1. Demand and Supply: an Introduction
CHAPTER 2
Demand and Supply: an Introduction
© 2012 McGraw-Hill Ryerson Limited

2. Increase in Demand more quantity is demanded at each price
LO5
Increase in Demand
Price
more quantity is demanded at each price
caused by a factor other than price D1 D2
$20
Quantity 14 20
© 2012 McGraw-Hill Ryerson Limited

3. Determinants of Demand
LO5
Determinants of Demand
1. Consumer preferences
If tastes change, demand changes
2. Consumer incomes
Normal Products: buy more when income rises, less when income falls
Inferior Products: buy more when income falls, less when income rises
© 2012 McGraw-Hill Ryerson Limited

4. Determinants of Demand
LO5
Determinants of Demand
3. Prices of Related Products:
Products are related if a change in the price of one product causes a change in demand for the other product
Two types of related products:
Substitutes
Complements
© 2012 McGraw-Hill Ryerson Limited

5. Determinants of Demand
LO5
Determinants of Demand
3. Prices of Related Products
Substitute Product
similar products that can be substituted for each other
increase in price of one product causes increased demand for the related product
© 2012 McGraw-Hill Ryerson Limited

6. Determinants of Demand
LO5
Determinants of Demand
3. Prices of Related Products
Complementary Product
tend to be bought together
Increase in price of one product causes a decrease in demand for related product
© 2012 McGraw-Hill Ryerson Limited

7. Determinants of Demand
LO5
Determinants of Demand
4. Expectations of future prices, income, availability
If prices or incomes are expected to rise, consumers buy more
If goods are expected to be scarcer, buy more now
5. Population size, income, and age distribution
Increases in population or incomes cause increase in demand
Changes in age distribution affect demand
© 2012 McGraw-Hill Ryerson Limited

8. Adjustment to an Increase in Demand
LO5
Adjustment to an Increase in Demand S
When demand increases, a shortage is created and price rises
$22
$20
shortage D2 D1 14 18 20
© 2012 McGraw-Hill Ryerson Limited

9. Adjustment to a Decrease in Demand
LO5
Adjustment to a Decrease in Demand S
When demand decreases, a surplus is created and price drops
$20
$18 D2 D1 8 10 14
© 2012 McGraw-Hill Ryerson Limited

10. Determinants of Supply
LO6
Determinants of Supply
Prices of Productive Resources
If the price of a productive resource increases, firms will supply less
2. Business Taxes
If business taxes rise, firms will supply less
3. Technology
An improvement in technology leads to a fall in the cost of production and an increase in supply
© 2012 McGraw-Hill Ryerson Limited

11. Determinants of Supply
LO6
Determinants of Supply
4. Prices of Substitutes in Production
An increase in the price of one product will cause a drop in the supply of products that are substitutes in production
5. Future Expectation of Suppliers
Lower expected future prices will lead to an increase in supply
6. Number of Suppliers
A decrease in the number of suppliers will reduce market supply
© 2012 McGraw-Hill Ryerson Limited

12. Effects of an Increase in Supply
LO6
Effects of an Increase in Supply S1 S2
$20
When supply increases, a surplus is created and price falls
$18 D 14 16 20
© 2012 McGraw-Hill Ryerson Limited

13. Effects of a Decrease In Supply
LO6
Effects of a Decrease In Supply S2 S1
When supply decreases, a shortage is created and price rises
$22
$20 D 12 14
© 2012 McGraw-Hill Ryerson Limited