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Determinants of Supply and Demand

A presentation detailing the determinants of supply and demand from ROTTEN to TRIBE.

Evan Pensis

on 19 September 2011

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Transcript of Determinants of Supply and Demand

Problem What are the determinants of
supply and demand?! First, let's look at
demand. The determinants of demand can be remembered in the
acronym TRIBE. as in T
E astes and preferences
of consumers elated goods (prices) ncome of buyers. uyers (the number of) xpectations
of the future { Tastes determine demand because
if a consumer prefers a certain
product over another, the demand
for that product will increase
when compared to competitors. ex: the demand for
low-calorie beverages Related goods determines demand based on
the price change of related goods:
a substitute good is a product
that can take the place of another,
a complementary good is one used
together with another good. If the price of a substitute or
complementary good increases
or decreases, it will impact the
demand of the initial good. Income of buyers For most products, a rise in income triggers
and increase in demand, unless the product
in question has been purchased in an attempt
to save money. ex: The demand of luxury clothes may increase
while the demand of second-hand goods
may decrease. Buyers Demand of a product is likely to
increase with an increase in the
number of buyers. ex: Rising numbers of babies
increase the market for child-
related products. Expectations of the Future If the consumer expects the price
of a product to rise in the future,
then demand will increase for said product as more consumers attempt
to purchase the product before the price escalates. } All of these factors determine the demand of a product and will impact the demand schedule as demonstrated in the graph (although the graph demonstrates an increase in demand, a decrease may occur as well): but.... What are the determinants of supply?? The determinants of supply can be expressed with the acronym ROTTEN. as in [ R
N esource costs ther good's prices axes and subsidies echnological changes xpectations of
producers umber of sellers : Resource costs Other good's prices Taxes
& Subsidies Technological changes Expectations of producers Number of sellers } These factors all determine the supply of a certain product, and they will impact the supply schedule of a particular good as shown in the following graph (this graph demonstrates a decrease in supply, however the factors may also increase supply): and now... let's review! DETERMINANTS OF Supply & Demand determinants of Resource prices determine supply
because when resource prices rise,
the profit of the product is squeezed
and the supply is decreased, because
now it costs more to produce the product
with the same resources. Prices of other goods determines the supply
of a product when alternative substitutions
provide competition with the original product.
ex: Producers may be enticed by a higher price of volleyballs
when compared to basket balls. Thus, they will switch
production to manufacturing the volleyballs to increase
profits. When the price of volleyballs declines, then the
producer may switch production back to basketballs. Businesses treat most taxes as costs. Therefore, an increase in taxes will increase production costs and reduce supply. The opposite is also true, in the case of subsidies, where producer's costs are diminished and supply increases. When new technology is introduced, production costs are cut because the firm is able to produce the product with fewer resources. Therefore, the supply is increased. Changes in expectations about the future price and profit of a particular product have the potential to affect the producer's decision to supply that product. If the predicted price of oats is higher in 2012 than it is in 2011, then the farmer may withhold some of his oats from the market in hopes to sell them for a higher price next year. Ceteris paribus, the greater the number of sellers, the greater the supply of a particular product. ex: Three factories of 100 clothing manufacturers each will produce more than one factory of 100 clothing manufacturers. R
N esource prices ther good's prices axes and subsidies echnological changes xpectations of sellers umber of sellers T
E astes of consumers elated goods (price of) ncome of consumers uyers (number of) xpectations of the future Demand is directly and indirectly determined by the consumer. Remember: Remember: Supply is directly and indirectly affected by the producers.
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