FACTORS:

NON-PRICE

DETERMINANTS OF DEMAND NON-PRICE DETERMINANTS OF SUPPLY

SHIFTS IN DEMAND

COMPLEMENTARY GOODS:
What will happen to the equilibrium price

and quantity of tennis balls if court rental fees decline?

When the price of a complement falls,

demand shifts right, causing equilibrium price and quantity to rise.

Price ($/ball)

1.40
1.00

D
D 0

40

58

Quantity (millions of ball/month)

SUBSTITUTE GOODS:
What will happen to the equilibrium price

and quantity of overnight letter delivery service as the price of internet access falls?
When the price of a substitute falls, demand

shifts left, causing equilibrium price and quantity to fall.

Price ($/letter)

P
P

D 0

Quantity (letters/month)

INCOME:
What will happen to the equilibrium price and quantity of ground meat with high-fat content as income increases? Ground meat with high fat content is an inferior good. For health reasons, most people prefer grades of meat with low fat content, and when they do buy high-fat meat, it is usually a sign of budgetary pressure. When people in this situation receive higher incomes, they usually switch quickly to leaner grades of meat.

Price ($/kilo)

P
P

D 0

Quantity (kilos of ground meat)

 An increase in income would

cause the demand for inferior goods to shift leftward and viceversa. The demand curves for normal goods shift rightward when income goes up and vice-versa.

 PREFERENCES/TASTES

Ex. The release of the Jurassic

Park film shifted the demand for toy dinosaurs sharply to the right. The demand for toys with horse and other present-day animals designs shifted sharply to the left.

EXPECTATIONS ABOUT THE FUTURE

Ex. Apple Macintosh

If users of Apple Macintosh hear a credible

rumor that cheaper or significantly upgraded model will be introduced next month, the demand for the current model is likely to shift leftward.

SHIFTS IN THE SUPPLY CURVE

What will happen to the equilibrium price and quantity of skateboards if the price fiberglass, a substance used for making skateboards, rises? When input prices rise, supply shifts left, causing equilibrium price to rise and equilibrium quantity to fall.

S S Price ($/skateboard)

80 60

D 0

800

1,000

Quantity (skateboards/month)

 The

effects of equilibrium price and quantity run in opposite direction whenever marginal cost of production decline.

Examples:

What will happen to the equilibrium price and quantity of new houses if the wage rate of carpenters fall?

When input prices fall, supply shifts right, causing equilibrium price to fall and equilibrium quantity to rise.

S S Price ($1,000s/house)

120 90

D 0

40

50

Quantity (skateboards/month)

What is the effect of technical change on the market for term-paper revisions? When a new technology reduces the cost of production, supply shifts right causing equilibrium price to fall and equilibrium quantity to rise.

Price ($/revision)

S 55

7.5 D 0 12 36

Quantity (millions of revisions/year)

SIMULTANEOUS SHIFTS IN DEMAND AND SUPPLY

When demand shifts left and supply shift right, equilibrium price falls, but equilibrium quantity may either rise or fall. Example:

Figure A
P Price ($/bag)

S S

P D D 0 Q Q

Quantity (millions of bags/month)

Figure B
P Price ($/bag)

S S

P D D 0 Q Q

Quantity (millions of bags/month)

The net effect of the two shifts depends on which of the individual effects is larger.

In figure A, the demand shift dominates, so the equilibrium quantity declines. In figure B, the supply shift dominates, so equilibrium quantity goes up.

SUMMARY OF CHANGES IN DEMAND, SUPPLY, & EQUILIBRIUM

CHANGE

IN DEMAND:

An increase in demand raises

both equilibrium price and equilibrium quantity. A decrease in demand reduces both equilibrium price and quantity.

 CHANGE

IN SUPPLY:

An increase in supply reduces

equilibrium price, but increases equilibrium quantity. An decrease in supply raises equilibrium price, but decreases equilibrium quantity.

SUPPLY INCREASE, DEMAND INCREASE

Price drop is even greater than

if there was only one change. Increase in supply > decrease in demand results in equilibrium quantity increase Increase in supply < decrease in demand results in equilibrium quantity decrease

SUPPLY DECREASE, DEMAND INCREASE

Price rise is even greater than if there wads only one change Decrease in supply is > increase in demand results in equilibrium quantity decrease Decrease in supply is < increase in demand results in equilibrium quantity increase

BOTH DEMAND AND SUPPLY INCREASE

Increase

in supply > increase in demand results in equilibrium price decrease Increase in supply < increase in demand results in equilibrium price increase Raise in equilibrium quantity is greater than caused by either change alone

BOTH DEMAND AND SUPPLY INCREASE

Decrease

in supply > increase in demand results in rise of equilibrium price Decrease in supply < increase in demand results in fall of equilibrium price Fall in equilibrium quantity is greater than caused by either change alone

SUMMARY OF CHANGES IN DEMAND, SUPPLY, & EQUILIBRIUM

CHANGE IN SUPPLY CHANGE IN DEMAND EFFECT ON EQUILIRBIUM PRICE EFFECT ON EQUILIBRIUM QUANTITY

1. INCREASE

DECREASE

DECREASE

UNCERTAIN

2. DECREASE

INCREASE

INCREASE

UNCERTAIN

3. INCREASE

INCREASE

UNCERTAIN

INCREASE

4. DECREASE

DECREASE

UNCERTAIN

DECREASE