Download 2-6 Quantity Supplied / Quantity Demanded

CHANGE IN DEMAND
vs
CHANGE IN QUANTITY
DEMANDED
Krugman Section 2, Module 5, 6
The Basic Determinants of Demand are:
(M.E.R.I.T.)
1) consumer tastes and preferences
2) number of consumers in the market
3) consumers’ money incomes
4) prices of related goods
5) consumer expectations about future prices
and incomes
1) Change in consumer tastes
A favorable change in consumer tastes means that more of
it will be demanded and shift the demand curve rightward.
Conversely, an unfavorable change in consumer tastes
means that less will be demanded and shift the demand
curve left.
Changes may occur because:
*a new product comes to the market
*health concerns
*fads
2) Number of buyers
An increase in the number of consumers in a market means
that more “stuff” will be demanded and shift the demand
curve rightward. Conversely, a decrease change in
consumers in a market means that less “stuff” will be
demanded and shift the demand curve to the left.
Factors affecting numbers include:
*improvements in communication
*aging baby boomers
*increased life expectancy
3) Consumer Income
For most commodities, a rise in income causes an increase
in demand. Conversely, demand will decline as incomes fall.
Commodities whose demand varies directly with money
income are called superior, or NORMAL GOODS..
Similarly, rising incomes may cause demand for hamburger
and charcoal grilles to decline as wealthier consumers
switch to T-bones and gas grilles. Goods whose demand
varies inversely with money income are called INFERIOR
GOODS.
4) Prices of related goods
A change in the price of a related good may increase or
decrease the demand depending upon whether the related
good is a substitute good or a complementary good.
*When two products are substitutes the price of one and
the demand for the other move in the same direction.
*When two products are complements, the price of one
good and the demand for the other good move in opposite
directions.
5) Expectations of the future
Consumer expectations of higher future prices may prompt
them to buy now to “beat” the anticipated price rise, thus
increasing today’s demand.
Conversely, expectations of lower prices may delay
purchases.
A change in the demand schedule or, graphically, a shift in
the location of the demand curve is called a CHANGE IN
DEMAND. This is caused by a change in one or more of the
determinents of demand.
S
PRICE
P2
P0
P1
E0
E1
D2
D1
Q1 Q0
Q2
D0
QUANTITY
By contrast, a CHANGE IN QUANTITY DEMANDED
designates the movement of one point to another--from one
price quantity to another--on a fixed demand curve, resulting
from (I.e.) a change in price.
$80
P
R
I
C
E
$70
$60
$50
$40
$30
$20
D (demand)
$10
0
100 200 300 400 500 600
QUANTITY
Changes in Quantity Demanded
Price of IceCream
Cones
B
$2.00
A tax that raises the price
of ice-cream cones
results in a movement
along the demand curve.
A
1.00
D
0
4
8
Quantity of Ice-Cream Cones
CHANGE IN SUPPLY
vs
CHANGE IN QUANTITY
SUPPLIED
The Determinants of Supply are:
(T.R.I.C.E.)
1) resource prices
2) technique of production
3) taxes and subsidies
4) prices of other goods
5) price expectations
6) number of sellers in the market.
1) Resource Prices
An increase in the price of resources used in production will
increase production costs and squeeze profits. This
reduction in profits reduces the incentive for firms to supply
output at each product price.
2) Technology
Improvements in technology enable firms to produce units
of output with fewer resources. Since resources are costly,
using fewer of them lowers production costs and increases
supply.
3) Taxes and subsidies
An increase in sales or property taxes will increase
production costs and reduce supply.
4) Prices of Other Goods
Firms that produce one good can sometimes use their plant
and equipment to produce alternative goods. Higher prices
of these “other goods” can sometimes entice producers to
switch production to them in order to make more profit.
5) Expectation of future
Expectations of future prices can affect the willingness of a
producer to supply that product.
6) Number of sellers
The larger the number of sellers, the larger the supply. As
more firms enter an industry, the curve moves to the right.
As firms leave an industry the curve shifts to the left.
A CHANGE IN SUPPLY means a change in the entire
schedule and a shift of the entire curve, which is caused by
a change in one or more of the determinants of supply.
S1
P
P2
R
P0
I
P1
C
E
S0
E1
E0
E1
D
Q2 Q0 Q1
QUANTITY
S1
In contrast, a CHANGE IN QUANTITY SUPPLIED is a
movement from one point to another on a fixed supply
curve. The cause of which is a change in price of a specific
product.
S (supply)
$80
P
R
I
C
E
$70
$60
$50
$40
$30
$20
$10
0
100 200 300 400 500 600
QUANTITY
Change in Quantity Supplied
Price of IceCream Cone
S
C
$3.00
A rise in the price of
ice cream cones
results in a
movement along
the supply curve.
A
1.00
0
1
5
Quantity of
Ice-Cream
Cones
In 1993, Congress was expected to pass more stringent gun
control laws. How would consumer expectations affect
supply and demand?
If freezing weather were to destroy most of Florida’s citrus
crop, how might consumers react? What would be their
rationale?
The price of beef rises. How will this affect the price of
chicken?
International trade agreements such as NAFTA and GATT
have reduced foreign trade barriers on American farm
products. How does this affect supply and demand? What
determinant shifts the curve?
The local grocer lowers the price of grapes. Is this a
change in demand or a change in quantity demanded?
The price of coffee decreases. What happens to the
demand for cream? These two products are called
_____________.
Farmers anticipate the price of corn will rise in a few
months. What is likely to happen affecting supply and
demand?
The price of gasoline falls and, as a result, you drive your
car more. How will this affect demand for complementary
goods? What kinds of goods are affected?