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Determinants of Demand FACTORS THAT SHIFT THE DEMAND CURVEChange in Demand • Change in consumer tastes • Change in the number of buyers • Change in consumer incomes • Change in the prices of complementary and substitute goods • Change in consumer expectations AP Microeconomics Visual National Council on Economic Education Visual 2.2 http://apeconomics.ncee.net Change in Quantity Demanded • Movement from one point to another on the demand curve. • Cause is an increase or decrease in price. • Demand does not change. • Demand is the entire curve. AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net Inverse Relationship • Price is an obstacle-higher price less product purchased; lower price more product purchased. Sales represent this law of demand. • Diminishing Marginal Utility- in a specific timeeach buyer will derive less satisfaction from each successive unit. • Income Effect-lower price increases purchasing power of buyer’s money-leads to more items purchased. Higher price opposite effect. AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net Substitution Effect • Suggests that at a lower price buyers have incentive to substitute what is now a less expensive product for a relatively more expensive one. It is a better deal. • Example-decline in price of chicken will increase purchasing power of consumer incomes-therefore we will buy more chicken. The Income Effect. AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net Changes in Supply and Quantity Supplied AP Microeconomics Visual National Council on Economic Education Visual 2.3 http://apeconomics.ncee.net Determinants of Supply FACTORS THAT SHIFT THE SUPPLY CURVE-Change in Supply • Change in resource prices or input prices • Change in technology • Change in taxes and subsidies • Change in the prices of other goods • Change in producer expectations • Change in the number of suppliers • Any factor that increases the cost of production decreases supply. • Any factor that decreases the cost of production increases supply. AP Microeconomics Visual National Council on Economic Education Visual 2.4 http://apeconomics.ncee.net Equilibrium AP Microeconomics Visual National Council on Economic Education Visual 2.5 http://apeconomics.ncee.net Equilibrium • Price where intentions of buyers and sellers match. • Price where quantity demanded=quantity supplied. • Quantity-the quantity demanded=quantity supplied at the equilibrium price in a competitive market. • Equilibrium=no shortage or surplus • Competition among buyers and sellers drives price to equilibrium price-it remains there unless it is disturbed by changes in demand or supply (shifts in curves) AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net Surplus • Look at text page 55 • Quantity Supplied > Quantity Demanded at any price above equilibrium • Surplus-the $4 price encourages sellers to offer lots of corn but discourages many consumers from buying it. • What does a surpluses do to price? Up or Down AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net Shortage • Any price below equilibrium is shortage • Quantity demanded>quantity supplied • The $2 price discourages sellers from devoting resources to corn and encourages consumers to desire more than what is available. • Competition among buyers does what to price? Up or down AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net A Price Ceiling AP Microeconomics Visual National Council on Economic Education 2.11 http://apeconomics.ncee.net Price Ceiling • Price ceiling-maximum legal price a seller may charge for a product/service. Any price above this is illegal. Any below is legal. • Rationale-enables consumers to obtain some “essential” good or service that they could not afford at equilibrium. • Prevents mkt adj where competition bids up price. AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net A Price Floor AP Microeconomics Visual National Council on Economic Education 2.12 http://apeconomics.ncee.net Price Floor • Minimum price fixed by government. • Price at or above floor is legal. Price below is not. • Price floors above equilibrium-when mkt system has not provided sufficient income for certain group of resource suppliers or producers. AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net Shifts in Demand and Supply AP Microeconomics Visual National Council on Economic Education Visual 2.6 http://apeconomics.ncee.net Qualities That Affect Elasticity of Demand AP Microeconomics Visual National Council on Economic Education Visual 2.7 http://apeconomics.ncee.net Tax Incidence and Elasticity of Demand The more inelastic the demand for a good, the more the incidence of an excise tax can be shifted to the consumer. AP Microeconomics Visual National Council on Economic Education 2.10 http://apeconomics.ncee.net Elasticity Coefficients AP Microeconomics Visual National Council on Economic Education Visual 2.8 http://apeconomics.ncee.net Summarizing Price Elasticity of Demand AP Microeconomics Visual National Council on Economic Education Visual 2.9 http://apeconomics.ncee.net Tax Incidence and Elasticity of Demand AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net
