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Demand and Supply
Factors that Change the Slope of a Demand Curve:
1. Availability of Substitutes. A demand curve for a good becomes flatter as the
number of substitutes for the good increases. For example, there were few substitutes
for White-Out when it was first introduced so its demand curve was steep. As other
liquid correcting fluids were introduced, the demand curve for White-Out became
flatter. While a change in the price of White-Out had a small affect on the quantity
demanded of White-Out when it was first introduced, it has a much larger affect on the
quantity demanded today because of the flatter demand curve. The availability of
substitutes is the main factor that affects the slope of a demand curve.
2. Length of the Adjustment Period. A demand curve becomes flatter as the
adjustment period increases. For example, a demand curve for water is likely to be
very steep in the short run. As the adjustment period increases, people become
adjusted to using less water (e.g. wash the car less) so the demand curve becomes
flatter. While a change in the price of water will have a small affect on the quantity
demanded of water in the short run, it will have a larger effect on the quantity
demanded in the long run because of the flatter demand curve.
3. Proportion of Budget that a Good Represents. A demand curve for a good
becomes flatter as the proportion of the budget that the good represents becomes
larger. For example, the demand curve for salt is very steep while the demand curve
for yachts is much flatter. While a change in the price of salt will have a small affect
on the quantity demanded of salt, a change in the price of yachts will have a larger
affect on the quantity demanded of yachts.
Elastic and Inelastic Demand Curves:
A flat demand curve is called relatively elastic while a steep demand curve is called
relatively inelastic.
P
P
Relatively Inelastic
Demand
D
Relatively Elastic
Demand
D
Q
Q
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Definition of Supply:
Supply is a relation that shows the quantities that sellers are willing to make available
for sale at alternative prices during a given time period, all other things remaining the
same.
How to Graph a Supply Schedule:
The procedure for graphing a supply schedule is the same as the procedure for
graphing a demand schedule. See the Practical #4A Help Sheet for instructions on
graphing.
Law of Supply:
The law of supply states that as the price of a good increases that sellers will usually
supply more of it and as the price of the good decreases that sellers will usually supply
less of it, all other things remaining the same.
Two Kinds of Changes Involving Supply:
1. Change in the Quantity Supplied. Movement along a supply curve is called a
change in the quantity supplied. A change in the quantity supplied of a good is due to
a change in the price of the good.
Change in Quantity Supplied
30
25
A
Price
20
15
B
10
5
0
0
2
4
6
Quantity
8
10
12
3
Let the price of the good fall from $20 to $10. This will cause the quantity supplied to
decrease from 8 units to 4 units or movement from point A to point B.
2. Change In Supply. Movement from one supply curve to another is called a
change in supply:
Price
Change in Supply
40
35
30
25
20
15
10
5
0
Initial Supply
New Supply
0
2
4
6
Quantity
8
10
12
An increase in supply is a shift of the supply curve to the right (e.g. from the initial
supply curve to the new supply curve). It means that sellers are willing to supply a
greater quantity of goods at every price level. For example, sellers were willing to
supply 2 units of goods at a price of $15 before the shift but are willing to supply 6
units of goods at $15 after the shift.
A decrease in supply is a shift of the supply curve to the left (e.g. from the new supply
curve to the initial supply curve). It means that sellers are willing to supply a smaller
quantity of goods at every price level. For example, sellers were willing to supply 8
units of goods at a price of $20 before the shift but are willing to supply 4 units of
goods at $20 after the shift.
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Factors that Cause a Change in Supply:
1. Resource Prices. An increase in resource prices will decrease supply while a
decrease in resource prices will increase supply. For example, a higher wage rate
causes the cost of production to increase. To get sellers to offer the same quantity of
goods after a wage increase as before, sellers must be given a higher price to
compensate them for the higher costs of production. A higher price for every level of
output means that the supply curve shifts to the left.
2. Prices of Related Goods1. An increase in the price of a related good will
decrease the supply of the other related good while a decrease in the price of a related
good will increase the supply of the other related good. Consider the tradeoff in the
production of corn and wheat. If the price of corn rises relative to the price of wheat, it
would probably be profitable to move resources from wheat production to corn
production. This will cause the supply curve of corn to shift to the right and the
supply curve of wheat to shift to the left.
3. Expectations About the Future. If sellers expect that resource prices or the
price of a related good will soon rise, supply will decrease. If sellers expect that
resource prices or the price of related goods will soon fall, supply will increase. For
example, a pending increase in the minimum wage laws will probably decrease
supply.
4. State of Technology. A decline in efficiency will decrease supply while an
improvement in efficiency will increase supply. For example, a new machine that
increases the technological efficiency of labor in production will probably lower
production cost and shift the supply curve to the right.
5. Number of Sellers in Market. A reduction in the number of sellers will decrease
supply while an increase in the number of sellers will increase supply. For example, if
there are three hot dog stands on the boardwalk and another stand opens, there is an
increase in the supply of hot dogs.
6. Weather. Bad weather will decrease supply while good weather will increase
supply. For example, a drought in the midwest during the summer will decrease the
supply of corn.
1
Two goods are called related if they use the same or a very similar set of inputs.