Demand and Supply: Non-Price Determinants of Demand & Introduction to Supply
Non-Price Determinants of Demand Overview
Factors other than the price of the good itself that influence demand.
These factors cause a shift in the demand curve:
Increase in demand $\implies$ shift to the right.
Decrease in demand $\implies$ shift to the left.
This contrasts with a change in the price of the good itself, which causes a movement along the existing demand curve.
Key Non-Price Determinants of Demand
Number of Buyers
An increase in the number of potential buyers in a market increases demand, shifting the demand curve to the right.
A decrease in the number of potential buyers decreases demand, shifting the demand curve to the left.
Example: An increase in students returning to school in the fall leads to an increased demand for muffins. If demand increases by 5 muffins at each price point:
At a price of 0, demand increases from 24 to 29 muffins.
At a price of $1$, demand increases from 21 to 26 muffins.
At a price of $2$, demand increases from 18 to 23 muffins.
Buyers' Income
Normal Goods: Goods for which demand increases as income increases (e.g., higher income $\implies$ buy more muffins). Demand shifts right with positive income shock; shifts left with negative income shock.
Inferior Goods: Goods for which demand decreases as income increases (e.g., higher income $\implies$ buy less public transportation). Demand shifts left with positive income shock; shifts right with negative income shock.
Example: Public transportation is often considered an inferior good because as income increases, the demand for public transportation often decreases.
Prices of Related Goods
Substitutes: Goods that can be used in place of one another.
If the price of a substitute good increases, the demand for the own good increases (shifts right) because it becomes relatively cheaper.
If the price of a substitute good decreases, the demand for the own good decreases (shifts left) because it becomes relatively more expensive.
Examples:
If the price of cupcakes increases, the demand for muffins increases (muffins become relatively cheaper).
If the price of pizza increases, the demand for hamburgers increases (hamburgers become relatively cheaper).
Complements: Goods that are often consumed together.
If the price of a complementary good increases, the demand for the own good decreases (shifts left).
If the price of a complementary good decreases, the demand for the own good increases (shifts right).
Example: If the price of gasoline increases, the demand for large sports utility vehicles (SUVs) might decrease.
Tastes and Preferences
If society's preferences for a particular good increase, demand for that good increases (shifts right).
If preferences decrease, demand for that good decreases (shifts left).
Example: During the COVID-19 pandemic, increased time spent indoors led to a change in preferences, increasing demand for video game consoles, causing a shift to the right in their demand curve.
Expectations (Future Prices)
Buyers' expectations about future prices can affect current demand.
If buyers expect the price of a good to be higher in the future, current demand for that good may increase (shift right) as they buy now to avoid future higher prices.
If buyers expect a future negative event (e.g., recession, job loss), their demand for expensive goods or services in the present may decrease (shift left).
Movement Along vs. Shift of the Demand Curve Summarized
Movement along the demand curve: Occurs only when the price of the own good changes.
Decrease in price $\implies$ move down the curve, increasing quantity demanded.
Increase in price $\implies$ move up the curve, decreasing quantity demanded.
Shift of the demand curve: Occurs when any of the non-price determinants of demand change (number of buyers, income, prices of related goods, tastes, expectations).
If demand increases at any given price, the curve shifts right.
If demand decreases at any given price, the curve shifts left.
Application Example: The Market for Orange Juice
Consider an initial point A with price P1 and quantity Q1
Scenario A: The price of apple juice increases.
Apple juice is a related good (a substitute) for orange juice, not the own good.
This is a change in a non-price determinant, causing a shift in the demand curve.
Because apple juice's price increased, orange juice becomes relatively more appealing, leading to an increase in the demand for orange juice (shift to the right). At price P_1, the quantity demanded is now higher.
Scenario B: The price of orange juice falls.
This is a change in the price of the own good.
This causes movement along the demand curve.
A fall in the price from P1 to P2 leads to an increase in the quantity demanded from Q1 to Q2 (movement to the right along the curve), assuming all other factors remain constant.
Scenario C: A consumer's income falls (assuming orange juice is a normal good).
Income is a non-price determinant.
This causes a shift in the demand curve.
Since income falls and orange juice is a normal good, the demand for orange juice will decrease (shift to the left). At price P1, the quantity demanded is now lower, moving from Q1 to Q_2^{'}.
The Law of Supply
Definition: States that, all else being equal (ceteris paribus), as the price of a good increases, the quantity supplied of that good increases; and as the price decreases, the quantity supplied decreases.
Directional Relationship: Prices and quantity supplied move in the same direction.
Contrast with Demand: In demand, prices and quantity demanded move in opposite directions.
Supply Schedule and Supply Curve
Supply Schedule: A table that shows the relationship between different possible prices for a good and the quantity that sellers are willing and able to supply at each of those prices.
Example (Starbucks muffins):
Price 0 \implies Quantity Supplied 0
Price $1 \implies Quantity Supplied 3
Price $2 \implies Quantity Supplied 6
(This relationship continues as price increases).
Supply Curve: A graphical representation of the supply schedule.
Maps prices (y-axis) against quantities supplied (x-axis).
Upward sloping from left to right, reflecting the Law of Supply.
Example (Starbucks individual supply curve):
At a price of $0, Starbucks supplies 0 muffins.
At a price of $1, Starbucks supplies 3 muffins.
At a price of $2, Starbucks supplies 6 muffins.
Connecting these points creates Starbucks' individual supply curve.
Market Supply
Definition: The total quantity of a good that all sellers in a market are willing and able to supply at each given price.
Calculation: Determined by summing the individual quantities supplied by all firms at each specific price horizontally.
Example (Starbucks + Timmies muffins):
Starbucks Supply Schedule:
Price $0: 0
Price $1: 3
Price $2: 6
Timmy's Supply Schedule:
Price $0: 0
Price $1: 2
Price $2: 4
Market Supply Schedule (Starbucks + Timmies):
Price $0: 0 + 0 = 0
Price $1: 3 + 2 = 5
Price $2: 6 + 4 = 10
Market Supply Curve: Graphing the market supply schedule, showing the relationship between price and the total quantity supplied across the entire market. This curve is also upward sloping and combines the individual supply curves.