Determinants of Supply & Demand (AP Microeconomics)

Factors Affecting Demand  (T-B-P-I-E)

T: Tastes of Consumers

• Consumer preferences and tastes influence demand.

• If a product becomes more desirable, demand increases.

• Factors like advertising and health warnings can affect consumer preferences.

B: Buyers (Amount)

• More buyers lead to increased demand.

• Fewer buyers lead to decreased demand.

P: Price of Related Goods

• Substitutes: Goods that can be used in place of each other.

  • If the price of a substitute falls, demand for the original good decreases.

• Complements: Goods that are often consumed together.

  • If the price of a complement falls, demand for the original good increases.

I: Income of Consumers

• Normal Goods: As income rises, demand for these goods increases.

• Inferior Goods: As income rises, demand for these goods decreases.

E: Expectations of Future Prices

• If consumers expect prices to rise in the future, they may increase their current demand.

• If consumers expect prices to fall in the future, they may decrease their current demand.

Factors Affecting Supply (T-P-R-E-N-T)

T: Taxes and Subsidies

• Taxes: Higher taxes on production decrease supply, while lower taxes increase supply.

• Subsidies: Higher subsidies increase supply, while lower subsidies decrease supply.

P: Prices of Related Goods

• Substitute Goods: If the price of a substitute good increases, producers may switch to producing the substitute, decreasing the supply of the original good.

• Complementary Goods: If the price of a complementary good increases, the demand for the original good may decrease, leading to a decrease in its supply.

R: Resource Costs

• An increase in the cost of resources (like labor or raw materials) can decrease supply.

• A decrease in resource costs can increase supply.

E: Expectations of Future Prices

• If producers expect future prices to rise, they may decrease current supply to sell more at higher prices later.

• If producers expect future prices to fall, they may increase current supply to sell more before the price drops.

N: Number of Sellers

• More sellers in the market increase supply.

• Fewer sellers in the market decrease supply.

T: Technology

• Technological advancements can increase productivity, leading to increased supply.

• Technological breakdowns or setbacks can decrease supply.