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Economics

What are non-price determinants in economics?

Economics

What is the difference between movement along the supply curve and a movement of the supply curve?

To understand the difference between movements along the supply curve and shifts of the supply curve, let’s start by understanding the law of supply. The law of supply states that if the price of a good or service increases, then the quantity supplied will also increase. To understand this fully, you have to think like a producer. Let’s assume that producers want to make as much money as possible. Also, remember that producers—like everyone else—make choices. For example, a T-shirt maker can choose to make T-shirts of various colours and styles, print different things on their T-shirts, or even make a different kind of clothing altogether. Putting these ideas together, we can better understand that the law of supply says that producers will allocate their productive resources towards whatever makes them the most money. So if the price of green T-shirts goes up—this doesn’t change the cost of making it—producers will be more interested in making (and selling) green T-shirts, because they can earn greater profits. The law of supply directly refers to the supply curve: the supply curve is upward-sloping because, based on the selling price, producers will produce more (or less) of a good. The supply schedule shows this relationship: |Price |Quantity supplied| |:-:|:-:| |$0|0| |$10|50| |$20|100| |$30|150| |$40|200| The supply schedule shows a movement **along** the supply curve. If this is true, then why don’t producers simply raise the price of a good and produce more? This is because, in the demand and supply model, price is determined by the interaction of the demand curve and the supply curve: consumers are less likely to buy a good at higher prices. Lastly, let’s look at a *shift* of the supply curve. As described above, the supply curve shows the relationship between price and quantity supplied, but it doesn’t give much insight into the production of the good itself. For a producer to make a given good or service, they will incur production costs. Among these are opportunity costs: the value of other goods or services the producer could make, and the best time to supply a product to the market. Along with the selling price, these factors influence how much of a product the producer will make. If one of these other factors changes, for example, the cost of raw materials increases, the relationship between price and quantity supplied changes. This is because the profit has decreased for every price, and the producers are less interested in producing the product. Together, these other factors are known as non-price determinants of supply. Changes to these determinants decrease supply (the supply curve shifts left) and increase supply (the supply curve shifts right). |Non-price determinant of supply |Supply shifts right if…|Supply shifts left if…| |:-:|:-:|:-:| |Cost of raw materials/labour|costs decrease|costs increase| |Price of related goods (joint supply)|price of other goods increases|price of other goods decreases| |Price of related goods (competitive supply)|price of other goods decreases|price of other goods increases| |Taxes and subsidies|indirect taxes decrease/subsidies increase|indirect taxes increase/subsidies decrease| |Future expectations of price|prices are expected to fall|prices are expected to rise| |Technology|technology increases|technology decreases| |Number of firms|firms join market|firms leave market|

Economics

Why is the supply curve upward-sloping?

The law of supply states that as price increases, so does quantity supplied and vice versa, as seen in the supply schedule below: |Price|Quantity supplied| |:-:|:-:| |$1|5| |$2|10| |$3|15| |$4|20| |$5|25| Because it reflects this relationship, the supply curve is positively sloped. To better understand the law of supply, keep in mind that suppliers can make choices about what they produce. For example, a restaurant can produce a wide range of meals. If the price consumers are willing to pay for one type of meal increases relative to the others, it makes sense that restaurants would begin making more of that type of meal. This **profit motive** is one reason the supply curve is upward sloping. Alongside this idea is the idea of **opportunity cost**. Every time a restaurant makes one type of meal (e.g., pasta), they give up the ability to make a different meal (e.g., pizza). When the price of pasta goes up the opportunity cost of making pizza increases, and restaurateurs reallocate their resources to producing more pasta. This is especially true if other firms, seeing high prices in the industry, switch their production to seek these higher prices. In the example above, restaurants increase production by reallocating their existing resources. But what if restaurants want to produce more meals than they can with their given resources? To do so, the restaurant must buy new machinery or hire more workers, meaning the restaurant will face additional costs. This is a third reason price has a positive relationship with quantity supplied—production *may* only be able to increase if prices rise enough to cover **increased production costs**.

Economics

How does the price of related goods influence demand?

Related goods are goods that are bought with another good (complements), or instead of another good (substitutes). An example of complementary goods is movie tickets and beverages. Often, when someone buys a movie ticket, they will also buy a beverage. Notice that the strength of this relationship changes depending on the product: it is more common for someone to buy a drink on its own—without going to the movies—than for someone to buy a movie ticket and not buy a drink. The law of demand states that when the price of a good increases, the quantity demanded for that good decreases, and vice versa. So, if the price of movie tickets goes up, people will buy fewer movie tickets. For the theatre, this means that not only will they sell fewer movie tickets, but they will also sell fewer drinks: this shows the complementary relationship between movie tickets and drinks. An example of substitute goods are two competing movie theatres. If people usually go to the movies at MovieZone **or** CinePlace, but not both simultaneously, then these brands are strong substitutes for each other. The strength of this relationship is determined by consumer behavior. A consumer who wants to go to the movies is likely to prefer either MovieZone or CinePlace to a different activity, like going to a museum. So museums are a weak substitute for either of the theatres. As above, the law of demand dictates that if MovieZone raises the price of tickets, the quantity demanded will fall. This effect is amplified if consumers are very willing to switch to CinePlace. For this reason, firms aim to build brand loyalty, weakening the strength of the substitution relationship with competing brands. |If the price of MovieZone tickets | The quantity demanded for MovieZone tickets | The demand for drinks |The demand for CinePlace tickets | | :-: | :-: | :-: |:-:| | increases | decreases | also decreases |increases| | decreases | increases| also increases | decreases|

Economics

How does an increase in net exports shift the AD curve?

Aggregate demand (AD) is the total demand for an economy’s output at a given price level. It has four components: - Consumption (C): household spending on goods and services. - Investment (I): business spending on capital goods and raw materials. - Government spending (G): government purchases of goods and services (not transfers). - Net exports (NX): the value of exports (X) minus the value of imports (M). When any of these components increase, ceteris paribus, AD increases, shown by a rightward shift of the AD curve. For C, I, G, and exports, the relationship is straightforward: more spending on domestic output means higher AD. But it is less obvious why a fall in imports raises AD. Consider this example: If German households buy 5 German cars and 1 Japanese car, German output is 5 cars. Yet firms report sales as 6 cars, so consumption is recorded as the value of 6 cars. To avoid overstating domestic output, the value of the imported car is subtracted. In effect, imports are deducted from C, I, and G to ensure AD reflects demand for domestic production only. This is especially important with imported inputs. If a $\text{\textdollar}$100 belt is recorded as consumption but $\text{\textdollar}$20 of materials were imported, subtracting imports ensures AD reflects the $\text{\textdollar}$80 of domestic value added. Returning to the car example: if next year total car sales stay at 6 but imports fall to zero, consumption is unchanged, but domestic production must have risen from 5 to 6. In this case, households are substituting a domestically produced car for the previously imported one. Thus, lower imports—holding other components constant—mean greater demand for domestic output. In short: - If exports increase, foreign demand for domestic goods rises → AD increases. - If imports decrease (without a fall in C, I, or G), households or firms must be substituting toward domestic goods → AD increases. Therefore, when net exports increase—whether from higher exports or lower imports—aggregate demand increases, and the AD curve shifts to the right.

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Over 80% of IB students globally are experiencing the power of Revision Village

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