2020 NOTE: Each of these pages is offered as a supporting, supplemental resource for material already taught in the class. Each of the steps and assignments posted to this page are optional, and not graded (unless you are using this page to make up a related assignment that was assigned BEFORE school was cancelled due to COVID-19.
DETERMINANTS OF SUPPLY AND DEMAND:
Which non-price factors can shift demand or supply in a market at every price point?
So far, we've looked at how price can affect the quantity demanded or quantity supplied for a given product in a given market. However, factors other than price can shift the entire demand curve or supply curve (or both) to the right or left, so that there is more or less demand for (or supply of) the product at every single price point.We call this shift Change in Demand, or Change in Supply. It's an entirely new demand curve, or supply curve (or both). |
REMINDER: On a supply and demand graph, Left Is Less and Right is Might ("alright, alright, alright . . .") Therefore, a shift of the entire demand curve to the right means there is MORE demand (or MORE supply) for the product at EVERY single price point in the market.
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Since we cannot directly represent these non-price factors on a supply and demand graph (because we only have two axes: Price and Quantity), we have to represent the change as a shift that occurs over time. The original demand curve (call it D1) or supply curve (call it S1) represents an earlier time. Then, something other than price changes the market in a way that is so significant that it creates a new demand or supply curve (call them D2 and S2), at a later time, with new quantities demanded or supplied at every single price along the curves.
1. CLARIFYING:
WHAT IS THE DIFFERENCE BETWEEN A CHANGE IN QUANTITY DEMANDED AND A CHANGE IN DEMAND?
Put as simply as possible, Change in Quantity Demanded (as well as Change in Quantity Supplied) is what you can plainly see on a standard supply and demand graph. It happens when the price for a product goes up or down. The demand curve (as well as the supply curve) shows you, as it is designed to do, the effect that this price change will have on quantity demanded or supplied. If that is not making sense or you would like a more thorough explanation, watch the Khan Academy video directly above. If you understand what was said clearly, glance at the supply example below and move on to Micro Core 2.2.
THE SAME DISTINCTION APPLIES TO CHANGE IN QUANTITY SUPPLIED
VERSUS CHANGE IN SUPPLY
(if you understood the explanation above with demand, you're set;
if not, check out the supply examples immediately below)
SECTION SUMMARY:
If PRICE is what has CHANGED,
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If ANYTHING ELSE (not price)
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2. SPECIFYING:
WHICH FACTORS CAN SHIFT DEMAND
AND WHICH CAN SHIFT SUPPLY?
DETERMINANTS OF DEMAND
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DETERMINANTS OF SUPPLY
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Please note that sources (professors, textbooks and so on) don't always agree on the number of factors (determinants) that can cause a change in demand or a change in supply. Our acronyms identify SEVEN, but you'll notice that the ACDC Economics video posted below focuses on FIVE of each. You'll also notice that different sources use different names for the shifters / determinants, but the fundamental idea for each is the same.
The 5 demand shifters explained in the video below:
1. Tastes / Preferences ( = basically the same in PIRATES) 2. Number of Consumers ( = Population change effect above) 3. Price of Related Goods ( = Related Goods) 4. Income ( = Income effect in PIRATES) 5. Expectations ( = basically the same) START WATCHING AT THE 3 MINUTE MARK (before that is just review of Micro Core 1):
The two demand shifters that we included in PIRATES but that were NOT mentioned in the video were Advertising and Seasonality.
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The 5 supply shifters explained in the video below:
1. Price of Resources ( = Cost of Inputs in SPICERS) 2. Number of Producers ( = Change in the number of Sellers) 3. Technology ( = Improvements in Technology) 4. Taxes & Subsidies (the order is flipped in SPICERS) 5. Expectations ( = Changes in future Expectations) START WATCHING AT THE 1 MINUTE MARK (before that is just review of Micro Core 1):
The two supply shifters we included in SPICERS that were NOT discussed in the video were PRODUCTIVITY (which many people would combine with Technology, but it is possible to increase productivity through organizational and method shifts that do not involve technology changes) and changes in government REGULATIONS. Given the fact that companies usually continue to produce products for national markets that add more regulations, a solid case can be made to dismiss it. Then you're left with SPICES. Nevertheless, some regulations may change supply in the short term (and perhaps in the long run, if costs become prohibitive or a product is banned in its current form).
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3. PRACTICING:
EFFECTS OF CHANGES IN SUPPLY AND DEMAND
What could knowledge of Change in Demand or Change in Supply be used for? If businesses understand these concepts, they can better predict what is likely to happen in different scenarios of change in their markets. If government leaders understand them, they can also better predict likely market effects of government interventions (such as changes in taxes, subsidies, regulations or the outright banning of a product or service), and weigh those costs against the benefits of making the intervention (perhaps because of market failure scenarios, or negative externalities). But that's jumping ahead to Micro Core 3, so let's focus on the business angle for now.
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WHAT HAPPENS TO EQUILIBRIUM PRICE AND EQUILIBRIUM QUANTITY
WHEN THE CURVES SHIFT?
This video does a good job of summarizing what we have learned so far about shifting demand and shifting supply due to non-price factors (determinants), such as the PIRATES and the SPICERS. If you are still fuzzy on the concept, watching this video and following along by sketching what he does can be very helpful.
The 8 graphs below do not need to be memorized, but represent conclusions you should be able to reach should you create a graph that does any of these things. NEED A MORE DETAILED EXPLANATION?
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4. PRACTICING:
GRAPHING CHANGES IN SUPPLY AND DEMAND
As you do these practice assignments, attempt to pull together the different applications from this entire page (and be aware that the question creators may attempt to trick you with some of these problems). For each market change that is explained, do the following on the practice sheet:
1. Figure out whether DEMAND or SUPPLY is affected (look at the PIRATES and SPICERS determinants and write down which one you think is in effect)
2. Figure out whether the change that is stated would INCREASE (either demand or supply) or DECREASE (either demand or supply) and draw that shift on the graph (label it with a directional arrow between the two curves, and write out the specific change - for example, "Decrease in demand")
3. Label the original Equilibrium Price (PE1) and Equilibrium Quantity (QE1) that existed BEFORE you shifted the curves, AND THEN label the new Equilibrium Price (PE2) and Equilibrium Quantity (QE2) where the shifted supply or demand curve meets the original supply or demand curve (that did NOT shift). Be sure to label what happens to Equilibrium Price and Equilibrium Quantity with UP or DOWN arrows.
1. Figure out whether DEMAND or SUPPLY is affected (look at the PIRATES and SPICERS determinants and write down which one you think is in effect)
2. Figure out whether the change that is stated would INCREASE (either demand or supply) or DECREASE (either demand or supply) and draw that shift on the graph (label it with a directional arrow between the two curves, and write out the specific change - for example, "Decrease in demand")
3. Label the original Equilibrium Price (PE1) and Equilibrium Quantity (QE1) that existed BEFORE you shifted the curves, AND THEN label the new Equilibrium Price (PE2) and Equilibrium Quantity (QE2) where the shifted supply or demand curve meets the original supply or demand curve (that did NOT shift). Be sure to label what happens to Equilibrium Price and Equilibrium Quantity with UP or DOWN arrows.
PRACTICE ASSIGNMENT: Graphing Shifts in Supply and Demand
lesson_4.2_handout_1_graphing_shifts_in_supply_and_demand.pdf | |
File Size: | 151 kb |
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ADDITIONAL PRACTICE: Shifting Supply and Demand Curves
shifting_demand_curves_practice.pdf | |
File Size: | 847 kb |
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shifting_supply_curves_practice.pdf | |
File Size: | 604 kb |
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REVIEW CONCEPTS AND VOCABULARY FROM THE MICROECONOMICS UNIT WITH QUIZLET
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REVIEW FOR THE MIDTERM WITH THE COMBINED INTRO TO ECON AND MICROECONOMICS QUIZLET STUDY SET |