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AP Microeconomics Visual Visual 2.2National Council on Economic Education http://apeconomics.ncee.net
Determinants of Demand
FACTORS THAT SHIFT THE DEMAND CURVE-Change in Demand
• Change in consumer tastes
• Change in the number of buyers
• Change in consumer incomes
• Change in the prices of complementary
and substitute goods
• Change in consumer expectations
AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net
Change in Quantity Demanded
• Movement from one point to another on the demand curve.
• Cause is an increase or decrease in price.
• Demand does not change.
• Demand is the entire curve.
AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net
Inverse Relationship
• Price is an obstacle-higher price less product purchased; lower price more product purchased. Sales represent this law of demand.
• Diminishing Marginal Utility- in a specific time-each buyer will derive less satisfaction from each successive unit.
• Income Effect-lower price increases purchasing power of buyer’s money-leads to more items purchased. Higher price opposite effect.
AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net
Substitution Effect
• Suggests that at a lower price buyers have incentive to substitute what is now a less expensive product for a relatively more expensive one. It is a better deal.
• Example-decline in price of chicken will increase purchasing power of consumer incomes-therefore we will buy more chicken. The Income Effect.
AP Microeconomics Visual Visual 2.3National Council on Economic Education http://apeconomics.ncee.net
Changes in Supply and Quantity Supplied
AP Microeconomics Visual Visual 2.4National Council on Economic Education http://apeconomics.ncee.net
Determinants of Supply
FACTORS THAT SHIFT THE SUPPLY CURVE-Change in Supply
• Change in resource prices or input prices
• Change in technology
• Change in taxes and subsidies
• Change in the prices of other goods
• Change in producer expectations
• Change in the number of suppliers
• Any factor that increases the cost of production decreases supply.
• Any factor that decreases the cost of production
increases supply.
AP Microeconomics Visual Visual 2.5National Council on Economic Education http://apeconomics.ncee.net
Equilibrium
AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net
Equilibrium• Price where intentions of buyers and sellers match.• Price where quantity demanded=quantity supplied.• Quantity-the quantity demanded=quantity
supplied at the equilibrium price in a competitive market.
• Equilibrium=no shortage or surplus• Competition among buyers and sellers drives price
to equilibrium price-it remains there unless it is disturbed by changes in demand or supply (shifts in curves)
AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net
Surplus
• Look at text page 55• Quantity Supplied > Quantity Demanded at
any price above equilibrium• Surplus-the $4 price encourages sellers to
offer lots of corn but discourages many consumers from buying it.
• What does a surpluses do to price? Up or Down
AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net
Shortage
• Any price below equilibrium is shortage• Quantity demanded>quantity supplied• The $2 price discourages sellers from
devoting resources to corn and encourages consumers to desire more than what is available.
• Competition among buyers does what to price? Up or down
AP Microeconomics Visual 2.11National Council on Economic Education http://apeconomics.ncee.net
A Price Ceiling
AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net
Price Ceiling
• Price ceiling-maximum legal price a seller may charge for a product/service. Any price above this is illegal. Any below is legal.
• Rationale-enables consumers to obtain some “essential” good or service that they could not afford at equilibrium.
• Prevents mkt adj where competition bids up price.
AP Microeconomics Visual 2.12National Council on Economic Education http://apeconomics.ncee.net
A Price Floor
AP Microeconomics Visual National Council on Economic Education http://apeconomics.ncee.net
Price Floor• Minimum price fixed by government.
• Price at or above floor is legal. Price below is not.
• Price floors above equilibrium-when mkt system has not provided sufficient income for certain group of resource suppliers or producers.
AP Microeconomics Visual Visual 2.6National Council on Economic Education http://apeconomics.ncee.net
Shifts in Demand and Supply
AP Microeconomics Visual Visual 2.7National Council on Economic Education http://apeconomics.ncee.net
Qualities That Affect Elasticity of Demand
AP Microeconomics Visual 2.10National Council on Economic Education http://apeconomics.ncee.net
Tax Incidence and Elasticity of Demand
The more inelastic the
demand for a good, the
more the incidence of an
excise tax can be shifted
to the consumer.
AP Microeconomics Visual Visual 2.8National Council on Economic Education http://apeconomics.ncee.net
Elasticity Coefficients
AP Microeconomics Visual Visual 2.9National Council on Economic Education http://apeconomics.ncee.net
Summarizing Price Elasticity of Demand