Supply and Demandin Action

The Motion of a “Free Market”

Price

Qty

D1

S1

-------------Q1

E1P1 --------------

T-Shirts

Equilibrium occurs when Demand = Supply

Key Terms for S&D Unit

Goods which can “replace” other goods

Px good A => Demand good B

Goods which “go together” (are needed to use the other)

Px good A => Demand good B

Gas & Cars

Soda & Water

Substitute-

Compliment-

Changes in Demand

• When a Determinant of Demand (TIPSE) changes the entire demand curve will shift left or right

• A “shift” in a demand curve is called a change in demand• Right shift is an increase in demand• Left shift is a decrease in demand

Price

Qty

Hybrid Cars

D1D2

Determinants of Demand

(TIPSE)• Tastes• Incomes• Population• Substitute/Complement Price• Expectations

If TIPSE changes =>Draw a New D-Curve!

Example: Change in Demand

Event: The price of bottled water increases

Price

Qty

Market for Soda

D1D2

TIPSE ↓Price Substitute ↑

↓ Demand ↑

Worksheet Side #1

Changes in Supply

• When a Determinant of Supply (TIN) changes the entire supply curve will shift left or right

• A “shift” in a supply curve is called a change in supply• Right shift is an increase in supply• Left shift is a decrease in supply

Price

Qty

S1

S2

T-Shirts

Be careful!a “down” shift in supply is

an increase in supply

Determinants of Supply

(TIN)• Technology• Input Prices• Number of Sellers

If TIN changes =>Draw a New S-Curve!

Example: Change in SupplyEvent: IBM enters the Soda market

Price

Qty

S1

S2

Market for Soda

TIN ↓# of Sellers ↑

↓ Supply ↑

Worksheet Side #2