Two goods are complements if an increase in the price of one causes a fall in demand for the other.
Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.
Other examples: college tuition and textbooks, bagels and cream cheese, eggs and bacon
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Demand Curve Shifters: Tastes
THE MARKET FORCES OF SUPPLY AND DEMAND
Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.
Example: The Atkins diet became popular in the ’90s, caused an increase in demand for eggs, shifted the egg demand curve to the right.
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Demand Curve Shifters: Expectations
THE MARKET FORCES OF SUPPLY AND DEMAND
Expectations affect consumers’ buying decisions.
Examples:
If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now.
If the economy sours and people worry about their future job security, demand for new autos may fall now.
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Summary: Variables That Influence Buyers
THE MARKET FORCES OF SUPPLY AND DEMAND
Variable A change in this variable…
Price …causes a movement along the D curve
# of buyers …shifts the D curve
Income …shifts the D curve
Price of related goods …shifts the D curve
Tastes …shifts the D curve
Expectations …shifts the D curve
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A C T I V E L E A R N I N G 1Demand Curve
A. The price of iPods falls
B. The price of music downloads falls
C. The price of CDs falls
Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why?
The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price.
Suppose Starbucks and Jitters are the only two sellers in this market. (Qs = quantity supplied)
18
15
12
9
6
3
0
Starbucks
12
10
8
6
4
2
0
Jitters
+
+
+
+
=
=
=
=
30
25
20
15
+
=
10
+
=
5
+
=
0
Market Qs
$0.00
6.00
5.00
4.00
3.00
2.00
1.00
Price
0
THE MARKET FORCES OF SUPPLY AND DEMAND
P
Q
The Market Supply Curve
P
QS (Market)
$0.00
0
1.00
5
2.00
10
3.00
15
4.00
20
5.00
25
6.00
30
0
Supply Curve Shifters
THE MARKET FORCES OF SUPPLY AND DEMAND
The supply curve shows how price affects quantity supplied, other things being equal.
These “other things” are non-price determinants of supply.
Changes in them shift the S curve…
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Supply Curve Shifters: Input Prices
THE MARKET FORCES OF SUPPLY AND DEMAND
Examples of input prices: wages, prices of raw materials.
A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right.
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THE MARKET FORCES OF SUPPLY AND DEMAND
P
Q
Suppose the price of milk falls.
At each price, the quantity of Lattes supplied will increase (by 5 in this example).
Supply Curve Shifters: Input Prices
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Supply Curve Shifters: Technology
THE MARKET FORCES OF SUPPLY AND DEMAND
Technology determines how much inputs are required to produce a unit of output.
A cost-saving technological improvement has the same effect as a fall in input prices, shifts S curve to the right.
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Supply Curve Shifters: # of Sellers
THE MARKET FORCES OF SUPPLY AND DEMAND
An increase in the number of sellers increases the quantity supplied at each price,
shifts S curve to the right.
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Supply Curve Shifters: Expectations
THE MARKET FORCES OF SUPPLY AND DEMAND
Example:
Events in the Middle East lead to expectations of higher oil prices.
In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher price.
S curve shifts left.
In general, sellers may adjust supply* when their expectations of future prices change. (*If good not perishable)
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Summary: Variables that Influence Sellers
THE MARKET FORCES OF SUPPLY AND DEMAND
Variable A change in this variable…
Price …causes a movement along the S curve
Input Prices …shifts the S curve
Technology …shifts the S curve
# of Sellers …shifts the S curve
Expectations …shifts the S curve
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A C T I V E L E A R N I N G 2Supply Curve
Draw a supply curve for tax return preparation software. What happens to it in each of the following scenarios?
A. Retailers cut the price of the software.
B. A technological advance allows the software to be produced at lower cost.
C. Professional tax return preparers raise the price of the services they provide.
A C T I V E L E A R N I N G 2A. Fall in price of tax return software
S curve does not shift.
Move down along the curve to a lower P and lower Q.
Price of tax return software
Quantity of tax return software
S1
P1
Q1
Q2
P2
A C T I V E L E A R N I N G 2B. Fall in cost of producing the software
S curve shifts to the right:
at each price, Q increases.
Price of tax return software
Quantity of tax return software
S1
P1
Q1
S2
Q2
A C T I V E L E A R N I N G 3C. Professional preparers raise their price
This shifts the demand curve for tax preparation software, not the supply curve.
Effect on Q is ambiguous: The fall in demand reduces Q, the increase in supply increases Q.
CONCLUSION: How Prices Allocate Resources
THE MARKET FORCES OF SUPPLY AND DEMAND
One of the Ten Principles from Chapter 1: Markets are usually a good way to organize economic activity.
In market economies, prices adjust to balance supply and demand. These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources.
CHAPTER SUMMARY
A competitive market has many buyers and sellers, each of whom has little or no influence on the market price.
Economists use the supply and demand model to analyze competitive markets.
The downward-sloping demand curve reflects the Law of Demand, which states that the quantity buyers demand of a good depends negatively on the good’s price.
CHAPTER SUMMARY
Besides price, demand depends on buyers’ incomes, tastes, expectations, the prices of substitutes and complements, and number of buyers. If one of these factors changes, the D curve shifts.
The upward-sloping supply curve reflects the Law of Supply, which states that the quantity sellers supply depends positively on the good’s price.
Other determinants of supply include input prices, technology, expectations, and the # of sellers. Changes in these factors shift the S curve.
CHAPTER SUMMARY
The intersection of S and D curves determines the market equilibrium. At the equilibrium price, quantity supplied equals quantity demanded.
If the market price is above equilibrium, a surplus results, which causes the price to fall. If the market price is below equilibrium, a shortage results, causing the price to rise.
CHAPTER SUMMARY
We can use the supply-demand diagram to analyze the effects of any event on a market: First, determine whether the event shifts one or both curves. Second, determine the direction of the shifts. Third, compare the new equilibrium to the initial one.
In market economies, prices are the signals that guide economic decisions and allocate scarce resources.
