Transcript Determinants of Demand

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
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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.
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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.
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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.
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Changes in Supply and Quantity Supplied
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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.
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Equilibrium
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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)
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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
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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
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A Price Ceiling
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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.
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A Price Floor
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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.
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Shifts in Demand and Supply
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Qualities That Affect Elasticity of
Demand
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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.
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Elasticity Coefficients
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Summarizing Price Elasticity of
Demand
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Tax Incidence and Elasticity of Demand
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