How does changes in substitutes affect demand

I really want to make sure that you have this point clear. When we hold everything else equal, we're moving along a given demand curve. We're essentially saying the demand, the price quantity demanded relationship, is held constant, and we can pick a price and we'll get a certain quantity demanded.

We're moving along the curve. If we change one of those things, we might actually shift the curve. We'll actually change this demand schedule, which will change this curve.

Now, there other related products, they don't just have to be substitutes. So, for example, let's think about scenario two. Or maybe the price of a Kindle goes up. Let me write this this way. Kindle's price goes up. Now, the Kindle is not a substitute. People don't either buy an ebook or they won't either buy my ebook or a Kindle. Kindle is a compliment. You actually need a Kindle or an iPad or something like it in order to consume my ebook.

So this right over here is a complement. So if a complement's price becomes more expensive, and this is one of the things people might use to buy my book, then it would actually, for any given price, lower the quantity demanded. Conversely, if the price of steel decreases, producing a car becomes less expensive.

At any given price for selling cars, car manufacturers can now expect to earn higher profits, so they will supply a higher quantity. The shift of supply to the right, from S 0 to S 2 , means that at all prices, the quantity supplied has increased.

In the example above, we saw that changes in the prices of inputs in the production process will affect the cost of production and thus the supply. Several other things affect the cost of production, too, such as changes in weather or other natural conditions, new technologies for production, and some government policies.

The cost of production for many agricultural products will be affected by changes in natural conditions. A drought decreases the supply of agricultural products, which means that at any given price, a lower quantity will be supplied; conversely, especially good weather would shift the supply curve to the right. When a firm discovers a new technology that allows the firm to produce at a lower cost, the supply curve will shift to the right, as well.

For instance, in the s a major scientific effort nicknamed the Green Revolution focused on breeding improved seeds for basic crops like wheat and rice.

By the early s, more than two-thirds of the wheat and rice in low-income countries around the world was grown with these Green Revolution seeds—and the harvest was twice as high per acre. A technological improvement that reduces costs of production will shift supply to the right, so that a greater quantity will be produced at any given price. Government policies can affect the cost of production and the supply curve through taxes, regulations, and subsidies. For example, the U. Taxes are treated as costs by businesses.

Higher costs decrease supply for the reasons discussed above. Other examples of policy that can affect cost are the wide array of government regulations that require firms to spend money to provide a cleaner environment or a safer workplace; complying with regulations increases costs.

A government subsidy, on the other hand, is the opposite of a tax. Government subsidies reduce the cost of production and increase supply at every given price, shifting supply to the right.

The following Work It Out feature shows how this shift happens. We know that a supply curve shows the minimum price a firm will accept to produce a given quantity of output. What happens to the supply curve when the cost of production goes up? Following is an example of a shift in supply due to a production cost increase. Draw a graph of a supply curve for pizza.

Pick a quantity like Q 0. If you draw a vertical line up from Q 0 to the supply curve, you will see the price the firm chooses. An example is shown in Figure 7.

Why did the firm choose that price and not some other? One way to think about this is that the price is composed of two parts. The first part is the average cost of production, in this case, the cost of the pizza ingredients dough, sauce, cheese, pepperoni, and so on , the cost of the pizza oven, the rent on the shop, and the wages of the workers. If you add these two parts together, you get the price the firm wishes to charge. Now, suppose that the cost of production goes up.

Step 4. Shift the supply curve through this point. You will see that an increase in cost causes an upward or a leftward shift of the supply curve so that at any price, the quantities supplied will be smaller, as shown in Figure Changes in the cost of inputs, natural disasters, new technologies, and the impact of government decisions all affect the cost of production.

In turn, these factors affect how much firms are willing to supply at any given price. Figure 11 summarizes factors that change the supply of goods and services. Notice that a change in the price of the product itself is not among the factors that shift the supply curve.

Although a change in price of a good or service typically causes a change in quantity supplied or a movement along the supply curve for that specific good or service, it does not cause the supply curve itself to shift. Because demand and supply curves appear on a two-dimensional diagram with only price and quantity on the axes, an unwary visitor to the land of economics might be fooled into believing that economics is about only four topics: demand, supply, price, and quantity.

Factors other than price that affect demand and supply are included by using shifts in the demand or the supply curve. In this way, the two-dimensional demand and supply model becomes a powerful tool for analyzing a wide range of economic circumstances. Factors that can shift the demand curve for goods and services, causing a different quantity to be demanded at any given price, include changes in tastes, population, income, prices of substitute or complement goods, and expectations about future conditions and prices.

Factors that can shift the supply curve for goods and services, causing a different quantity to be supplied at any given price, include input prices, natural conditions, changes in technology, and government taxes, regulations, or subsidies. Landsburg, Steven E.

New York: The Free Press. National Chicken Council. Wessel, David. May 27, , p. Skip to content Chapter 3. Demand and Supply.

Learning Objectives By the end of this section, you will be able to: Identify factors that affect demand Graph demand curves and demand shifts Identify factors that affect supply Graph supply curves and supply shifts.

When does ceteris paribus apply? Shift in Demand A shift in demand means that at any price and at every price , the quantity demanded will be different than it was before.

Figure 2. Demand Curve. The demand curve can be used to identify how much consumers would buy at any given price. Figure 3. Demand Curve with Income Increase. With an increase in income, consumers will purchase larger quantities, pushing demand to the right.

Figure 4. Demand Curve Shifted Right. With an increase in income, consumers will purchase larger quantities, pushing demand to the right, and causing the demand curve to shift right. Shift in Supply We know that a supply curve shows the minimum price a firm will accept to produce a given quantity of output. Figure 7. Supply Curve. The supply curve can be used to show the minimum price a firm will accept to produce a given quantity of output.

Figure 8. Setting Prices. The cost of production and the desired profit equal the price a firm will set for a product. Figure 9. Increasing Costs Leads to Increasing Price.

An increase in supply means that producers plan to sell more of the good at each possible price. A decrease in supply is depicted as a leftward shift of the supply curve. A decrease in supply means that producers plan to sell less of the good at each possible price.

Other factors affecting supply include technology, the prices of inputs, and the prices of alternative goods that could be produced. An advance in technology, a decrease in the prices of inputs, or a decrease in the prices of alternative goods that could be produced will result in an increase in supply. Consumers make their choices based on their overall spending power and make constant adjustments based on price changes.

They strive to maintain their living standards despite price fluctuations. The substitution effect kicks in when a product's price increases but the consumer's spending power stays the same.

The substitution effect is strongest for products that are close substitutes. For instance, a shopper might pick a synthetic shirt when the pure cotton brand seems too pricey.

Eventually, enough shoppers may follow suit to make a measurable effect on the sales of both shirt makers. Elsewhere, if a golf club hikes its fees, some members might quit.

However, if there is no comparable choice for them to turn to then they may just have to pay up to avoid quitting the sport completely. As illogical as it seems, the substitution effect may not occur when the products that increase in price are inferior in quality.

In fact, an inferior product that rises in price may actually enjoy a sales increase. Products that display this phenomenon are called Giffen goods , after a Victorian economist who first observed it.

Sir Robert Giffen noted that cheap staples such as potatoes will be purchased in greater quantities if their prices rise. He concluded that people on extremely limited budgets are forced to buy even more potatoes because their increasing price places other higher-quality staples altogether out of their reach. Substitute goods may be adequate replacements or inferior goods. Demand for an inferior good will increase when overall consumer spending power falls. Small Business.

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