CHANGE IN DEMAND vs CHANGE IN QUANTITY DEMANDED Krugman Section 2, Module 5, 6

Determinants of Demand The Basic Determinants 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 tastes A 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 buyers An 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 Income For most commodities, a rise in income causes an increase in demand. Conversely, demand will decline as incomes fall. NORMAL GOODS Commodities whose demand varies directly with money income are called superior, or NORMAL GOODS.. INFERIOR 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 GOODS.

4) Prices of related goods substitute goodcomplementary good A change in the price of a related good may increase or decrease the demand depending upon whether the related good is a substitute good or a complementary 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 future Consumer 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.

QUANTITY PRICE S E0E0 P0P0 Q0Q0 P1P1 Q1Q1 E1E1 D0D0D0D0 D1D1D1D1 P2P2 Q2Q2 D2D2D2D2 CHANGE IN DEMAND A change in the demand schedule or, graphically, a shift in the location of the demand curve is called a CHANGE IN DEMAND. This is caused by a change in one or more of the determinents of demand.

QUANTITY P PPRIRICECEPPRIRICECE D (demand) $80 $70 $60 $50 $40 $30 $20 $ CHANGE IN QUANTITY DEMANDED price By contrast, a CHANGE 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 price.

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 $ Changes in Quantity Demanded

CHANGE IN SUPPLY vs CHANGE IN QUANTITY SUPPLIED

Determinants of Supply The Determinants 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.

QUANTITY P PPRIRICECEPPRIRICECE S0S0S0S0 D E0E0 P0P0 Q0Q0 P1P1 Q1Q1 E1E1 S1S1S1S1 P2P2 Q2Q2 E1E1 S1S1S1S1 CHANGE IN SUPPLY A CHANGE 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.

QUANTITY P PPRIRICECEPPRIRICECE S (supply) $80 $70 $60 $50 $40 $30 $20 $ CHANGE IN QUANTITY SUPPLIED price In contrast, a CHANGE 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 of a specific product.

1 5 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A 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?

International trade agreements such as NAFTA and GATT have reduced foreign trade barriers on American farm products. How does this affect supply and demand? What determinant shifts the curve? 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 _____________. Farmers anticipate the price of corn will rise in a few months. What is likely to happen affecting supply and demand? The price of gasoline falls and, as a result, you drive your car more. How will this affect demand for complementary goods? What kinds of goods are affected?