2 Shifts in Demand and Supply
Learn what shifts demand and supply, how their determinants affect each curve, and how shifts change equilibrium price and quantity.
Curves, shifts, and movements
A shows how much buyers are willing and able to purchase at each price, holding other influences constant. A shows how much sellers are willing and able to sell at each price, also holding other influences constant.
A changes the quantity buyers or sellers choose at every price. A change in the good’s own price does not its curve; it causes movement along the existing curve. Non-price determinants, by contrast, can demand or supply.
What shifts demand
Demand shifts when a factor other than the good’s own price changes. An increase in demand shifts the right; a decrease shifts it left.
Income: Higher income raises demand for a and lowers demand for an .
Prices of related goods: If the price of a rises, demand for this good tends to rise. If the price of a rises, demand for this good tends to fall.
Tastes and preferences: Greater popularity shifts demand right, while declining popularity shifts it left.
Number or composition of buyers: More potential buyers generally increase market demand.
Expectations: Expectations of higher future prices or income can increase demand today. Expectations of lower future prices can reduce it.
What shifts supply
Supply shifts when production conditions change. An increase in supply shifts the right; a decrease shifts it left.
Input costs: Higher costs, such as wages, materials, or fuel, generally reduce supply; lower costs increase it.
Technology and productivity: Improvements that make production more efficient generally increase supply.
Natural conditions: Favorable weather can increase agricultural supply, while drought or other disruption can decrease it.
Government policy: Production taxes or costly regulations tend to decrease supply; subsidies tend to increase it.
Number of sellers: More firms in a market generally increase market supply.
Expectations: If sellers expect a higher future price, they may hold back some output now, reducing current supply. This depends on the product and storage possibilities.
Predicting a new equilibrium
is where quantity demanded equals quantity supplied. To predict how equilibrium changes, identify the affected curve, determine whether it shifts right or left, and compare the new intersection with the original one.
For a single , the equilibrium effects are:
Demand increases: Equilibrium price and quantity both rise.
Demand decreases: Equilibrium price and quantity both fall.
Supply increases: Equilibrium price falls and quantity rises.
Supply decreases: Equilibrium price rises and quantity falls.
These are changes in equilibrium outcomes. A in one curve produces movement along the other curve, not a second . For example, a drought that reduces wheat supply shifts the left, resulting in a higher equilibrium price and lower quantity. The higher price causes movement along the ; it does not itself demand.
When both curves
Analyze each separately, then combine the effects. If both shifts push an outcome in the same direction, that direction is predictable. If they push in opposite directions, the result depends on the relative sizes of the shifts and may be ambiguous without more information.
Demand and supply both increase: Equilibrium quantity rises; the price effect is ambiguous.
Demand and supply both decrease: Equilibrium quantity falls; the price effect is ambiguous.
Demand increases while supply decreases: Equilibrium price rises; the quantity effect is ambiguous.
Demand decreases while supply increases: Equilibrium price falls; the quantity effect is ambiguous.
For example, if demand for coffee increases while a poor harvest reduces supply, both changes push price upward, so equilibrium price rises. Their effects on quantity oppose each other: stronger demand raises it, while reduced supply lowers it. The final quantity depends on which is larger.