AS: Unit 1 - Shifts in demand and supply

In this post we will learn:

1. How and why there are shifts in demand
2. How and why there are shifts in supply

Shifts in the demand curve

Analysing the diagram:

Given that the original equilibrium demand curve is 'D' at price 'P' and quantity 'Q'

• Reduction in demand
• The demand curve will shift left (D to D1)
• Price will reduce from 'P' to 'P1'
• Quantity demanded will reduce from 'Q' to 'Q1'
• Increase in demand
• The demand curve will shift right (D to D2)
• Price will increase from 'P' to 'P2'
• Quantity demanded will increase from 'Q' to 'Q2'

Causes:

• Change in prices or related goods
• Substitutes
• If price of a substitute increase then demand for this good will increase
• If price of a substitute decrease then demand for this good will decrease
• E.g. If the good is butter and the price of margarine increases, then the demand for butter will increase. Similarly if price of margarine decreases, then the demand for butter will decrease.
• Complements
• If price of complementary good increase then demand for this good will decrease
• If price of complementary good decrease then demand for this good will increase
• E.g. If this good is DVD players and the price of DVDs increases, the demand for DVD players will decrease. Similarly if price of DVDs decreases, the demand for DVD players will increase as they are consumed together.
• Change in income
• Normal goods
• If income increases then demand for normal goods will increase
• If income decreases then demand for normal goods will decrease
• Inferior goods
• If income increases then demand for inferior good will decrease
• If income decreases then demand for inferior good will increase
• E.g. Transportation, if income increases you are more likely to drive your car. If income decreases you are more likely to take the train. In this case car is the normal good and public transport is the inferior good.
• Change in taste
• Change in expectation

Shifts in the Supply curve 

 

 

Analysing the diagram:

Given that the original equilibrium demand curve is 'S' at price 'P' and quantity 'Q'

• Reduction in supply
• The supply curve will shift left (S to S2)
• Price will increase from 'P' to 'P2' 
• Quantity demanded will reduce from 'Q' to 'Q2'
• Increase in supply
• The supply curve will shift right (S to S1)
• Price will decrease from 'P' to 'P1'
• Quantity demanded will increase from 'Q' to 'Q1'

Causes:

•  Change in technology
• Better technology will increase efficiency / productivity
• E.g. new machine which can produce 5 times more goods will lead decrease average costs
•  Change in supplies
• Cheaper supplies
• E.g. cheaper source of oil will decrease average costs (therefore shift S to S1). Conversely natural disaster may increase price of oil thus increase average costs (therefore shift S to S2)

 

AS: Unit 1 - Demand and Supply curves in a market and the equilibrium

In this post we will learn:

1. The basics of the demand and supply curve
2. How the price mechanism establishes an equilibrium in a market

So this post will mainly be about the very basic demand and supply diagram.

*ASSUMING CETERUS PARABUS*

Firstly the Demand curve (on the right) is downwards sloping. Why?

This because of the Law of Demand which suggests there is an inverse relationship between the price and demand of a good (hence the axes on the diagram)! This basically means as prices fall (P1 to P2) there will be a increase in quantity demanded (Q1 to Q2), similarly as prices rises (P2 to P1) there will be a decrease in quantity demanded (Q2 to Q1).

 

Secondly the Supply curve (on the left) is upwards sloping. Why?

Well surprise; this is because of the Law of Supply! Similarly to the relationship of the demand curve, as prices increase (P1 to P2) there will be an increase in the quantity supplied (Q1 to Q2) and as prices decrease (P2 to P1) there will be a decrease in the quantity supplied (Q2 to Q1).

 

It is actually quite logical, if you think about it. If the price of  a good decreases of course you're more likely to buy it! Similarly if you sold a good and the price of the good increased of course you'd supply more!  

 

The Equilibrium

 

When demand meets supply the equilibrium is established and there is no tendency for change. Price is at 'P1' and quantity is at 'Q1'.

 

 

However when we're not at equilibrium we are at market disequilibrium and supply does not equal demand.

• If price is at 'Ps'
• Suppliers are willing to supply quantity 'Qy'
• However demand is only at 'Qx'
• Thus there is excess supply (more supply than demand) from points 'A' to 'B' (Qx to Qy)
• If price is at 'Pd'
• Suppliers are only willing to supply at 'Qx'
• However demand is at 'Qy'
• Thus there is excess demand (more demand than supply) from points 'C' to 'D' (Qy to Qx)
• If price is at 'P1'
• There is market equilibrium

---

Please leave feedback and any questions. Thank you! xx