Supply and Demand in Action The Motion of a “Free Market”

There is no UP or DOWN! Supply/Demand increases or decreases DON’T SAY UP OR DOWN! Supply/Demand increases or decreases The curve shifts to the LEFT or RIGHT

2-Types of Demand Changes 1) Change in QUANTITY Demanded Only price changes (move along existing curve) 2) Change in Demand Shift in Demand Curve (new demand curve needed) also called an increase/decrease in demand

Changes in Quantity Demanded Price Gov’t taxes ice cream cones $100 leads to B $2.00 movement along existing demand curve Price ONLY changes A 1.00 D 4 8 Quantity Ice Cream Cones

6 Determinants of Demand A curve shift occurs whenever any Determinant of Demand changes (TIPSEN) Tastes Incomes Price Complements Substitute Price Expectations (future prices, income, etc…) Number of Buyers

Example: Change in Demand Event: The price of blue jeans falls Market for T-shirts Price S1 P2 ------------------- E2 P1 -------------- E1 ------------------ ------------- D2 D1 Q1 Q2 Qty

2 Types of Supply Changes Change in QUANTITY Supplied Only price changes (move along existing curve) Change in Supply Shift in supply curve (new supply curve needed) Also called an increase/decrease in supply

Change in Quantity Supplied If only price changes It leads to movement along the existing supply curve .B .A

6 Determinants of Supply A shift occurs whenever any Determinant of Supply changes (TINE) & (TP) Technology Input Prices (cost of an input like oil, steel or labor) Number of Sellers Expectations (of future prices, etc…) Also: TP Taxes or Subsidies Price of other outputs (what else could you produce)

Example: Change in Supply Event: IBM enters the Soda market Market for Soda Price S1 S2 P1 -------------- E1 ------------------- P2 E2 ------------- D1 -------- Q1 Q2 Qty

Short Answer Problems See handout for 3 short answer problems Price S1 -------------- E1 ------------- D1 Q1 Qty