How does supply and demand affect prices

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.

Let's say a pizza place is just opening. The owner figures that they will need five employees. After putting an ad in the paper there are twenty applicants. Five have had experience working in a pizza place before. They came to the interview clean and on time. The other fifteen had no work experience.

Many came late. A few were caught steeling pepperoni on the way out. One spilled flour all over the floor. Which applicants will be hired? Of course it will be the five with experience and the other fifteen will be rejected because they would be too costly to hire. NOW, if the pizza place wants to produce more pizzas they will need more workers. This means they will have to hire some of those who were rejected because they were more costly less experienced, etc.

So, they will only hire the more costly employees if they can get a higher price to cover the higher costs. Second, there are increasing costs because some resources are fixed. This should not make sense to you. Why would there be increasing costs if we use the same quantity of some resource? Well, let's say that the size of the kitchen and the number of ovens capital resources are fixed. This means that they don't change.

Now, if we want to produce more pizzas you will have to cram more workers into the same size kitchen. As they bump into each other and wait for an oven to be free they still get paid, but the cost per pizza increases. Therefore they will not produce more pizza unless they can get a higher price to cover these higher per unit costs.

So the supply curve should be upward sloping. Market supply is the horizontal summation of the individual supply curves. Instead of looking at how many pizzas one pizza place is willing and able to produce at different prices individual supply , we keep the prices the same and add the quantities of additional pizza places.

Prices stay the same, but quantities increase because there are more pizza suppliers. So the market supply of pizzas is further to the right horizontal than the individual pizza place supply curves.

The price of the product P. But there are other determinants of how much business supply besides the price. We call these the Non-Price determinants of Supply.

Change in Quantity Supplied Qs. Change in Supply S. A change in supply is a shifting the supply curve because there is a new supply schedule. The supply curve either moves left or right horizontally since the prices stay the same and only the quantities change and quantity is on the horizontal axis.

Many students want to draw the arrows perpendicular to the supply curve. The law of demand states that, if all other factors remain the same, the price will be the main factor to influence how much of a commodity is sold.

Typically, increasing the price of a commodity will result in a lower quantity sold lower demand , whereas decreasing the price will increase the quantity sold higher demand. The law of supply is essentially the opposite of the law of demand.

According to the law of supply, if no other factors change, price is the main factor influencing how much of a commodity is produced. If the price of a particular product or service increase, suppliers will want to offer more of that product or service. However, the price of some commodities affects supply and demand more so than the price of others - this is known as price elasticity.

When the price of a commodity easily affects supply and demand, it's described as price elastic. Alternatively, a commodity is described as inelastic if its price doesn't significantly affect supply or demand. Economics professor Art Carden takes the challenge in this short video on the laws of supply and demand.

McKenzie on Prices. EconTalk, June 23, They discuss why Southern California experiences frequent water crises, why price falls after Christmas, why popcorn seems so expensive at the movies, and the economics of price discrimination. EconTalk, October 15, Frank argues that the traditional way of teaching economics via graphs and equations often fails to make any impression on students.

In this conversation with host Russ Roberts, Frank outlines an alternative approach from his new book, where students find interesting questions and enigmas from everyday life.

They then try to explain them using the economic way of thinking. Frank and Roberts discuss a number of the enigmas and speculate on the future of economics and education. The topics discussed include tuxedos vs. Ticket Prices and Scalping. EconTalk, July 16, Don Boudreaux on Energy Prices. EconTalk, Aug. Roberts on the Price of Everything. Russ Roberts, host of EconTalk and author of the economics novel, The Price of Everything, talks with guest host Arnold Kling about the ideas in The Price of Everything: price gouging, the role of prices in the aftermath of natural disaster, spontaneous order, and the hidden harmony of the economic cosmos.

Along the way, Roberts talks about novels vs. Should everything be traded in markets? Podcast at EconTalk. A listener asked: What are the limits of libertarianism, or perhaps the limits of markets? Zelizer podcast. Cole on the Market for New Cars. EconTalk, June 09, They talk about dealer markup, the role of information and the internet in bringing prices down, why haggling persists, how sales people are compensated, and the gray areas of buyer and seller integrity.

Meanwhile, sellers are considered to be profit maximizers. This assumption limits their willingness to sell to within a price range, high to low, where they can stay in business.

When either demand or supply shifts, the equilibrium price will change. The section on understanding supply factors explains why a market component may move. The examples below show what happens to price when supply or demand shifts occur. When a bumper crop develops, supply shifts outward and downward, shown as S2 in Image 2, more product is available over the full range of prices. With no immediate change in consumers' willingness to buy crops, there is a movement along the demand curve to a new equilibrium.

Consumers will buy more but only at a lower price. How much the price must fall to induce consumers to purchase the greater supply depends upon the elasticity of demand. In Image 2, price falls from P1 to P2 if a bumper crop is produced. If the demand curve in this example was more vertical more inelastic , the price-quantity adjustments needed to bring about a new equilibrium between demand and the new supply would be different.

To understand how elasticity of demand affects the size of adjustment in prices and quantities when supply shifts, try drawing the demand curve or line with a slope more vertical than that depicted in Image 2. Then compare the size of price-quantity changes in this with the first situation.

With the same shift in supply, equilibrium change in price is larger when demand is inelastic than when demand is more elastic. The opposite is true for quantity.

A larger change in quantity will occur when demand is elastic compared with the quantity change required when demand is inelastic. A decline in the preference for beef is one of the factors that could shift the demand curve inward or to the left, as seen in Image 3. With no immediate change in supply, the effect on price comes from a movement along the supply curve.

An inward shift of demand causes price to fall and also the quantity exchanged to fall. The amount of change in price and quantity, from one equilibrium to another, is dependent upon the elasticity of supply.