1. Shifting D & S

2. Shifting D or S If anything other than price changes, we must shift one or both curves We call this shifting “increasing” or “decreasing” demand or supply Curves shift right or left, not up or down (At every price point, more/less quantity) “Demand” and “Supply” are whole curves; specific spots on the curves are “quantity supplied” or “quantity demanded” Q P D2D2 P1P1 Q1Q1 D1D1 P2P2 Q2Q2 S

3. Consumer Substitutes Consumer Substitute: product that could be used instead of our product Example: what happens to demand for apples when prices for pears increase? If the price of a substitute increases, demand increase; if price of substitute falls, demand falls Note the title, arrow, and subscripts to show the shift Quantity Price D2D2 D1D1 Effect of Pear Prices on Apples S

4. Complements Complement: product often purchased along with our product Demand changes when the price of complement products change Example: what happens to demand for Oreos when price of milk increase? If the price of a complement increases, demand decreases; if price of complement falls, demand increases Quantity Price D1D1 D2D2 Effect of Milk Prices on Oreos S

5. Household Income Demand changes when household income changes Example: what happens for demand for iPods when households earn more money? For “normal goods,” demand rises with income For “inferior goods,” demand falls with income What are examples of inferior goods? Quantity Price D2D2 D1D1 Effect of Rising Income on iPods S

6. Factor Costs Supply changes when factor costs change Most common reason why Supply shifts If factor costs increase, supply decreases; if factor costs decrease, supply increases Example: what happens to supply of lattes when coffee bean prices fall? Example: what happens to the supply of tennis shoes if employee wages rise? Effect of Coffee Bean Prices on Lattes Quantity Price S1S1 S2S2 D

7. Supplier Substitutes Supplier substitutes are what a supplier could produce with the same resources, instead of the original product If the price of a substitute increases, supply decreases; if the price of a substitute decreases, supply increases Example: for a supplier, what is a substitute for ice cream? Example: the price of hybrid cars rises. What happens to supply of traditional cars? Effect of Office Construction prices on home construction Quantity Price S2S2 S1S1 D

8. Government Action Government action (e.g., taxes, subsidies) affects supply Example: what happens for supply of photovoltaic cells when government subsidizes their production? Example: what happens to supply of air flights when government raises taxes on airport runway departures? Effect of subsidies on cell production Quantity Price S1S1 S2S2 D

9. Weather Weather can have a strong impact on both demand and supply. What happens to supply when a freeze strikes CA orange groves? What happens to demand for Gatorade in the summer?