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Unit 2: Consumer Choice, Demand, and Supply Lecture #2: Determinants of supply and demand… shifting the curves SUBSTITUTION EFFECT • At a lower price buyers have an incentive to substitute what is now a less expensive product for similar products that are now relatively more expensive. • The lower priced product is seen as a “better deal” • Why do you think products like Coke run specials? INCOME EFFECT • The impact a change in price of a product has on a consumer’s real income and consequently on the quantity demanded of that good The Market Never Stands Still • ENTIRE curves for both supply and demand can shift to the left or right • Changes that INCREASE supply and demand shift the curve to the right • Changes that DECREASE supply and demand shift the curve to the left CHANGES IN PRICE OF A PRODUCT NEVER SHIFT A CURVE Figure 3 Shifts in the Demand Curve Price of Ice-Cream Cone Increase in demand Decrease in demand Demand curve, D2 Demand curve, D1 Demand curve, D3 0 Quantity of Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning Consumer Behavior There are several factors that change overall consumer demand Determinants of Demand 1) Change in Consumer Taste and Preferences 2) Change in Consumer Income 3) Change in Consumer Expectations 4) Change in the Price of Related Goods… • SUBSTITUTE GOODS • COMPLEMENTARY GOODS 5) Change in the Number of Consumers Substitutes and Complements • Substitute Goods • A product that is used in place of another • Chick-fil-a has a huge sale on sandwiches…it impacts the demand for burgers • Complementary Goods • A product that is used together with another good. • If cost of peanut butter rises, demand for jelly would decrease and shift its curve to the left Price of IceCream Cone Consumer Income Normal Good $3.00 An increase in income... 2.50 Increase in demand 2.00 1.50 1.00 0.50 D1 0 1 2 3 4 5 6 7 8 9 10 11 12 D2 Quantity of Ice-Cream Cones Consumer Income Inferior Good Price of IceCream Cone $3.00 2.50 An increase in income... 2.00 Decrease in demand 1.50 1.00 0.50 D2 0 1 D1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones Producer Behavior There are several factors that change overall producer supply… DETERMINANTS OF SUPPLY • Resource Prices • Other goods prices • Taxes and subsidies • Technology • Expectations of Producers • Number of sellers (competition) Figure 7 Shifts in the Supply Curve Price of Ice-Cream Cone Supply curve, S3 Decrease in supply Supply curve, S1 Supply curve, S2 Increase in supply 0 Quantity of Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning
