CHANGE IN DEMAND CHANGE IN DEMAND vs vs CHANGE IN QUANTITY CHANGE IN QUANTITY DEMANDED DEMANDED Krugman Section 2, Module 5, 6
Dec 26, 2015
CHANGE IN DEMANDCHANGE IN DEMAND
vsvs
CHANGE IN QUANTITY CHANGE IN QUANTITY DEMANDEDDEMANDED
Krugman Section 2, Module 5, 6
The Basic Determinants of DemandDeterminants of Demand are:
(M.E.R.I.T.)
1) consumer tastes and preferences
2) number of consumers in the market
3) consumers’ money incomes
4) prices of related goods
5) consumer expectations about future prices and incomes
1) Change in consumer tastesA favorable change in consumer tastes means that more of it will be demanded and shift the demand curve rightward.
Conversely, an unfavorable change in consumer tastes means that less will be demanded and shift the demand
curve left.
Changes may occur because:
*a new product comes to the market
*health concerns
*fads
2) Number of buyersAn increase in the number of consumers in a market means that more “stuff” will be demanded and shift the demand
curve rightward. Conversely, a decrease change in consumers in a market means that less “stuff” will be
demanded and shift the demand curve to the left.
Factors affecting numbers include:
*improvements in communication
*aging baby boomers
*increased life expectancy
3) Consumer IncomeFor most commodities, a rise in income causes an increase
in demand. Conversely, demand will decline as incomes fall.
Commodities whose demand varies directly with money income are called superior, or NORMAL GOODSNORMAL GOODS..
Similarly, rising incomes may cause demand for hamburger and charcoal grilles to decline as wealthier consumers
switch to T-bones and gas grilles. Goods whose demand varies inversely with money income are called INFERIOR INFERIOR
GOODSGOODS.
4) Prices of related goodsA change in the price of a related good may increase or
decrease the demand depending upon whether the related good is a substitute goodsubstitute good or a complementary goodcomplementary good.
*When two products are substitutes the price of one and the demand for the other move in the same direction.
*When two products are complements, the price of one good and the demand for the other good move in opposite
directions.
5) Expectations of the futureConsumer expectations of higher future prices may prompt them to buy now to “beat” the anticipated price rise, thus
increasing today’s demand.
Conversely, expectations of lower prices may delay purchases.
QUANTITYQUANTITY
PRICEPRICES S
E0 P0
Q0
P1
Q1
E1
DD0 0 DD1 1
P2
Q2
DD2 2
A change in the demand schedule or, graphically, a shift in the location of the demand curve is called a CHANGE IN CHANGE IN
DEMANDDEMAND. This is caused by a change in one or more of the determinents of demand.
QUANTITYQUANTITY
PP
RRII
CCEE
D (demand)D (demand)
$80
$70
$60
$50
$40
$30
$20
$10
0100 200 300 400 500 600
By contrast, a CHANGE IN QUANTITY DEMANDEDCHANGE IN QUANTITY DEMANDED designates the movement of one point to another--from one price quantity to another--on a fixed demand curve, resulting
from (I.e.) a change in priceprice.
0
D
Price of Ice-Cream Cones
Quantity of Ice-Cream Cones
A tax that raises the price of ice-cream cones
results in a movement along the demand curve.
A
B
8
1.00
$2.00
4
Changes in Quantity Demanded
CHANGE IN SUPPLYCHANGE IN SUPPLY
vsvs
CHANGE IN QUANTITY CHANGE IN QUANTITY SUPPLIEDSUPPLIED
The Determinants of SupplyDeterminants of Supply are:
(T.R.I.C.E.)
1) resource prices
2) technique of production
3) taxes and subsidies
4) prices of other goods
5) price expectations
6) number of sellers in the market.
1) Resource Prices
An increase in the price of resources used in production will increase production costs and squeeze profits. This
reduction in profits reduces the incentive for firms to supply output at each product price.
2) Technology
Improvements in technology enable firms to produce units of output with fewer resources. Since resources are costly, using fewer of them lowers production costs and increases
supply.
3) Taxes and subsidies
An increase in sales or property taxes will increase production costs and reduce supply.
4) Prices of Other Goods
Firms that produce one good can sometimes use their plant and equipment to produce alternative goods. Higher prices of these “other goods” can sometimes entice producers to switch production to them in order to make more profit.
5) Expectation of future
Expectations of future prices can affect the willingness of a producer to supply that product.
6) Number of sellers
The larger the number of sellers, the larger the supply. As more firms enter an industry, the curve moves to the right.
As firms leave an industry the curve shifts to the left.
QUANTITYQUANTITY
PP
RRII
CCEE
SS0 0
D D
E0 P0
Q0
P1
Q1
E1
SS11
P2
Q2
E1
SS11
A CHANGE IN SUPPLYCHANGE IN SUPPLY means a change in the entire schedule and a shift of the entire curve, which is caused by
a change in one or more of the determinants of supply.
QUANTITYQUANTITY
PP
RRII
CCEE
S (supply)S (supply)$80
$70
$60
$50
$40
$30
$20
$10
0 100 200 300 400 500 600
In contrast, a CHANGE IN QUANTITY SUPPLIEDCHANGE IN QUANTITY SUPPLIED is a movement from one point to another on a fixed supply
curve. The cause of which is a change in price price of a specific product.
1 5
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones0
S
1.00A
C$3.00 A rise in the price of
ice cream cones results in a
movement along the supply curve.
Change in Quantity Supplied
In 1993, Congress was expected to pass more stringent gun control laws. How would consumer expectations affect supply and demand?
If freezing weather were to destroy most of Florida’s citrus crop, how might consumers react? What would be their rationale?
The price of beef rises. How will this affect the price of chicken?
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The local grocer lowers the price of grapes. Is this a change in demand or a change in quantity demanded?
The price of coffee decreases. What happens to the demand for cream? These two products are called _____________.
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