)

Population or Number of Buyers (positive relationship)
As population increases, greater demand for goods/services so increase demand
As population decreases, lower demand so decrease demand

Price of Substitutes (positive relationship)
If price of coke increases, people will decrease the quantity demanded of coke and increase the
demand for a substitute good--pepsi (buy more)
If price of coke decreases, people will increase the quantity demanded of coke and decrease the
demand for a substitute good--pepsi (buy less)

Price of a Complementary Good (negative relationship)
If soda and pretzels are complementary goods (consumed together) then an increase in the price
of soda reduces the quantity demanded for soda and therefore reduces the demand (decrease in
demand) for complementary products such as pretzels (since you consume them together you
buy more of both or less of both)

Tastes and Preferences/Information about a good (positive relationship)
Tastes and Preferences refer to subjective feelings a consumer may have about the desirability of
a good or service. Anything that improves your feeling about a good will increase demand and
anything that lowers your opinion of a good will decrease demand. This category includes such
things as quality, color, size, brand reputation, warranties, advertising, personal endorsements,
product function/attributes, etc.

Expectations about future prices (positive relationship)
If you expect prices to be higher in the future, you may increase the demand for the good/service
now. If you expect prices to be lower in the future, you may decrease the demand for the
good/service now and wait to purchase when the prices are lower.

Expectations about future income (positive relationship)
If you expect your income to increase in the near future, you typically increase your demand for
goods/services now. Start spending money as if you already have the higher income level.

*Interest rates (negative relationship)
As interest rates increase, borrowing becomes more expensive therefore consumers may
decrease their demand for goods/services.
As interest rates decrease, borrowing becomes less expensive, so increase demand.
Supply: Factors that Shift the Supply Curve
“positive relationship” means that an increase in the factor will increase supply (shift to the right) or a decrease in
the factor will decrease supply (shift to the left)
“negative relationship” means that an increase in the factor will decrease supply (shift to the left) or a decrease in
the factor will increase supply (shift to the right)

Cost of production (negative relationship)
Anything that increases costs to the firm will result in a decrease in supply.
An increase in the price of land (e.g. rent/lease/mortgage), labor (wages, benefits), and/or capital
(higher equipment costs/financing of equipment, materials) will increase their costs, lower their
profitability at the market price, and thus provide an incentive for the firm to reduce its supply
(produce less at a given price).

Technology (positive relationship)
We assume that the introduction of a new technology makes the firm operate more efficiently
and therefore they can produce more than before (or the same amount at a lower cost) and
therefore we observe an increase in supply (produce more)

*Interest rates (negative relationship)
As interest rates fall, firms have access to financial capital at a lower cost, thus their costs fall,
profitability increases at the market price and they increase supply (produce more).

Number of sellers (positive relationship)
As more firms enter the industry there is greater overall production. Therefore the market supply
is increased. As firms leave the industry, there is less produced overall and therefore market
supply is decreased.

Price of Related Goods (negative relationship)
If your firm is currently producing milk and cheese and the market price of cheese (price of a
related good) begins to increase, the firm may reduce production of milk (decrease the supply of
milk) and shift production into cheese production for higher profits. So price of cheese goes up,
supply of milk decreases.

Business taxes.
Taxes increase the firm’s costs so they will decrease supply with higher taxes and lower their costs
with lower taxes.

Subsidy (government gives money to the firm that is not repaid: gift).
Often subsidies are given as a per unit dollar value or as a percentage of production value.
Subsidies are the opposite of a tax. Subsidies lower the firm’s cost so they will increase supply
with subsidies.
*note that interest rates will shift both demand and supply simultaneously!