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SHIFTS IN DEMAND
COMPLEMENTARY GOODS:
What will happen to the equilibrium price
Price ($/ball)
1.40
1.00
D
D 0
40
58
SUBSTITUTE GOODS:
What will happen to the equilibrium price
and quantity of overnight letter delivery service as the price of internet access falls?
When the price of a substitute falls, demand
Price ($/letter)
P
P
D 0
Quantity (letters/month)
INCOME:
What will happen to the equilibrium price and quantity of ground meat with high-fat content as income increases? Ground meat with high fat content is an inferior good. For health reasons, most people prefer grades of meat with low fat content, and when they do buy high-fat meat, it is usually a sign of budgetary pressure. When people in this situation receive higher incomes, they usually switch quickly to leaner grades of meat.
Price ($/kilo)
P
P
D 0
cause the demand for inferior goods to shift leftward and viceversa. The demand curves for normal goods shift rightward when income goes up and vice-versa.
PREFERENCES/TASTES
Park film shifted the demand for toy dinosaurs sharply to the right. The demand for toys with horse and other present-day animals designs shifted sharply to the left.
rumor that cheaper or significantly upgraded model will be introduced next month, the demand for the current model is likely to shift leftward.
What will happen to the equilibrium price and quantity of skateboards if the price fiberglass, a substance used for making skateboards, rises? When input prices rise, supply shifts left, causing equilibrium price to rise and equilibrium quantity to fall.
S S Price ($/skateboard)
80 60
D 0
800
1,000
Quantity (skateboards/month)
The
effects of equilibrium price and quantity run in opposite direction whenever marginal cost of production decline.
Examples:
What will happen to the equilibrium price and quantity of new houses if the wage rate of carpenters fall?
When input prices fall, supply shifts right, causing equilibrium price to fall and equilibrium quantity to rise.
S S Price ($1,000s/house)
120 90
D 0
40
50
Quantity (skateboards/month)
What is the effect of technical change on the market for term-paper revisions? When a new technology reduces the cost of production, supply shifts right causing equilibrium price to fall and equilibrium quantity to rise.
Price ($/revision)
S 55
7.5 D 0 12 36
Figure A
P Price ($/bag)
S S
P D D 0 Q Q
Figure B
P Price ($/bag)
S S
P D D 0 Q Q
The net effect of the two shifts depends on which of the individual effects is larger.
In figure A, the demand shift dominates, so the equilibrium quantity declines. In figure B, the supply shift dominates, so equilibrium quantity goes up.
IN DEMAND:
both equilibrium price and equilibrium quantity. A decrease in demand reduces both equilibrium price and quantity.
CHANGE
IN SUPPLY:
equilibrium price, but increases equilibrium quantity. An decrease in supply raises equilibrium price, but decreases equilibrium quantity.
if there was only one change. Increase in supply > decrease in demand results in equilibrium quantity increase Increase in supply < decrease in demand results in equilibrium quantity decrease
in supply > increase in demand results in equilibrium price decrease Increase in supply < increase in demand results in equilibrium price increase Raise in equilibrium quantity is greater than caused by either change alone
in supply > increase in demand results in rise of equilibrium price Decrease in supply < increase in demand results in fall of equilibrium price Fall in equilibrium quantity is greater than caused by either change alone
1. INCREASE
DECREASE
DECREASE
UNCERTAIN
2. DECREASE
INCREASE
INCREASE
UNCERTAIN
3. INCREASE
INCREASE
UNCERTAIN
INCREASE
4. DECREASE
DECREASE
UNCERTAIN
DECREASE