The Market Never Stands Still
RIPEN and GRENT
“Determinants of Supply and
Demand”
Please write down the three questions below. Use the chart on
the next slide to answer. Thanks.
1. According to the schedule and the graph, what is the
equilibrium price and quantity demanded in this
example?
2. Priced at $19, what is the surplus / shortage?
3. If there is a shortage of -800, then what was the price
of the DVDs?
SSEMI3 The student will explain how markets, prices,
and competition influence economic behavior.
a. Identify and illustrate on a graph factors that cause
changes in market supply and demand.
b. Explain and illustrate on a graph how price floors
create surpluses and price ceilings create shortages.
c. Define price elasticity of demand and supply.
Determinants of Demand
• Change in consumer income
• Change in tastes and preferences
• Change in the price of a substitute good
• Change in the price of a complementary good
• Change in consumers’ price expectations
• Change in number of consumers in the market
Shifts in Demand
4.00
3.50
Demand price
3.00
2.50
A
2.00
B
1.50
C
1.00
D
E
0.50
F
D1
0.00
10
20
30
40
50
60
D2
70
Quantity of pecans per day
80
Determinants of Demand (from Cannon)
(Things that shift the entire line!)
•R
•I
elated goods (Complements and Substitutes)
Complements: if price of complement increases, demand for the other good
decreases; if price of the complement decreases, demand for the other good
increases
Substitutes: if price of substitute increases, demand for other good increases; if
price of substitute decreases, demand for other good decreases
ncome – income increases, demand increases; income decreases, demand
decreases
references – preferences increase, demand increases; preferences decrease,
•P demand decreases
xpectations – expect higher prices in future, current demand increases
•E expect lower prices in future, current demand decreases
•N umber of buyers – # of buyers increase, demand increases; # of buyers
decrease, demand decreases
Determinants of Demand (from Cannon)
(Things that shift the entire line!)
•R
•I
•P
•E
•N
elated goods (Complements and Substitutes)
Complements: if price of complement increases, demand for the other good
decreases; if price of the complement decreases, demand for the other good
increases
Substitutes: if price of substitute increases, demand for other good increases; if
price of substitute decreases, demand for other good decreases
Related goods (Complements and
Substitutes)
Based on the law of demand, we know that
when the price of a good rises, consumers will
buy a smaller quantity of the good. Many
goods have what economists call a
complementary good. This is a good that is
consumed with the original good. For example,
peanut butter and jelly are often consumed
together so they are called complementary
goods. When the price of peanut butter rises,
consumer respond by buying a smaller
quantity of peanut butter. Since jelly is a
complementary good to peanut butter,
consumer buy less jelly at all prices, shifting
the demand curve for jelly to the left.
Determinants of Demand (from Cannon)
(Things that shift the entire line!)
•R
•I
elated goods (Complements and Substitutes)
Complements: if price of complement increases, demand for the other good
decreases; if price of the complement decreases, demand for the other good
increases
Substitutes: if price of substitute increases, demand for other good increases; if
price of substitute decreases, demand for other good decreases
ncome – income increases, demand increases; income decreases, demand
decreases
•P
•E
•N
Income – income increases, demand increases; income decreases, demand
decreases
When a large number of consumers in the market for a good experience a change
income, the entire demand curve in that market may shift. For example, if the United
States is experiencing a severe recession, a large number of consumers in the market for
automobiles will experience a decrease in income as companies reduce their work force.
This will cause the demand curve for automobiles to decrease, shifting it to the left. In
contrast, if the United States is experiencing a major period of economic growth,
employers will have to compete with one another for workers and wages of consumers
will rise. Therefore, the demand for automobiles will increase, shifting the demand to the
right.
Determinants of Demand (from Cannon)
(Things that shift the entire line!)
•R
•I
elated goods (Complements and Substitutes)
Complements: if price of complement increases, demand for the other good
decreases; if price of the complement decreases, demand for the other good
increases
Substitutes: if price of substitute increases, demand for other good increases; if
price of substitute decreases, demand for other good decreases
ncome – income increases, demand increases; income decreases, demand
decreases
references – preferences increase, demand increases; preferences decrease,
•P demand decreases
•E
•N
Preferences – preferences increase, demand increases; preferences decrease,
demand decreases
When a large number of consumers
experience a change in preference toward or
away from a good, the demand for the good
will change. For example, as more information
became available and marketing campaigns
targeted the obesity problem in the United
States, more and more consumers began to
reject high fat, high calorie foods. This change
caused a decrease in demand for many fast
food items, shifting the demand for certain
types of fast food to the left.
Determinants of Demand (from Cannon)
(Things that shift the entire line!)
•R
•I
elated goods (Complements and Substitutes)
Complements: if price of complement increases, demand for the other good
decreases; if price of the complement decreases, demand for the other good
increases
Substitutes: if price of substitute increases, demand for other good increases; if
price of substitute decreases, demand for other good decreases
ncome – income increases, demand increases; income decreases, demand
decreases
references – preferences increase, demand increases; preferences decrease,
•P demand decreases
xpectations – expect higher prices in future, current demand increases
•E expect lower prices in future, current demand decreases
•N
Expectations – expect higher prices in future, current demand
increases expect lower prices in future, current demand decreases
Sometimes, consumers predict that market
prices for are going to change in the
future. When consumers believe the price
for a good will go lower in the future and
they can delay their purchase until that
time, the demand for the good will
decrease now, shifting the demand curve
to the left. If they believe prices will go up
in the future, they will buy more of the
good now before the price increase occurs,
shifting the demand curve to the right. For
example, during the Great Recession of
2008-2009, house prices in many markets
around the United States fell drastically..
Consumers delayed their purchases
because of an expected decrease in prices.
Determinants of Demand (from Cannon)
(Things that shift the entire line!)
•R
•I
elated goods (Complements and Substitutes)
Complements: if price of complement increases, demand for the other good
decreases; if price of the complement decreases, demand for the other good
increases
Substitutes: if price of substitute increases, demand for other good increases; if
price of substitute decreases, demand for other good decreases
ncome – income increases, demand increases; income decreases, demand
decreases
references – preferences increase, demand increases; preferences decrease,
•P demand decreases
xpectations – expect higher prices in future, current demand increases
•E expect lower prices in future, current demand decreases
•N umber of buyers – # of buyers increase, demand increases; # of buyers
decrease, demand decreases
Number of buyers – # of buyers increase, demand increases; # of buyers
decrease, demand decreases
The demand for a particular good may increase
or decrease due to more or less people in the
market for the good. For example, before the
advent of ecommerce (using the world wide
web to buy and sell), most businesses sold
products to people who lived in their area of
the country or who ordered products from
their mail order catalogs. As people began to
use online shopping in greater numbers, many
businesses with little or no web presence
probably experienced a decline in consumers
of their products due to increased competition
from online businesses while businesses who
quickly and effectively adapted to the
ecommerce model probably saw an increase in
consumers of their products.
IRDL the Turtle!!!!
Increase Right, Decrease Left
Pecan Article
• http://online.wsj.com/news/articles/SB100014240527487040768045
76180774248237738
Pecan statements
1.
2.
3.
4.
5.
6.
7.
8.
Lunar New Year, Chinese love Pecans on New year
Corn syrup, used with pecans to make pecan pie, has risen in price
Price of walnuts increases
Household income increases in China
Price of pecans drops
US trade agreements allow for more pecans to be sold in more
countries
Pecan prices expected to be higher next year
Famous celebrities seen eating pecans at award ceremonies
Determinants of Supply
(from lesson)
• Change in the cost of productive resources
• Change in technology
• Change in profit opportunities of producing other
products
• Change in producers’ price expectations
• Change in number of sellers in the market
• Change in the government tax or subsidy
Determinants of Supply
(from Cannon)
•G
overnment decisions
•R
esource prices or availability -
TAXES – taxes increase, supply decreases; taxes decrease, supply increases
SUBSIDIES –subsidies increase, supply increases; subsidies decrease, supply
decreases
REGULATIONS – regulations increase, supply decreases; regulations decrease,
supply increases
•resource prices have an inverse relationship with supply
•resource availability has a direct relationship with supply
•E
xpectations – expect to sell more, supply increases; expect to sell less,
•N
umber of producers – direct relationship to supply
•T
echnology or training – direct relationship to supply
supply decreases; expect to sell at future higher prices, immediate supply
decreases.
Shifts in Supply
4
3.5
S1
Supply price
3
S2
2.5
A
2
B
1.5
C
1
D
E
0.5
F
0
10
20
30
40
50
60
Quantity of pecans per day
70
80
Pecan Statements (supply)
1.
2.
3.
4.
5.
6.
7.
8.
US farmers cutting down pecan groves to make way for more profitable crops
Price of pecan-shelling machines rises greatly
Price of pecans falls as consumers prefer hazelnuts*
Scientists successfully produce genetically modified pecan trees that can
produce twice as much as a normal tree
Engineers develop machines that “shake” the nuts out of trees
US gov’t provides subsidies to pecan growers
A flood destroys pecan groves in Georgia
Pecan producers expect lower pecan prices due to declining demand for nuts
Activity 6.3
&
Cannon’s Activity