Determinants of Supply and Demand

Unit 2 in AP Microeconomics is all about supply and demand. Whether it's just drawing the graphs, analyzing consumer and producer surplus, or looking at actions taken in markets, supply and demand form the basis for your entire AP Microeconomics experience. There are many ways that supply and demand can shift, and knowing how and when they will is extremely important. Let's jump right into what determines how supply and demand will shift!

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Determinants of Demand

There's a handy mnemonic that you can use to memorize the non-price determinants of demand: TBPIE. You wouldn't want to have tuberculosis pie, would you?

T - Tastes of consumers

• Depending on what consumers think is desirable, the demand for various goods will shift up and down.
• This is also affected by advertising, health warnings, etc.
• Simply, if people want a good, demand rises, and vice versa

B - Buyers (amount)

• Naturally, if there are more buyers then demand will increase.
• Conversely, if the amount of buyers decreases there will be less demand for whatever good is demanded.

P - Price of related goods (substitutes and complements)

• If the price of a substitute falls, then demand for a substitute good will increase.
• Confused? Here's an example. If coffee and tea are substitute goods (buyers consumer either one or the other) and the price of coffee falls, then buyers are more likely to purchase coffee over tea.
• If the price of a complement falls, then demand for the complement will increase and so will the demand for the good in question.
• For example, if the price of peanut butter falls then the demand for jelly will increase along with the increase in quantity demanded for peanut butter.

I - Income

• As buyers' incomes rise the demand for some goods and services rises as well.
• Goods that follow this trend are called normal goods, and an example of this is whole wheat pasta.
• The opposite of these are inferior goods, and in this case when buyers' income rises the demand for those goods decreases.
• An example of this is canned soup.

E - Expectations of future prices

• If buyers expect that prices will rise in the future, then demand for that product will rise now.
• For example, if there's a 24-hour sale on the latest iPhone, sales will spike now in comparison to 24 hours later.
• Conversely, if buyers expect that prices will drop in the future they will hold off on buying that product. The stock market works in a similar way to this.

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Determinants of Supply

What are the factors that affect supply? TPRENT is a mnemonic to help you remember them! Imagine that you’re renting out a teepee and you’ll remember the determinants of supply.

T - Taxes and subsidies💵

Note: supply changes based on whether a tax is in play or a subsidy is in play.

• With higher taxes on suppliers, this means those suppliers will produce less to pay fewer taxes.
• In contrast, lower taxes means higher supply (suppliers will produce more).
• Subsidies are the opposite of taxes.
• If there are higher subsidies then suppliers will be motivated to produce more goods.
• Lower subsidies? Lower supply.

P - Prices of related products🏸

• If prices of related products increase, sellers will have more incentive to produce those other products.
• What does this mean? Supply of the current product will decrease.
• For example, if the price of coffee goes up and you’re a tea producer, then you’re going to stop producing tea in favor of coffee because you can make more money.
• Conversely, if prices in related markets decrease, then supply will increase in the present market.
• Why? Sellers can get better prices in their current markets over switching to a related market.

R - Resources (price)🌽

• Say you’re a baker and you need wheat for your bread. If the price of wheat increases then you’ll be able to buy less of it.
• This means supply will decrease since you can’t make as much bread.
• But, if wheat prices decrease then you’ll be able to buy more wheat with the same amount of money and produce more bread. This means supply increases.

E - Expectations of sellers📈

• If sellers expect that prices will increase in the future, then supply will decrease now because they predict a larger profit in the future.
• In comparison, if sellers expect price drops in the future, then supply will increase because they want to take advantage on higher prices now.

N - Number of sellers👫

• This one is quite simple to understand. If there are more sellers in a market, that means there are more products in circulation and supply increases.
• Conversely, with less sellers in a market, the amount of goods in a market decreases and hence, supply decreases.

T - Technology📱

• With improved technology, suppliers will be able to produce more goods and supply will increase.
• In comparison, when technology breaks down, supply will decrease since suppliers won’t be able to make as many goods.

Don't forget: supply and demand can shift based on factors that are independent of price. Price changes DO NOT SHIFT SUPPLY AND DEMAND! A change in price will change the quantity supplied and quantity demanded.

TBPIE and TPRENT can help you remember the determinants of supply and demand.

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