Download 330Handout Supply and+

Dr. Westerhold
Econ 330
Handout: Partial List of Factors Affecting 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 or Substitutes in Consumption (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 or Complements in Consumption (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 the firm’s costs, lower their profitability at the current 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 or Substitutes in Production(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. As the 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 (excise subsidy) or as a percentage
of production value (ad valorem subsidy). Subsidies are the opposite of a tax.
Subsidies lower the firm’s cost resulting in an increase in supply with subsidies.