When it comes to the U.S. economy, supply includes three basic components: Labor, capital, and natural resources. When price changes, quantity supplied will change. That is a movement along the same supply curve. When factors other than price changes, supply curve will shift. Here are some determinants of the supply curve. (1.) Production cost: Since most private companies’ goal is profit maximization. Higher production cost will lower profit, thus hinder supply. Factors affecting production cost are: input prices, wage rate, government regulation and taxes, etc. (2.) Technology: Technological improvements help reduce production cost and increase profit, thus stimulate higher supply. (3.) Number of sellers: More sellers in the market increase the market supply. (4.) Expectation for future prices: If producers expect future price to be higher, they will try to hold on to their inventories and offer the products to the buyers in the future, thus they can capture the higher price.When price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the five determinants of the demand curve. (1.) Income: A rise in a person’s income will lead to an increase in demand (shift demand curve to the right), a fall will lead to a decrease in demand for normal goods. Goods whose demand varies inversely with income are called inferior goods. (2.) Consumer Preferences: Favorable change leads to an increase in demand, unfavorable change lead to a decrease. (3.) Number of Buyers: the more buyers lead to an increase in demand; fewer buyers lead to decrease. (4.) Price of related goods: (a.) Substitute goods (those that can be used to replace each other): price of substitute and demand for the other good are directly related.Example: If the price of coffee rises, the demand for tea should increase. (b.) Complement goods (those that can be used together): price of complement and demand for the other good are inversely related. Example: if the price of ice cream rises, the demand for ice-cream toppings will decrease. (5.)Expectation of future:(a.) Future price: consumers’ current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices. (b.) Future income: consumers’ current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income.Equilibrium – Consumers and producers react differently to price changes. Higher prices tend to reduce demand while encouraging supply, and lower prices increase demand while discouraging supply. Economic theory suggests that, in a free market there will be a single price which brings demand and supply into balance, called equilibrium price. Both parties require the scarce resource that the other has and hence there is a considerable incentive to engage in an exchange. Equilibrium price is also called market clearing price because at this price the exact quantity that producers take to market will be bought by consumers, and there will be nothing left. This is efficient because there is neither an excess of supply and wasted output, nor a shortage – the market clears efficiently. Changes in equilibrium price and quantity: the four-step process: (1.) Draw a demand and supply model representing the situation before the economic event took place. (2.) Decide whether the economic event being analyzed affects demand or supply. (3.) Decide whether the effect on demand or supply causes the curve to shift to the right or to the left and to sketch the new demand or supply curve on the diagram. (4.) Identify the new equilibrium and then compare the original equilibrium price and quantity to the new equilibrium price and quantity. The law of demand, which tells us the slope of the demand curve. The law of supply, which gives us the slope of the supply curve. The shift variables for demand. The shift variables for supply.