ECON 101 - Chap. 3.2: Shifts in Demand and Supply "Ceteris Paribus"

Ceteris paribus assumption

• “everything else is held equal”

• Meaning factors that would actually shift or change the whole demand or supply schedule

Shifting the Demand Curve

• Demand curve shifts when there’s a change in external factor → ex. Income increases

  • When incomes increases, consumers will purchase a larger quantity which then shifts the demand curve to the right

  • A shift to the left will happen when consumers’ incomes have decreased and will buy less products

Factors that Affect Demand

• A shift in demand happens when other facts causes a different quantity to be demanded at every price

• Income

• Changing tastes or preferences of consumers

• Population or its composition

• Price of substitute or complement goods

  • Substitute: a good that can replace the one studied (something that has a lower price that can give the same need)

  • Complement: a good that must be consumed together (cheese and wine)

• Expectations about the future

• Price will not affect demand curve, only the equilibrium point.

How Factors Affect Demand (Increase Demand)

• Taste shift to greater popularity

• Population likely to buy rises

• Income rises (for normal good)

• Price of substitute rises

• Price of complements falls

• Future expectations encourage buying

How Factors Affect Demand (Decrease Demand)

• Taste shift to lesser popularity

• Population likely to buy drops

• Income drops (for a normal good)

• Price of substitute falls

• Price of complements rises

• Future expectations discourage buying

Types of Goods and Services

• Normal good: demand rises when income rises and vice versa

• Inferior good: demand falls when income rises and vice versa

• Substitute use in place of another good/service

• Complement often used together with the good; consumption of one tends to enhance the consumption of the other

Supply Curve

• shows minimum price a company will accept to produce an extra pound

• Reflection of increasing costs to produce extra units of output

Shifts in Supply Curve

• if cost of production increases, market price necessary for company to sell the same amount then price will increase (goes up to vertical axis)

• Same happens when cost of production decrease, supply curve shifts downward or to the right towards higher quantities

Factors that Shift Supply

• Natural conditions

• Input prices (increase in price of an essential tool or material that is used to produce the goods/services)

• Technology

• Government policies

How Factors Affect Supply (Increase)

• Favourable natural conditions for production

• A fall in input prices

• Improved tech

• Lower product taxes/less costly regulations

How Factors Affect Supply (Decrease)

• Poor natural conditions for production

• A rise in input prices

• A decline in tech (not common)

• Higher product taxes/more costly regulations