Demand (Determinants, Graph, and Shifts)

Determinants of Demand (factors that shift demand)

• Income

• substitutes and complements

• tastes and preferences

• Expectations about the future

Graphing Demand - downward sloping curve (price must fall to restore equilibrium)

Demand Shifts - right=increase, left=decrease

Supply and Demand (Equilibrium)

Equilibrium Price - where quantity demanded = quantity supplied

Surplus - when supply>demand (price must fall to restore equilibrium)

Shortage - When demand > supply (price must rise to restore equilibrium)

Market Adjustments - If demand or supply shifts, equilibrium price and quantity will change accordingly

Price Controls

Price Ceilings (maximum price) —> causes shortages

• Ex. Rent control when government sets rent below equilibrium. It results in shortage of apartments

Price Floors (minimum price) —→ causes surplus

• Ex. government sets wages above equilibrium. Results in surplus of workers

Substitutions and income effects

Substitution Effect - when a good’s price increases, people switch to cheaper alternative

Income Effect - a price increase reduces purchasing power, so people buy less

Price Change NEVER shifts the demand curve (only causes movement)

Only the determinants of demand shift the entire curve

(right) = increase in demand. (Left) = decrease in demand