Demand & Supply

DEMAND & SUPPLY SUPPLY 7 6 5 4 3 2 1 0 Price (p) Curves Price (p) DEMAND 0 1 2 3 4 Quantity (q) Own Price : Increase in own price decreases demand for that product, upward movement along D curve. Negative relationship between price and quantity demanded. # of buyers: Increase in number of buyers increases quantity demanded, shifts D curve to the right. Income: - Normal Goods: Increase in income causes increase in quantity demanded at each price, Curve shifts D curve to the right. (Ex: Clothing) Shifters - Inferior Goods: An increase in income shifts D curves to the left. (Ex: Bus rides) Increase Prices of related goods: (decrease) - Substitutes: Two goods are substitutes if in demand an increase in the price of one causes an or supply, increase in demand for the other, D curve shifts shifts right. (Ex: Pizza & Hamburger) demand or - Complements: Two goods are complements supply if an increase in the price of one causes a fall curve to in demand for the other, D curve shifts left. the right (Ex: Software & Computer) (left). Expectations: - If consumers expect prices to increase in the future they increase their demand today. D curve shifts right. - If consumers expect their income to rise in the future, they increase their spending today, demand increases, D shifts right. Movement Along Curve 7 6 5 4 3 2 1 0 0 1 2 3 4 Quantity (q) Own Price: Increase in own price increases supply of that product, upward movement along S curve. Positive relationship between price and quantity supplied. # of sellers: If number of sellers increases, the quantity supplied increases, S curve shifts right. Input Prices: A fall in input prices, decreasing the cost of production, increases the quantity supplied, shifts S curve to the right. Technology: A cost saving technological improvement, decreasing the cost of production, increases quantity supplied, S curve shifts right. (Similar to the decrease in input prices) Expectations: If suppliers expect prices to go up in the future, they decrease their supply today and save inventory to sell for a higher price in the future. S curve shifts left.