This is where it all begins. In our definition of demand we held these things constant ceteris paribus , but in the real world these things do change, changing demand, and ultimately changing prices. So let's look at each determinant individually to understand how they each affect demand. Pe -- expected price. If you expect the price to go up in the future demand today will increase shift to the right.
For example, if we read that there will be a new tax on vodka starting next week, people will want to buy more now before the price increases. Retailers understand this. They want you to expect the price to increase in the future so you'll buy it today. The opposite happens when you expect the price to go down in the future. In the past when my wife and I were shopping whenever I put something in the cart, she would take it out and put it back on the shelf!
I'd ask, "why are you doing that? She would say that she expected it to go on sale soon and we should wait until it does. If you expect the price to go down in the future demand today decreases. But, whenever I put something in the cart, she would take it out saying that she expects it to go on sale soon. After awhile I got a little upset, when I'd ask her about the items she put in the cart and she'd say that they were on sale last week and we missed it.
Finally, I went to talk to the store manager and explained the situation to him. He saved our marriage by explaining that most chain store have a policy stating that if an item goes on sale after you have purchased it, you can bring in the receipt within 30 days and get a refund. Retailers understand how price expectations affect demand. Pog -- price of other goods. Substitute goods are goods where if you buy more of one, you buy less of the other one. Examples of substitutes include vodka and gin, hot dogs and hamburgers, chicken and beef, Coca-Cola and Pepsi.
Let's look at Coke and Pepsi. If the price of Coke increases it will increase the demand for Pepsi the graph shifts to the right. I f you are going to buy a can of Coke, you may walk right past the Pepsi machine, but when you notice that the price of Coke has increased, you'll probably turn around and buy the Pepsi. You weren't going to buy Pepsi before, but now, at the same price, you are willing to buy it. So the demand for Pepsi has increased. The demand curve has shifted to the right.
At the same prices, the quantities demanded are greater. If the price of Coke increases, what happens to the demand for Coke? Price does not change demand as we have defined it but it will change the quantity demanded. You've seen a good example of this in your local grocery store.
For example, I may want to buy some coffee. So I go to the coffee aisle and grab a can of Folgers and continue down the aisle. But at the end of the aisle I see a display of Maxwell House coffee on sale! What do I do with the Folgers in my shopping cart? I take it out of my cart and put it on the Maxwell House display.
Haven't you seen various brands mixed in with such displays? The demand for Folgers decreased I no longer want it at that price, so I take it out of my cart because the price of Maxwell House decreased. Complementary goods are goods where if you buy more of one you also buy more of the other one. Let's say that you want to eat hot dogs tonight and you go to your local grocery store and put a bag of buns in your cart and head down the aisle to the wieners. When you get to the wiener display you notice that their price has increased significantly so you decide not to eat hot dogs.
What are you going to do with the buns? You should put them back, but if you are like many people you'll put them in the wiener display and move on quickly. But the point is, you were going to buy the buns at their present price they were already in your cart , but when you learned the price of hot dogs increased your demand for buns decreased the demand curve shifted to the left - at the same prices the quantities demanded decreased.
P of wieners D of buns. Of course, if the price of one product decreases cheaper film developing , the demand for its complement film increases. P of one product D of its compliment. Independent goods are goods where if the price of one changes, it has no effect on the demand for to other one. For example, what happens to the demand for paper clips if the price of surfboards increases? P of one product D of its compliment P of one product D of its compliment.
I -- income. Income D for normal goods Income D for normal goods. So if incomes increase, the demand curve for restaurant meals, and cars, and boats, will shift to the right. At the same prices people will buy more. Income D for inferior goods Income D for inferior goods. The term "inferior good" does not mean they are of low quality. There is an inverse relationship between income and demand. Examples of inferior goods might include used clothing, potatoes, rice, maybe generic foods.
If you lose your job so your income decreases you may shop for clothes at the Salvation Army Thrift Store demand for used clothing increases. What is a normal good for one consumer might be an inferior good for another. For example, if the income of one family increases they may buy a second small car a normal good , but for another family, an increase in income may mean that they don't buy a small car an inferior good anymore and they buy a mini van instead.
Npot D Npot D. Often economists say that an increase in the "number of consumers" will increase demand. But, if K-Mart has a sale on Pepsi price of Pepsi decreases what happens to the number of consumers buying Pepsi? It will increase. The law of demand says that if price goes down, quantity demanded goes up. So, if they have more customers because the price went down, what happens to demand? Nothing - price does not change the demand schedule. T -- tastes and preferences.
Supply is more difficult for students to understand than demand. We are all consumers demanders , but few of us own a business suppliers. So, remember to think of yourself as a business owner when we discuss supply. Supply is a schedule which shows the various quantities businesses are willing and able to offer for sale at various prices in a given time period, ceteris paribus.
Supply is NOT the quantity available for sale. This is the way the term is often used in the popular press. Supply is the whole schedule with many prices and many quantities. Just like with demand, there is a difference between a change in quantity supplied and a change in supply itself.
So, if the price increases what happens to supply? Price does not change supply, it changes quantity supplied, because supply means the whole schedule with various prices and various quantities. If we plot these points remember any point on a graph simply represents two numbers We get the graph below. If we assume there are quantities and prices in-between those on the schedule we get a supply curve.
The law of supply states that there is a direct relationship between price and quantity supplied. In other words, when the price increases the quantity supplied also increases. This is represented by an upward sloping line from left to right.
Why is the law of supply true? Why is the supply curve upward sloping? Why will businesses supply more pizzas only id the price is higher? I think it is just common sense. If you want the pizza places to work harder and longer and produce more pizzas, you have to pay them more, per pizza.
But economists, as social science, want to explain common sense. We know businesses behave this way, but why? There are two explanations for the law of supply and both have to do with increasing costs.
Businesses require a higher price per pizza to produce more pizzas because they have higher costs per pizza. First, there are increasing costs because of the law of increasing costs.
In a previous lecture we explained that the production possibilities curve is concave to the origin because of the law of increasing costs. A lot of times, it has to do with supply and demand, such as we saw during the infamous GameStop surge , when a collective of small individual traders drove share prices up. While some lucky traders were able to sell the stock at its peak and profit, many traders hoping to make a quick buck instead lost money when the price eventually fell back down.
Nobody can predict every element that goes into stock price fluctuations , though many try. But for investors interested in adding individual stocks to their portfolio, it can be helpful to have a basic understanding of how to research stocks and monitor stock prices.
That starts by paying attention to the news cycle, market conditions — and even your gut. Nearly any and all daily happenings can influence stock prices. The market, after all, is a reflection of how companies and industries are valued in our society.
Being the fickle creatures that we are as human beings, our ideas of value change all the time. Investing always carries some risk. When investors, particularly at the hedge-fund level, sense cause for concern, we can watch that drama play out on the stock market.
But one factor influences share prices more than any other: Profit. Ahead, we break down how the many factors work together to influence stock prices. The two most fundamental factors boil down to profitability and the valuation ratio, says Juan Pablo Villamarin , CFA and senior investment analyst at Intercontinental Wealth Advisors.
Technical factors can also include the time of day or specific days of the week a trade takes place compared to other days and times, says Villamarin. In addition, the price movement of one stock compared to the movement of another stock in the same industry or business sector can also influence the stock price.
Trends — both historically from the company and an industry as a whole — are considered technical factors. In January , for example, Apple shares fell in price despite the company reporting record quarterly profits. Things happening in the world at large can also affect stock prices. By comparing the quantity between importer and exporter, we can determine who has more impact on the market. In the following table, an example of demand and supply increase is illustrated.
The new curve intersects the original supply curve at a new point. At this point, the equilibrium price market price is higher, and equilibrium quantity is higher also.
In this graph, demand is constant, and supply increases. The new curve intersects the original demand curve at a new point. At this point, the equilibrium price market price is lower, and the equilibrium quantity is higher. In this graph, the increased demand curve and increased supply were drawn together. The new intersection point is located on the right hand side of the original intersection point.
This new equilibrium point indicated an equilibrium quantity which is higher than the original equilibrium quantity.
The equilibrium price is also higher. It is because demand has increased relatively more than supply in this case. This supply and demand factor exercises may help you better apply these concepts.
Price Floor: is legally imposed minimum price on the market. The two laws interact to determine the actual market price and volume of goods on the market. The law of supply and demand , one of the most basic economic laws, ties into almost all economic principles somehow. In practice, people's willingness to supply and demand a good determines the market equilibrium price or the price where the quantity of the good that people are willing to supply equals the quantity that people demand.
However, multiple factors can affect both supply and demand, causing them to increase or decrease in various ways. The law of demand states that if all other factors remain equal, the higher the price of a good, the fewer people will demand that good.
In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more.
The chart below shows that the curve is a downward slope. Like the law of demand, the law of supply demonstrates the quantities sold at a specific price. But unlike the law of demand, the supply relationship shows an upward slope.
This means that the higher the price, the higher the quantity supplied. From the seller's perspective, each additional unit's opportunity cost tends to be higher and higher.
Producers supply more at a higher price because the higher selling price justifies the higher opportunity cost of each additional unit sold. It is important for both supply and demand to understand that time is always a dimension on these charts. The quantity demanded or supplied, found along the horizontal axis, is always measured in units of the good over a given time interval.
Longer or shorter time intervals can influence the shapes of both the supply and demand curves. At any given point in time, the supply of a good brought to market is fixed. In other words, the supply curve, in this case, is a vertical line, while the demand curve is always downward sloping due to the law of diminishing marginal utility. Sellers can charge no more than the market will bear based on consumer demand at that point in time.
Over longer intervals of time, however, suppliers can increase or decrease the quantity they supply to the market based on the price they expect to charge. So over time, the supply curve slopes upward; the more suppliers expect to charge, the more they will be willing to produce and bring to market.
For all periods, the demand curve slopes downward because of the law of diminishing marginal utility. The first unit of a good that any buyer demands will always be put to that buyer's highest valued use.
For each additional unit, the buyer will use it or plan to use it for a successively lower-valued use. For economics, the "movements" and "shifts" in relation to the supply and demand curves represent very different market phenomena. A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve.
The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes per the original demand relationship.
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