Changes in Demand and Supply Part I

Introduction As we have seen, the demand and supply curves meet to determine an equilibrium price. DS

Introduction, cont. However, sometimes the demand curve will shift DS

Introduction, cont. However, sometimes the demand curve will shift to the right DSD1

Introduction, cont. However, sometimes the demand curve will shift to the right or to the left. DS D1

Introduction, cont. Other times the supply curve may shift DS

Introduction, cont. Other times the supply curve may shift to the right DS S1

Introduction, cont. Other times the supply curve may shift to the right or to the left. DS S1

Change in Demand A change of demand takes place when a new quantity is demanded at every price. An increase in demand means more is demanded at each price. –The curve shifts to the right. A decrease in demand means less is demanded at each price. –The curve shifts to the left.

New Demand Schedule (Increase in Demand) Price per CD Original Quantity of CDs Demanded New Quantity of CDs Demanded $ $ $ $ $ $ $ $ $

New Demand Curve (Increase in Demand)

Reasons for Change in Demand:

1. Consumer Income Peoples ability to buy changes due to more or less income. Examples include: –Actual pay increases or decreases. –Jobs created or eliminated. –Personal (non-business) tax increases or cuts. –Economic prosperity or recession.

2. Consumer Tastes Peoples desire to buy changes due to any number of reasons, including: –Advertising. –News reports. –Trends. –Seasons.

3. Prices of Related Products Peoples willingness to buy changes because of the new price of a related product. There are two types: Substitute (product that can be used in place of another) –If the price of a substitute (margarine) increases, the demand for the original product (butter) increases. –A decrease in price would decrease demand.

3. Price of Related Products, cont. Complement (one product that increases the use of another) –If the price of a complement (film) increases, the demand for the original product (cameras) decreases. –A decrease in price would increase demand.

4. Consumer Expectations Peoples willingness to buy changes because of expected future prices for that product. –If people expect prices to rise in the future, the demand for the product NOW increases. –If people expect prices to fall in the future, the demand for the product NOW decreases.

5. Population If the population in a market increases, there are more people to buy - demand increases. If the population in a market decreases, there are fewer people to buy - demand decreases.

NOTE: A CHANGE IN DEMAND IS NEVER IN RESPONSE TO A CHANGE IN PRICE OF THAT PRODUCT.