Shifts in Demand and Supply
Changes in income, tastes, related prices, production costs or weather can shift demand or supply. Identify the affected curve and its direction, then compare the old and new equilibrium under stated assumptions.
What a learner can do afterwards
- Sort an event into a shift of demand, a shift of supply, or a movement along a curve
- Work a news story through the four steps and predict the direction of equilibrium price and quantity changes; read their values when a schedule is given
- Explain the 'other things equal' assumption and why the model needs it
1 · Read
You know equilibrium is where planned buying and selling match. A change in a good's own price moves along its curve. A shift changes quantity at each given price: more means right, less means left. Tastes, income, expectations or substitute prices can shift demand. A substitute can replace another good. Higher income raises demand for a normal good. With supply unchanged and upward-sloping, that demand increase raises equilibrium price and quantity.
At the same price of $2 per pack, a taste change raises the quantity wanted from 4 packs to 7. This illustrates increased demand.
Supply shifts when conditions change how much sellers can offer at each price. Inputs are resources used in production. Lower input costs, cost-saving technology or a lower tax per unit can shift supply right. Crop damage can shift it left. For example, hail damages a pear harvest. At $4 per bag, growers offer 10 bags before and 6 after. This compares supply at the same price; it does not predict the new equilibrium.
Use four steps: mark the original equilibrium; choose demand or supply; shift it left or right; compare the new equilibrium. In a schedule, equilibrium is the row where quantities demanded and supplied match. With demand sloping down and supply sloping up, a left shift of supply raises price and cuts quantity; a right shift lowers price and raises quantity. Keep demand fixed: the price change moves along it, not to a new demand curve.
These boxes show the order of the method, not the shapes of demand and supply curves.
'Other things equal' means holding other relevant influences constant while studying one change. Price and quantity can still adjust. Real events can happen together: analyse each shift separately, then combine the results. If demand and supply both shift right in the standard model, quantity rises. Price may rise, fall or stay unchanged because the two shifts push price in opposite directions. Their sizes determine the price result.
The good's own price moves along a curve. Other factors can shift curves. Compare equilibria while keeping the stated assumptions in view.
Lesson, questions and flashcards written for this dataset. Economics reference records were consulted for concepts and teaching structure.
Readings and flashcards written for this dataset. Economics reference records informed the concepts; their prose, examples and tables are not reproduced.
More to read
What changes at the same price?
Suppose buyers choose a different quantity even though the selling price has not changed. Something besides that price has affected their choices. To investigate a demand shift, compare the quantities buyers want before and after at the same prices. More wanted at each price means demand has increased. If only the good's own price changes, buyers move along the existing demand curve.
Income is one possible influence, but higher income does not raise demand for every good. A normal good is one whose demand rises when income rises. Tastes and expectations can also change buying plans. So can the prices of substitutes, which are goods buyers can use in place of one another. A dearer substitute can increase demand for its alternative.
For supply, ask what has changed for producers. Lower input costs or equipment that makes production cheaper can increase the amount offered at each price. A damaged harvest can reduce it. Comparing at the same price helps identify a shift. It does not require the final market price to stay unchanged.
Compare the market before and after
An equilibrium comparison needs a starting point. Mark the old crossing of demand and supply, or find matching quantities in the old schedule. Then identify the curve affected by the event. Decide whether it moves left or right, find the new equilibrium and compare price and quantity.
Consider equipment that reduces a bakery's production costs. Holding other influences constant, sellers can offer more bread at each price, shifting supply right. With downward-sloping demand and upward-sloping supply, the new equilibrium has a lower price and a larger quantity. Buyers choose more bread as its price falls. That response is movement along demand, not another shift.
Several events can occur together. Holding other influences constant lets us analyse each effect separately before combining them. When demand and supply both shift right in the standard model, both changes raise equilibrium quantity. Their price effects oppose each other. Without knowing the sizes of the shifts, we cannot say whether price rises, falls or stays unchanged.
These comparisons describe equilibria. They do not establish how quickly an actual market reaches a new one.
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