AP Microeconomics Visual Visual 2.2 National Council on Economic Education Determinants of Demand FACTORS THAT SHIFT THE DEMAND.

AP Microeconomics Visual Visual 2.2National Council on Economic Education http://apeconomics.ncee.net

Determinants of Demand

FACTORS THAT SHIFT THE DEMAND CURVE-Change 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

AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net

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.


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 time-each 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.


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.


Changes in Supply and Quantity Supplied


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.


Equilibrium


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)


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


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

AP Microeconomics Visual 2.11National Council on Economic Education http://apeconomics.ncee.net

A Price Ceiling


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.


A Price Floor


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.


Shifts in Demand and Supply


Qualities That Affect Elasticity of Demand


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.


Elasticity Coefficients


Summarizing Price Elasticity of Demand


Tax Incidence and Elasticity of Demand

AP Microeconomics Visual Visual 2.2 National Council on Economic Education Determinants of Demand FACTORS THAT SHIFT THE DEMAND.

Documents

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price of chicken

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