Economics 1000

Essentials of Economics
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FALL 2013
MW 3:35-4:50
ITE C80

RICHARD N. LANGLOIS

The University of Connecticut

The demand curve.
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 Law of demand.
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Ceteris
paribus

 The law of demand: all other things equal, the

quantity demanded is inversely related to price.
 Demand curves never slope upward.
 Demand is about what consumers are both willing
and able to buy.
 Substitution effect: as price rises, consumers switch
to other goods.
 Income effect: as price rises, consumer’s real income
falls and he or she can afford less.
 Elasticity of demand.
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Elasticity of demand: the percent change in quantity

demanded with each percent change in price.
Market demand.
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 Increase in demand.
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$15

12 b f
Price

3 D'

D
0
8 14 20 26 32
Millions of pizzas per week
 Variables that affect demand.
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Variable: A change in this variable…

Price. Represents a movement along the demand curve.
Income. Shifts the demand curve.
Prices of related goods. Shifts the demand curve.
Changes in tastes. Shifts the demand curve.
Expectations. Shifts the demand curve.
Number of buyers. Shifts the demand curve.

Don’t confuse a movement along

a curve with a shift of a curve!
Demand curve shifters: income.
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 Demand for a normal good is

positively related to income.
 An increase in income causes
increase in quantity demanded at
each price, shifting the D curve to the
right.
 Demand for an inferior good is
negatively related to income.
 An increase in income shifts D curves
for inferior goods to the left.
Demand curve shifters: prices of related goods.
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 Two goods are substitutes if an increase

in the price of one causes an increase in
demand for the other.
 Example: pizza and hamburgers.
 An increase in the price of pizza increases
demand for hamburgers, shifting hamburger
demand curve to the right.

 Other examples: Coke and Pepsi; laptops

and desktop computers; compact discs
and music downloads.
Demand curve shifters: prices of related goods.
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 Two goods are complements if an

increase in the price of one causes a fall in
demand for the other.
 Example: computers and software.
 If price of computers rises, people buy fewer
computers, and therefore less software.
Software demand curve shifts left.

 Other examples: college tuition and

textbooks, bagels and cream cheese, eggs
and bacon.
 Demand curve shifters: tastes.
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 Anything that causes a shift in tastes

toward a good will increase demand
for that good and shift its D curve to
the right.
 Anything that causes a shift in tastes
away from a good will decrease
demand for that good and shift its D
curve to the left.
 Example: fear of E-coli changes
people’s taste for bagged spinach.
Source: http://www.drfad.com/marketing/crazy_ideas.htm
 Demand curve shifters: expectations.
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 If people expect their incomes to rise, their demand for

meals at expensive restaurants may increase now.
 If the economy turns bad and people worry about their
future job security, demand for new autos may fall now.
 Fear of a price rise or shortage shifts out demand today.
 Hoarding and bank runs.

 Expectation that electronics prices will continue to fall in the future

shifts inward demand today.
Demand curve shifters: # of buyers.
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The supply curve.
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 Supply.
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 In the short run, all other things equal, the

quantity supplied is directly related to price.
• Supply curves usually slope upward.
 As price increases, other things constant, a
producer becomes more willing and able to
supply the good.
• Higher prices attract resources from lower-valued uses.
 Supply curves slope upwards because of the “law”
of increasing opportunity cost.
• In the short run, at least one factor of production is
fixed, and diminishing returns eventually set in.
 Elasticity of supply.
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Elasticity of supply: the percent change in quantity

supplied with each percent change in price.
 An increase in supply.
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S'

c
$9 d
6

D
20 26 30
Millions of Pizzas per Week
 Variables that affect supply.
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Variable: A change in this variable…

Price. Represents a movement along the supply curve.
Prices of inputs. Shifts the supply curve.
Prices of substitutes. Shifts the supply curve.
Technology. Shifts the supply curve.
Expectations. Shifts the supply curve.
Number of sellers. Shifts the supply curve.

Don’t confuse a movement along

a curve with a shift of a curve!
 Supply curve shifters: input prices.
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 Prices of inputs that S

are employed in S'
making the good itself.
• For example, if the price $9
of mozzarella cheese 6

falls, the cost of pizza

production declines.
• Conversely, if the price D
of some relevant 20 26 30
resource increases, Millions of Pizzas per Week
supply decreases.
 Substitutes in production.
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 Prices of alternative
goods that use some of S
the same inputs. S'
• As the price of bread
increases, so does the $9
opportunity cost of 6

producing pizza and the

supply of pizza declines.
• Conversely, a fall in the D
price of an alternative good 20 26 30
makes pizza production Millions of Pizzas per Week
relatively more profitable
and supply increases.
 Supply curve shifters: technology.
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 A more efficient
technology, a high-tech S

oven, is invented. S'

 Production costs fall:

$9
 Suppliers will be more willing 6
and more able to supply the
good.
 Rightward shift of the supply
curve from S to S'.
D
 Result: more is 20 26 30
supplied at each Millions of Pizzas per Week

possible price.
 Supply curve shifters: expectations.
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 When a good can be

easily stored, expecting S'
S
future prices to be
higher may reduce
current supply
$9
6
 More generally, any
change expected to
affect future D
profitability could shift 20 26 30
the supply curve. Millions of bushels of wheat per week
Supply curve shifters: number of sellers.
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Market equilibrium.
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Market equilibrium.
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 An increase in demand.
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Price

$12 g
c
9

D'
D
0
20 24 30 Millions of pizzas per week
 An increase in supply.
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S'

c
$9
6
d

20 26 30 Millions of Pizzas per Week

An increase in both supply & demand.
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S'

c
$9
6
d

D’
D
20 26 30 Millions of Pizzas per Week
An increase in both supply & demand.
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Whether price goes up or down depends on

whether demand or supply dominates.
In all cases, quantity exchanged increases.
An increase in both supply & demand.
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