The demand for Folgers decreased I no longer want it at that price, so I take it out of my cart because the price of Maxwell House decreased. Complementary goods are goods where if you buy more of one you also buy more of the other one. Let's say that you want to eat hot dogs tonight and you go to your local grocery store and put a bag of buns in your cart and head down the aisle to the wieners. When you get to the wiener display you notice that their price has increased significantly so you decide not to eat hot dogs.
What are you going to do with the buns? You should put them back, but if you are like many people you'll put them in the wiener display and move on quickly. But the point is, you were going to buy the buns at their present price they were already in your cart , but when you learned the price of hot dogs increased your demand for buns decreased the demand curve shifted to the left - at the same prices the quantities demanded decreased. P of wieners D of buns.
Of course, if the price of one product decreases cheaper film developing , the demand for its complement film increases. P of one product D of its compliment. Independent goods are goods where if the price of one changes, it has no effect on the demand for to other one. For example, what happens to the demand for paper clips if the price of surfboards increases? P of one product D of its compliment P of one product D of its compliment.
I -- income. Income D for normal goods Income D for normal goods. So if incomes increase, the demand curve for restaurant meals, and cars, and boats, will shift to the right. At the same prices people will buy more. Income D for inferior goods Income D for inferior goods. The term "inferior good" does not mean they are of low quality.
There is an inverse relationship between income and demand. Examples of inferior goods might include used clothing, potatoes, rice, maybe generic foods. If you lose your job so your income decreases you may shop for clothes at the Salvation Army Thrift Store demand for used clothing increases. What is a normal good for one consumer might be an inferior good for another.
For example, if the income of one family increases they may buy a second small car a normal good , but for another family, an increase in income may mean that they don't buy a small car an inferior good anymore and they buy a mini van instead. Npot D Npot D. Often economists say that an increase in the "number of consumers" will increase demand. But, if K-Mart has a sale on Pepsi price of Pepsi decreases what happens to the number of consumers buying Pepsi? It will increase.
The law of demand says that if price goes down, quantity demanded goes up. So, if they have more customers because the price went down, what happens to demand? Nothing - price does not change the demand schedule. T -- tastes and preferences. Supply is more difficult for students to understand than demand. We are all consumers demanders , but few of us own a business suppliers.
So, remember to think of yourself as a business owner when we discuss supply. Supply is a schedule which shows the various quantities businesses are willing and able to offer for sale at various prices in a given time period, ceteris paribus.
Supply is NOT the quantity available for sale. This is the way the term is often used in the popular press. Supply is the whole schedule with many prices and many quantities. Just like with demand, there is a difference between a change in quantity supplied and a change in supply itself. So, if the price increases what happens to supply? Price does not change supply, it changes quantity supplied, because supply means the whole schedule with various prices and various quantities.
If we plot these points remember any point on a graph simply represents two numbers We get the graph below. If we assume there are quantities and prices in-between those on the schedule we get a supply curve. The law of supply states that there is a direct relationship between price and quantity supplied. In other words, when the price increases the quantity supplied also increases. This is represented by an upward sloping line from left to right.
Why is the law of supply true? Why is the supply curve upward sloping? Why will businesses supply more pizzas only id the price is higher?
I think it is just common sense. If you want the pizza places to work harder and longer and produce more pizzas, you have to pay them more, per pizza. But economists, as social science, want to explain common sense. We know businesses behave this way, but why? There are two explanations for the law of supply and both have to do with increasing costs.
Businesses require a higher price per pizza to produce more pizzas because they have higher costs per pizza. First, there are increasing costs because of the law of increasing costs. In a previous lecture we explained that the production possibilities curve is concave to the origin because of the law of increasing costs. Let's say a pizza place is just opening.
The owner figures that they will need five employees. After putting an ad in the paper there are twenty applicants. Five have had experience working in a pizza place before. They came to the interview clean and on time. The other fifteen had no work experience. Many came late. A few were caught steeling pepperoni on the way out. One spilled flour all over the floor. Which applicants will be hired? Of course it will be the five with experience and the other fifteen will be rejected because they would be too costly to hire.
NOW, if the pizza place wants to produce more pizzas they will need more workers. This means they will have to hire some of those who were rejected because they were more costly less experienced, etc. So, they will only hire the more costly employees if they can get a higher price to cover the higher costs. Second, there are increasing costs because some resources are fixed.
This should not make sense to you. Why would there be increasing costs if we use the same quantity of some resource? Well, let's say that the size of the kitchen and the number of ovens capital resources are fixed. This means that they don't change. Now, if we want to produce more pizzas you will have to cram more workers into the same size kitchen. As they bump into each other and wait for an oven to be free they still get paid, but the cost per pizza increases.
Therefore they will not produce more pizza unless they can get a higher price to cover these higher per unit costs.
So the supply curve should be upward sloping. Market supply is the horizontal summation of the individual supply curves. Instead of looking at how many pizzas one pizza place is willing and able to produce at different prices individual supply , we keep the prices the same and add the quantities of additional pizza places.
Prices stay the same, but quantities increase because there are more pizza suppliers. So the market supply of pizzas is further to the right horizontal than the individual pizza place supply curves.
The price of the product P. But there are other determinants of how much business supply besides the price. We call these the Non-Price determinants of Supply. Change in Quantity Supplied Qs. Change in Supply S. A change in supply is a shifting the supply curve because there is a new supply schedule. The supply curve either moves left or right horizontally since the prices stay the same and only the quantities change and quantity is on the horizontal axis.
Many students want to draw the arrows perpendicular to the supply curve. That could get confusing! A change in supply is caused by a change in the non-price determinants of supply. The amount of change in price and quantity, from one equilibrium to another, is dependent upon the elasticity of supply.
Imagine that supply is almost fixed over the time period being considered. That is, draw a more vertical supply curve for this shift in demand. When demand shifts from D1 to D2 on a more vertical supply curve inelastic supply almost all the adjustment to a new equilibrium takes place in the change in price. Two forces contribute to the size of a price change: the amount of the shift and the elasticity of demand or supply.
For example, a large shift of the supply curve can have a relatively small effect on price if the corresponding demand curve is elastic. That would show up in Example 1 above, if the demand curve is drawn flatter more elastic. In fact, the elasticity of demand and supply for many agricultural products are relatively small when compared with those of many industrial products.
This inelasticity of demand has led to problems of price instability in agriculture when either supply or demand shifts in the short-term. The two examples above focus on factors that shift supply or demand in the short-term. However, longer-term forces are also at work, which shift demand and supply over time.
One particular supply shifter is technology. A major effect of technology in agriculture has been to shift the supply curve rapidly outward by reducing the costs of production per unit of output. Technology has had a depressing effect on agricultural prices in the long-term since producers are able to produce more at a lower cost.
At the same time, both population and income have been advancing, which both tend to shift demand to the right. The net effect is complex, but overall the rapidly shifting supply curve coupled with a slow moving demand has contributed to low prices in agriculture compared to prices for industrial products. At various levels of a market, from farm gate to retail, unique supply and demand relationships are likely to exist.
However, prices at different market levels will bear some relationship to each other. For example, if hog prices decline, it can be expected that retail pork prices will decline as well. This price adjustment is more likely to happen in the long-term once all participants have had time to adjust their behaviour. The impact of population is also mediated by average salary and salary structure.
Salary structure affects prices, and prices affect supply and demand, which affect consumption. In a market-oriented economic system, the impact of population size on market demand affects supply and demand and prices. Current market demand reflects the effect of supply and demand in previous periods. There are a number of factors that influence market demand for a particularly good or service. The main determinants are:. A change in demand occurs when appetite for goods and services shifts, even though prices remain constant.
When the economy is flourishing and incomes are rising, consumers could feasibly purchase more of everything. Prices will remain the same, at least in the short-term, while the quantity sold increases. In contrast, demand could be expected to drop at every price during a recession.
When economic growth abates, jobs tend to get cut, incomes fall, and people get nervous, refraining from making discretionary expenses and only buying essentials. An increase and decrease in total market demand is illustrated in the demand curve , a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. Typically, the price will appear on the left vertical y-axis, while the quantity demanded is shown on the horizontal x-axis.
The supply and demand curves form an X on the graph, with supply pointing upward and demand pointing downward. Drawing straight lines from the intersection of these two curves to the x- and y-axes yields price and quantity levels based on current supply and demand. Consequently, a positive change in demand amid constant supply shifts the demand curve to the right, the result being an increase in price and quantity.
Alternatively, a negative change in demand shifts the curve left, leading price and quantity to both fall. It is important not to confuse change in demand with quantity demanded. Quantity demanded describes the total amount of goods or services demanded at any given point in time, depending on the price being charged for them in the marketplace.
Change in demand, on the other hand, focuses on all determinants of demand other than price changes. When an item becomes fashionable, perhaps due to smart advertising, consumers clamor to buy it. For instance, Apple Inc.
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