Supply and Demand in Action

1. Supply and Demand in Action

2. Changes in demand

3. Increase in demand Caused by change in determinants of demand except the price of the product. Causes of increase in demand include… • increase in price of a substitute product • decrease in the price of a complementary product • increase in consumers’ income • greater consumer preference for product • expected increase in the price of product

4. Expansion ALONG the supply curve (E to E1) Equilibrium re-established at E1 Higher price (P1) and a higher quantity (Q1) What happens to supply when demand increases?

5. Decrease in demand Caused by change in determinants of demand except the price of the product. Causes of decrease in demand include… • fall in price of a substitute product • increase in price of a complementary product • fall in consumers’ income • reduced preference for the product • expected fall in the price of the product

6. Equilibrium re-established at E2 Lower price (P2) and a lower quantity (Q2) Contraction ALONG the supply curve (E to E1) What happens to supply when demand decreases?

7. Changes in supply

8. Increase in supply Caused by change in determinants of supply except the price of the product. Causes of increase in supply include… • fall in price of alternative product • rise in the price of joint product • increase in price of FOP or other inputs • deterioration in productivity of FOP (technological progress)

9. Equilibrium re-established at E1 Lower price (P1) and a higher quantity (Q1) Expansion ALONG the demand curve (E to E1) What happens to demand when supply increases?

10. Decrease in supply Caused by change in determinants of supply except the price of the product. Causes of decrease in supply include… • rise in price of alternative product • fall in the price of joint product • reduction in price of FOP or other inputs • improvement in productivity of FOP (technological progress)

11. Contraction ALONG the demand curve (E to E2) Equilibrium re-established at E2 Higher price (P2) and a lower quantity (Q2) What happens to demand when supply decreases?

12. Simultaneous changes in demand and supply

13. When more than one change is involved, it is not always possible to predict the outcome, since the changes may work in opposite directions.

14. (a) quantity remains unchanged at Q0(b) quantity falls to Q2(c) quantity increases to Q3.

15. Explain the effects on supply, demand and the resulting market price of Brussel Sprouts based on the factors mentioned in the video. VIDEO: Brussels Sprouts Demand increases/decreases – WHY? Supply increases/decreases – WHY? This results in the price of Brussel Sprouts increasing/decreasing.

16. Now let’s see what you know…

17. Price of product A C A H B D X I E D3 D2 D1 S2 S1 S3 F Quantity of Product A Hopefully, you will be happy with your answers by the end of the song! Assume that Product A is a normal good. Assuming for each question the original equilibrium point is at position X, what is the new equilibrium position after each change that has occurred? Over the next 3 minutes you will see 10 questions relating to shifting demand and supply curves.

18. Price of product A C A H B D X I E D3 D1 D2 S1 S2 S3 F Quantity of Product A 1 Product A becomes more fashionable Happy now? Click to go through the answers! 2 6 10 5 8 7 4 9 3 5 There has been a large increase in utility bills in the past few months. The poor weather conditions have hampered production of Good A There has been a fall in the exchange rate between country A (which produces good A) and country B. Manufacturers of product A purchase raw materials from country B. The Government provides a subsidy to the manufacturers of Product A. New manufacturers enter the market for Product A. Product Z is a complement to product A. Product Z falls in price. The government increases an indirect tax on Product A Product A and Product D are in joint supply. There has been an increase in demand for product D. Demand for product C (which uses Product A as a component) decreases. Producers of Product A install new machinery to reduce cost of production. Demand for product C (which uses Product A as a component) decreases. Producers of Product A install new machinery to reduce cost of production. Product B is a substitute for product A. The price of Product B decreases. Income tax increases by 2% Workers making Product A receive a pay increase

19. Price of product A C A H B D X I E D2 D1 D3 S3 S2 S1 F Quantity of Product A 1 Product A becomes more fashionable F I D C H E E H A F 2 Workers making Product A receive a pay increase 3 Income tax increases by 2% 4 Product B is a substitute for product A. The price of Product B decreases. 5 Demand for product C (which uses Product A as a component) decreases. Producers of Product A install new machinery to reduce cost of production. 6 Product A and Product D are in joint supply. There has been an increase in demand for product D. 7 There has been a large increase in utility bills in the past few months. The poor weather conditions have hampered production of Good A 8 Product Z is a complement to product A. Product Z falls in price. The government increases an indirect tax on Product A 9 The Government provides a subsidy to the manufacturers of Product A. New manufacturers enter the market for Product A. 10 There has been a fall in the exchange rate between country A (which produces good A) and country B. Manufacturers of product A purchase raw materials from country B.