Supply Demand Curve Shifts

Why This Matters

The supply and demand model is the backbone of AP Microeconomics—it's the framework you'll use to analyze everything from consumer behavior to market equilibrium to government intervention. When the AP exam asks you to explain price changes, predict market outcomes, or evaluate policy effects, you're being tested on whether you understand why curves shift and how those shifts affect equilibrium price and quantity. This isn't just Unit 2 material; curve shifts reappear in monopoly analysis, factor markets, and international trade.

Here's the key insight: shifts (the whole curve moves) are fundamentally different from movements along a curve (quantity changes in response to price). The exam loves to test whether you can distinguish between determinants that shift curves versus price changes that cause movements. Don't just memorize that "income affects demand"—know whether a good is normal or inferior, understand why technology shifts supply rightward, and be ready to trace through the chain of causation. Master the mechanisms, and you'll nail both multiple-choice and FRQ questions.

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Demand Shifters: What Changes Consumer Behavior

Demand curves shift when something other than the good's own price changes consumers' willingness to buy at every price level. The key mechanism: demand shifters change the entire relationship between price and quantity demanded.

Income Changes (Normal vs. Inferior Goods)

• Normal goods see demand increase when consumer income rises—the curve shifts right as purchasing power grows
• Inferior goods work in reverse: higher income means less demand (think generic brands vs. name brands)
• The income effect is a foundational concept that connects to consumer choice and utility maximization in Unit 1

Consumer Preferences and Tastes

• Shifts in preferences—driven by trends, advertising, or cultural changes—move demand right (favorable) or left (unfavorable)
• Advertising works by increasing perceived marginal utility, making consumers willing to pay more at every quantity
• Exam tip: Preference shifts are often the "catch-all" explanation when other determinants don't apply

Prices of Related Goods

• Substitute goods have a positive cross-price relationship: if Pepsi's price rises, demand for Coca-Cola shifts right
• Complementary goods have a negative relationship: if printer prices spike, demand for ink cartridges shifts left
• Cross-price elasticity (covered later) quantifies these relationships—positive for substitutes, negative for complements

Consumer Expectations

• Expected future price increases cause current demand to rise—consumers buy now to avoid paying more later
• Expected future price decreases cause current demand to fall as consumers delay purchases
• This connects to intertemporal choice: consumers weigh present consumption against future consumption based on expected prices

Population and Market Size

• Population growth shifts demand right by adding more consumers to the market
• Demographic changes (aging population, urbanization) can shift demand for specific goods even without total population change
• Market expansion through globalization or reduced trade barriers has the same rightward-shifting effect

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Supply Shifters: What Changes Producer Behavior

Supply curves shift when something other than the good's own price changes producers' willingness to sell at every price level. The key mechanism: supply shifters alter the cost or feasibility of production.

Input Prices and Production Costs

• Higher input costs (wages, raw materials, energy) shift supply left—producers offer less at every price because profit margins shrink
• Lower input costs shift supply right, making production more profitable at existing prices
• This connects to marginal cost: when $MC$ rises at every output level, the supply curve (which is the MC curve above AVC) shifts left

Technology and Productivity

• Technological improvements shift supply right by lowering the cost of producing each unit
• Productivity gains mean more output per unit of input—effectively reducing $MC$ at every quantity
• Key insight: Technology is almost always a rightward shift; technological regression is rare outside of disaster scenarios

Number of Sellers

• More producers entering a market shifts supply right—total market supply is the horizontal sum of individual firm supplies
• Fewer producers (due to exit, bankruptcy, or barriers) shifts supply left
• Long-run entry and exit is the mechanism that drives economic profit to zero in competitive markets

Producer Expectations

• If producers expect higher future prices, they may withhold current supply (shift left) to sell later at better prices
• If producers expect lower future prices, they may increase current supply (shift right) to sell before prices fall
• This is especially relevant for storable commodities like oil, grain, or metals

Government Policies

• Per-unit taxes shift supply left by raising the effective cost of production by the tax amount
• Subsidies shift supply right by lowering the effective cost—producers receive payment that offsets their costs
• Regulations (environmental rules, safety standards) typically increase compliance costs, shifting supply left

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The Critical Distinction: Shifts vs. Movements

Understanding this difference is perhaps the most frequently tested concept in supply and demand analysis. A shift changes the entire curve; a movement is along a fixed curve in response to a price change.

Price Changes Cause Movements, Not Shifts

• A change in the good's own price causes movement along the existing demand or supply curve—this is called a change in quantity demanded or quantity supplied
• Shifts occur only when non-price determinants change—income, preferences, input costs, technology, etc.
• Vocabulary matters: "Demand increased" means the curve shifted right; "quantity demanded increased" means movement along the curve

Causation Flows from Shifts to New Equilibrium

• When a curve shifts, the market moves to a new equilibrium with a different price and quantity
• The new price then causes movement along the other curve that didn't shift
• Trace the chain: Shift → disequilibrium → price adjustment → movement along the stationary curve → new equilibrium

Simultaneous Shifts Create Ambiguity

• When both curves shift, either equilibrium price or quantity becomes ambiguous (depends on relative magnitude of shifts)
• Both shift right: Quantity definitely increases, but price effect is ambiguous
• Opposite shifts: Price effect is clear, but quantity effect is ambiguous—know which combinations produce which ambiguities

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Seasonal and External Factors

Some shifts are predictable and recurring, while others represent external shocks to the market. Both affect equilibrium but operate on different timescales and with different predictability.

Seasonal Demand Fluctuations

• Holiday items, winter clothing, and summer goods experience predictable demand shifts tied to calendar cycles
• Anticipation of seasonal shifts affects producer inventory decisions and pricing strategies
• Agricultural products face both seasonal demand and seasonal supply constraints from growing cycles

External Shocks and Natural Disasters

• Supply disruptions from hurricanes, droughts, or pandemics shift supply left suddenly and often dramatically
• Demand shocks can be positive (new health study favoring a product) or negative (safety recall)
• Short-run vs. long-run adjustment: Immediate shocks may cause large price swings; markets adjust as entry/exit occurs over time

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Quick Reference Table

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Self-Check Questions

1. A new study shows that coffee has significant health benefits. Which curve shifts, in which direction, and what happens to equilibrium price and quantity?

2. Compare and contrast: How would a drought affecting wheat farms and a new tax on wheat producers both affect the wheat market? What do they have in common, and how might their effects differ?

3. If consumer income rises and demand for a product decreases, what type of good is this? Give an example and explain the mechanism.

4. The price of streaming services decreases significantly. What happens to demand for movie theater tickets? Identify whether theaters and streaming are substitutes or complements and predict the market effect.

5. FRQ-style: Suppose both demand increases (due to population growth) and supply increases (due to technological improvement) in the market for smartphones. What can you say with certainty about the new equilibrium, and what remains ambiguous? Explain your reasoning.