Changes in Supply and Demand

Site: Saylor Academy
Course: ECON101: Principles of Microeconomics
Book: Changes in Supply and Demand
Printed by: Guest user
Date: Wednesday, October 27, 2021, 3:06 PM

Description

Read this article to learn more about how changes in supply and demand affect the market price equilibrium. Make sure to answer the "Try It" questions.

Changes in Supply and Demand

  • Describe the differences between changes in demand and changes in the quantity demanded
  • Describe the differences between changes in supply and changes in quantity supplied

It's hard to overstate the importance of understanding the difference between shifts in curves and movements along curves. Remember, when we talk about changes in demand or supply, we do not mean the same thing as changes in quantity demanded or quantity supplied.

A change in demand refers to a shift in the entire demand curve, which is caused by a variety of factors (preferences, income, prices of substitutes and complements, expectations, population, etc.).  In this case, the entire demand curve moves left or right:

Figure 1. Change in Demand. A change in demand means that the entire demand curve shifts either left or right. The initial demand curve D0 shifts to become either D1 or D2. This could be caused by a shift in tastes, changes in population, changes in income, prices of substitute or complement goods, or changes future expectations.

A change in quantity demanded refers to a movement along the demand curve, which is caused only by a change in price.  In this case, the demand curve doesn't move; rather, we move along the existing demand curve:

Figure 2. Change in Quantity Demanded. A change in the quantity demanded refers to movement along the existing demand curve, D0. This is a change in price, which is caused by a shift in the supply curve.

Similarly, a change in supply refers to a shift in the entire supply curve, which is caused by shifters such as taxes, production costs, and technology.  Just like with demand, this means that the entire supply curve moves left or right:

Figure 3. Change in Supply. A change in supply means that the entire supply curve shifts either left or right. The initial supply curve S0 shifts to become either S1 or S2. This is caused by production conditions, changes in input prices, advances in technology, or changes in taxes or regulations.

A change in quantity supplied refers to a movement along the supply curve, which is caused only by a change in price.  Similar to demand, a change in quantity supplied means that we're moving along the existing supply curve:

Figure 4. Change in Quantity Supplied. A change in the quantity supplied refers to movement along the existing supply curve, S0. This is a change in price, caused by a shift in the demand curve.

Here's one way to remember: a movement along a demand curve, resulting in a change in quantity demanded, is always caused by a shift in the supply curve. Similarly, a movement along a supply curve, resulting in a change in quantity supplied, is always caused by a shift in the demand curve.


Source: Lumen Learning, https://courses.lumenlearning.com/wmopen-microeconomics/chapter/changes-in-supply-and-demand/
Creative Commons License This work is licensed under a Creative Commons Attribution 4.0 License.

Watch It

Watch this video for another demonstration of the important distinction between these terms.

Try It

Question 1

Try graphing each of these situations to determine if they cause a shift in demand, quantity demanded, supply, or quantity supplied.

The cost of rubber used to produce tires falls by 20%. This will result in ________ for tires.

    • an increase in the quantity demanded
    • a decrease in demand
    • an increase in demand

Question 2

A recent study reveals that raisins are a natural aphrodisiac. This will likely result in ________ for raisins.

    • only a decrease in the quantity demanded
    • only an increase in the quantity demanded
    • an increase in demand

Question 3

An unexpected government tax rebate has given all the residents in your town $1,000 of extra income. This will result in ________ for goods at the local retail store.

    • an increase in the quantity supplied
    • anly an increase in quantity demanded
    • an increase in supply

Question 4

A recent pork shortage has increased its price by 25% on the world market. As an avid fan of hot dogs you would expect ________.

    • a decrease in demand
    • anly a decrease in the quantity supplied
    • a decrease in supply

Answer to Try It

1.

    • an increase in the quantity demanded Correct.
      Lower input prices will shift the supply curve to the right, causing movement along the original demand curve to a new equilibrium.
    • a decrease in demand
      This is incorrect. An increase in the demand can only occur when the demand curve shifts. Inputs prices only shift the supply curve.
    • an increase in demand
      This is incorrect. An increase in demand can only occur when the demand curve shifts. Input prices only shift the supply curve.

2.

    • only a decrease in the quantity demanded
      This is incorrect. A movement along a demand curve, resulting in a change in quantity demanded, is always caused by a shift in the supply curve.
    • only an increase in the quantity demanded
      This is incorrect. A movement along a demand curve, resulting in a change in quantity demanded, is always caused by a shift in the supply curve.
    • an increase in demand
      Correct. Changing tastes will result in a shift of the demand curve to the right, so that a greater quantity is demanded at any given price.

3.

    • an increase in the quantity supplied
      Correct. The rightward shift in the demand curve caused by the extra income will result in movement along the supply curve and therefore an increase in quantity supplied.
    • anly an increase in quantity demanded
      This is incorrect. The extra income will shift the demand curve, causing movement along the supply curve and a change in quantity supplied.
    • an increase in supply
      This is incorrect. The extra income will shift the demand curve, causing movement along the supply curve and a change in quantity supplied.

4.

    • a decrease in demand
      This is incorrect. Higher input prices will cause the supply curve to shift, not the demand curve. The result is ultimately a decrease in the quantity demanded.
    • anly a decrease in the quantity supplied
      This is incorrect. A change input prices will shift the supply curve, not the demand curve. Changes in quantity supplied are caused by shift of the demand curve.
    • a decrease in supply
      Correct. Higher input prices will cause the supply curve to shift leftwards, resulting in movement along the demand curve and a new equilibrium.

Try It

In the following simulation, you will have the opportunity to change the weather and/or change the cost of parking in order to push up the price of food from a food truck. You can play the simulation multiple times to see how different choices lead to different outcomes.

Glossary

demand:
the relationship between the price and the quantity demanded of a certain good or service

quantity demanded:
the total number of units of a good or service consumers are willing to purchase at a given price

quantity supplied: 
the total number of units of a good or service producers are willing to sell at a given price

shift in demand:
when a change in some economic factor (other than price) causes a different quantity to be demanded at every price

shift in supply: 
when a change in some economic factor (other than price) causes a different quantity to be supplied at every price

supply: 
the relationship between price and the quantity supplied of a certain good or service