Non-price changes

Examples of Non-price changes in the following topics:

• Changes in Supply and Shifts in the Supply Curve

  • The supply curve depicts the supplier's positive relationship between price and quantity.
  • If the price of the good or service changes, all else held constant such as price of substitutes, the supplier will adjust the quantity supplied to the level that is consistent with its willingness to accept the prevailing price.
  • The change in price will result in a movement along the supply curve, called a change in quantity supplied, but not a shift in the supply curve.
  • Changes in supply are due to non-price changes.
  • A shift in supply from S1 to S2 affects the equilibrium point, and could be caused by shocks such as changes in consumer preferences or technological improvements.

• Shifts in the Money Demand Curve

  • A shift in the money demand curve occurs when there is a change in any non-price determinant of demand, resulting in a new demand curve.
  • The interest rate is the price of money.
  • The shift of the money demand curve occurs when there is a change in any non-price determinant of demand, resulting in a new demand curve.
  • Non-price determinants are changes cause demand to change even if prices remain the same.
  • Factors that influence prices include:

• Determinants of Price Elasticity of Demand

  • The price elasticity of demand (PED) is a measure of how much the quantity demanded changes with a change in price.
  • When several close substitutes are available, consumers can easily switch from one good to another even if there is only a small change in price .
  • Duration of price change: For non-durable goods, elasticity tends to be greater over the long-run than the short-run.
  • In the short-term it may be difficult for consumers to find substitutes in response to a price change, but, over a longer time period, consumers can adjust their behavior.
  • Brand loyalty: An attachment to a certain brand (either out of tradition or because of proprietary barriers) can override sensitivity to price changes, resulting in more inelastic demand.

• Determinants of Supply

  • Supply levels are determined by price, which increases or decreases supply along the price curve, and non-price factors, which shifts the entire curve.
  • Good's own price: An increase in price will induce an increase in the quantity supplied.
  • Suppliers will change their production levels along the supply curve in response to a price change, so that their production level is equal to demand.
  • If the price of a good changes, there will be movement along the supply curve.
  • However, the supply curve itself may shift outward or inward in response to non-price related factors that affect the supply of a good, such as technological advances or increased cost of materials.

• Changes in Demand and Shifts in the Demand Curve

  • Movements along the demand curve are due to a change in the price of a good, holding constant other variables, such as the price of a substitute.
  • If the price of a good or service changes the consumer will adjust the quantity demanded based on the preferences, income and prices of other factors embedded within a given curve for the time period under consideration.
  • Shifts in the demand curve are related to non-price events that include income, preferences and the price of substitutes and complements.
  • A change in preferences could result in an increase (outward shift) or decrease (inward shift) in the quantity level desired for a specific price; while a change in the price of a substitute, could result in an outward shift if the price of the substitute increases and an inward shift if the substitute's price decreases.
  • Movements along a demand curve are related to a change in price, resulting in a change in quantity; shifts is demand (D1 to D2) are specific to changes in income, preferences, availability of substitutes and other factors.

• Duopoly Example

  • The firm determines its rival's output level, evaluates the residual market demand, and then changes its own output level to maximize profits.
  • The result of the firms' strategies is a Nash equilibrium--a pair or strategies where neither firm can increase profits by unilaterally changing the price.
  • However, not colluding and charging the marginal cost, which is the non-cooperative outcome, is the only Nash equilibrium of this model.
  • If capacity and output can be easily changed, Bertrand is generally a better model of duopoly competition.
  • When Firm 2 prices above monopoly price (PM), Firm 1 prices at monopoly level (P1=PM).

• The Law of Demand

  • If the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in quantity of good demanded by the consumer will be negatively correlated to the change in the price of the good or service.
  • The change in price will be reflected as a move along the demand curve.
  • The demand curve will shift, move either inward or outward as a result of non-price factors.
  • A shift in demand can be related to the following factors (non-exhaustive list):
  • The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price.

• Measuring the Price Elasticity of Supply

  • The price elasticity of supply is the measure of the responsiveness of the quantity supplied of a particular good to a change in price.
  • The price elasticity of supply (PES) is the measure of the responsiveness of the quantity supplied of a particular good to a change in price (PES = % Change in QS / % Change in Price).
  • The intent of determining the price elasticity of supply is to show how a change in price impacts the amount of a good that is supplied to consumers.
  • The percentage of change in supply is divided by the percentage of change in price.
  • There is no change in quantity if prices change.

• Monopoly Production Decision

  • Nonetheless, a pure monopoly can – unlike a firm in a competitive market – alter the market price for its own convenience: a decrease of production results in a higher price.
  • Like non-monopolies, monopolists will produce the at the quantity such that marginal revenue (MR) equals marginal cost (MC).
  • However, monopolists have the ability to change the market price based on the amount they produce since they are the only source of products in the market.
  • In short, three steps can determine a monopoly firm's profit-maximizing price and output:
  • Use the demand curve to find the price that can be charged at that level of output

• Impact of Price on Consumer Choices

  • The demand curve shows how consumer choices respond to changes in price.
  • A critical consideration of product/service pricing is the price elasticity of a given good, which indicates how responsive demand is to a change in price.
  • The figure pertaining to price elasticity shows how the slope of the demand curve will change depending on the degree of price sensitivity in the marketplace for a good.
  • Using demand curves, economists can project the impact of a price change on the consumer choices in a given market.
  • Construct the demand curve using changes in consumption due to price changes