Download Supply and Demand

Supply and Demand
in Action
The Motion of a “Free Market”
S1
-------------- E1
-------------
P1
Q1
D1
Qty
Key Terms for S&D Unit
Normal Good-
Income
=> Demand
Inferior Good-
Income
=> Demand
Goods which can “replace” other goods
SubstituteSoda & Water
Complement-
Px good A
Goods which “go together”
Px good A
Gas & Cars
=> Demand good B
(are needed to use the other)
=> Demand good B
There is no UP or DOWN!
DON’T SAY
UP or DOWN!
S1
-------------- E1
-------------
P1
Q1
D1
Qty
Supply & Demand increases or decreases
Curves shift to the RIGHT or LEFT
(increase)
(decrease)
Determinants of Demand & Supply
• Determinants of Demand cause a shift in a demand curve
Price
P2
P1
S1
------------------- E2
-------------- E1
------------------------------
– A shift is called a “change” in demand
– A right shift is an increase in demand,
– A left shift is a decrease in demand
Q1 Q2
D1
D2
Qty
• Determinants of Supply cause a shift in a supply curve
– A shift is called a “change” in supply
– A right shift is an increase in supply
– A left shift is a decrease in supply
2-Types of Demand Changes
• 1) Change in QUANTITY Demanded
•
•
move along existing curve (no shift!!)
Q1 to Q2 is increase quantity demanded
• 2) Change in Demand
•
Shift in Demand Curve
•
•
Right shift = increased
Q1 to Q2 is an increase in demand
(new demand curve)
Price
P1
------------------- E2
-------------- E1
------------------------------
P2
S1
Q1 Q2
D1
D2
Qty
6 Determinants of Demand
•A curve shift occurs whenever any Determinant of Demand changes
(TIPSEN)
S1
Tastes
P
------------------- E
P
-------------- E
Incomes
D
Price Complements
D
Q Q
Substitute Price
Qty
Expectations (future prices, income, etc…)
Number of Buyers
2
1
------------------------------
•
•
•
•
•
•
Price
2
1
1
2
1
2
Example:
Event:
Change in Demand
The price of blue jeans falls
Market for T-shirts
Price
------------------- E2
-------------- E1
-------------
P1
S1
------------------
P2
TIPSEN
↓
Price of complement falls
↓
Determinant of Demand ∆ed
Q1 Q2
↓
Increase in Demand &
increase in QTY supplied
D1
D2
Qty
2 Types of Supply Changes
1) Change in QUANTITY Supplied Price
move along existing curve (no shift!!)
Q1 to Q2 increase in quantity supplied
2) Change in Supply
•
Shift in supply curve (new supply curve)
•
Q1 to Q2 Increase in supply
P2
P1
S1
------------------- E2
-------------- E1
------------------------------
•
•
Q1 Q2
D1
D2
Qty
6 Determinants of Supply
• A shift occurs whenever any Determinant of Supply changes
Price
S1
(TINE) & (TP)
P1
-------------- E1
Technology
------------------- E
P
D
Input Prices (cost of an input like oil, steel or labor)
Q Q
Qty
Number of Sellers
Expectations (of future prices, etc…)
2
• Also: TP
• Taxes or Subsidies
• Price of other outputs (what else could you produce)
--------------------
•
•
•
•
S2
1
2
2
1
Practice Problems