Supply and Demand
in Action
The Motion of a “Free Market”
Equilibrium occurs when Demand = Supply
T-Shirts
Price
-------------- E1
-------------
P1
S1
Q1
D1
Qty
Key Terms for S&D Unit
Goods which can “replace” other goods
SubstituteSoda & Water
Compliment-
Px good A
Goods which “go together”
Px good A
Gas & Cars
=> Demand good B
(are needed to use the other)
=> Demand good B
Changes in Demand
• When a Determinant of Demand (TIPSE) changes the entire
demand curve will shift left or right
•
A “shift” in a demand curve is called a change in demand
•
•
Right shift is an increase in demand
Left shift is a decrease in demand
Hybrid Cars
Price
D1
D2
Qty
Determinants of Demand
(TIPSE)
•
•
•
•
•
Tastes
Incomes
Population
Substitute/Complement Price
Expectations
If TIPSE changes =>
Draw a New D-Curve!
Example:
Event:
Change in Demand
The price of bottled water increases
Market for Soda
TIPSE
↓
Price
Price Substitute ↑
↓
Demand ↑
D1
D2
Qty
Worksheet Side #1
Changes in Supply
• When a Determinant of Supply (TIN) changes the entire
supply curve will shift left or right
•
A “shift” in a supply curve is called a change in supply
•
•
Right shift is an increase in supply
Left shift is a decrease in supply
T-Shirts
Price
S1
S2
Be careful!
a “down” shift in supply is
an increase in supply
Qty
Determinants of Supply
(TIN)
• Technology
• Input Prices
• Number of Sellers
If TIN changes =>
Draw a New S-Curve!
Example:
Event:
Change in Supply
IBM enters the Soda market
Market for Soda
Price
S1
S2
TIN
↓
# of Sellers ↑
↓
Supply ↑
Qty
Worksheet Side #2