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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

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

9. 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)

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

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