Principles of Microeconomics
🛒principles of microeconomics review
3.2 Shifts in Demand and Supply for Goods and Services
Last Updated on June 24, 2024
Demand and supply curves shift due to various factors, affecting market equilibrium. Changes in consumer preferences, income, and related goods prices impact demand. Supply shifts result from changes in input costs, technology, and producer numbers.
Market dynamics involve movements along curves due to price changes and shifts caused by non-price factors. Equilibrium occurs where supply meets demand. Real-world events can be analyzed using supply-demand diagrams to predict new equilibrium prices and quantities.
Factors Affecting Demand and Supply
Factors shifting demand curves
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- Changes in consumer preferences shift demand curves
- Evolving tastes and preferences over time lead to demand shifts (organic products)
- Increased health consciousness shifts demand for organic products to the right
- Changes in the number of buyers shift demand curves
- Rising population or consumer numbers in the market shift demand to the right
- Falling number of buyers shifts demand to the left (aging population)
- Changes in consumer income shift demand curves
- Normal goods experience rising demand (shifts right) with higher income and falling demand (shifts left) with lower income (luxury cars)
- Inferior goods face falling demand (shifts left) with higher income and rising demand (shifts right) with lower income (generic brands)
- Changes in the prices of related goods shift demand curves
- Substitutes see demand for one good shift right when the price of the substitute rises (Lyft and Uber)
- Complements have demand for one good shift left when the price of the complement rises (smartphones and phone cases)
- Changes in consumer expectations shift demand curves
- Expectations about future prices, income, or product availability shift current demand
- Anticipating future price increases shifts current demand to the right (buying before a sales tax hike)
- Consumer sovereignty influences demand shifts
- Consumer preferences and choices drive market demand, affecting product offerings and prices
Graphical changes in supply
- Shifts in the supply curve represent changes in supply
- Rightward shift (increase in supply) means suppliers will produce more at each price level (good weather for crops)
- Leftward shift (decrease in supply) means suppliers will produce less at each price level (rising costs)
- Factors that shift the supply curve impact supply
- Rising input prices shift supply left, while falling input prices shift supply right (oil prices for plastics)
- Technological advancements that lower production costs shift supply to the right (automation)
- More producers entering the market shift supply right, while fewer producers shift supply left (number of farms)
- Government subsidies shift supply right, while taxes or regulations shift supply left (agricultural subsidies vs environmental regulations)
- Expectations of future price changes or production conditions can shift current supply (anticipating a minimum wage increase)
- Producer incentives affect supply shifts
- Changes in profit potential or market conditions influence suppliers' willingness to produce
Equilibrium and Market Dynamics
Movements vs shifts in curves
- Movements along the demand curve are caused by price changes
- Falling prices cause downward movements along the demand curve, increasing quantity demanded (summer sales)
- Rising prices cause upward movements along the demand curve, decreasing quantity demanded (surge pricing)
- Movements along the supply curve are caused by price changes
- Higher prices lead to upward movements along the supply curve, increasing quantity supplied (rare collectibles)
- Lower prices lead to downward movements along the supply curve, decreasing quantity supplied (off-season produce)
- Shifts of the demand curve are caused by non-price factors
- Rightward shifts represent increasing demand, while leftward shifts represent decreasing demand (changing consumer preferences)
- Shifts of the supply curve are caused by non-price factors
- Rightward shifts represent increasing supply, while leftward shifts represent decreasing supply (number of producers)
Market equilibrium through supply-demand diagrams
- Equilibrium is where quantity demanded equals quantity supplied () at the equilibrium price ()
- Shifts in demand impact equilibrium
- Increasing demand (shifts right) raises both equilibrium price and quantity (more buyers enter market)
- Decreasing demand (shifts left) lowers both equilibrium price and quantity (close substitutes become cheaper)
- Shifts in supply impact equilibrium
- Increasing supply (shifts right) lowers equilibrium price but raises quantity (bumper crop harvest)
- Decreasing supply (shifts left) raises equilibrium price but lowers quantity (input shortages)
- Simultaneous shifts in demand and supply have differing impacts
- Final impact depends on the relative size of the demand and supply shifts
- Increasing demand and decreasing supply raises price, but quantity change depends which shift dominates (oil markets)
- Real-world events can be analyzed with supply and demand diagrams
- Natural disasters (hurricanes), policy changes (tariffs), or technological changes (fracking) can shift supply and demand
- Diagrams illustrate the new equilibrium price and quantity after the shifts (avocado prices after a bad harvest)
Market Forces and Equilibrium
- The price mechanism facilitates market equilibrium
- Prices adjust to balance supply and demand, allocating resources efficiently
- Market dynamics involve the interaction of supply and demand
- Changes in market conditions lead to price and quantity adjustments
- Economic shocks can disrupt market equilibrium
- Sudden events or changes in economic conditions cause rapid shifts in supply or demand
- Ceteris paribus assumption in analysis
- Examining the effect of one variable while holding all others constant
Key Terms to Review (29)
Scarcity: Scarcity is the fundamental economic problem that arises from the fact that the resources available to meet human wants are limited. It is the core concept that drives economic decision-making and the study of economics as a whole.
Cost-Benefit Analysis: Cost-benefit analysis is a systematic process for calculating and comparing the benefits and costs of a decision, project, or policy. It involves assigning monetary values to all the relevant factors, both positive and negative, to determine whether the benefits outweigh the costs and whether the project or decision is worthwhile from an economic perspective.
Elasticity: Elasticity is a measure of how responsive a dependent variable is to changes in an independent variable. It is a fundamental concept in microeconomics that describes the sensitivity of one economic variable, such as quantity demanded or supplied, to changes in another variable, such as price or income.
Equilibrium Price: Equilibrium price is the market price at which the quantity demanded and the quantity supplied are equal, resulting in a balance between buyers and sellers in a given market. This concept is central to understanding how markets function and how prices are determined.
Marginal Analysis: Marginal analysis is a decision-making tool used in economics to evaluate the additional benefits and costs associated with producing or consuming one more unit of a good or service. It involves examining the change in total cost or total revenue resulting from a small change in output or consumption.
Supply and Demand: Supply and demand is a fundamental economic concept that describes the relationship between the quantity of a good or service supplied by producers and the quantity demanded by consumers. It is a model used to analyze the price and quantity equilibrium in a market, and is a central component in understanding how economies function.
Ceteris Paribus: Ceteris paribus is a Latin phrase that means 'all other things being equal' or 'holding all other factors constant.' It is a crucial concept in economic analysis that allows economists to isolate the effect of one variable on another, while assuming that all other relevant factors remain unchanged.
Price Mechanism: The price mechanism is the system by which the prices of goods and services are determined in a market economy. It is the process by which supply and demand interact to set the appropriate price for a product or service, allocating resources efficiently across the economy.
Normal Goods: Normal goods are a type of consumer good for which demand increases as a consumer's income increases. As a person's income rises, their demand for normal goods tends to rise as well, assuming other factors remain constant.
Law of Demand: The law of demand is an economic principle that states that as the price of a good or service increases, the quantity demanded of that good or service decreases, and vice versa. This inverse relationship between price and quantity demanded is a fundamental concept in microeconomics.
Demand Curve: The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded of that good or service. It depicts how the quantity demanded changes as the price changes, ceteris paribus (all other factors remaining constant).
Inferior Goods: Inferior goods are a type of consumer good for which demand decreases as a consumer's income increases. These are goods that people tend to consume less of as they become wealthier, in contrast to normal or superior goods where demand increases with rising income.
Rightward Shift: A rightward shift refers to a change in the supply or demand curve that results in an increase in the equilibrium quantity and price of a good or service. This shift indicates a rise in the overall market demand or supply for the product.
Producer Incentives: Producer incentives refer to the factors that motivate and influence the decisions and actions of producers in an economy. These incentives play a crucial role in determining the supply of goods and services, as producers respond to various economic signals and market conditions to maximize their profits and minimize their costs.
Economic Shocks: Economic shocks refer to sudden, unexpected events or changes that significantly impact the economy, causing disruptions in the normal patterns of supply, demand, and market equilibrium. These shocks can have far-reaching consequences on various economic indicators, such as GDP, employment, inflation, and consumer confidence.
Leftward Shift: A leftward shift refers to a change in the demand or supply curve that results in a decrease in the quantity demanded or supplied at any given price. This shift is represented by the curve moving to the left on a supply and demand graph.
Government Subsidies: Government subsidies are financial assistance or support provided by the government to individuals, businesses, or industries to promote certain economic activities or achieve specific policy objectives. These subsidies can take various forms, such as direct payments, tax credits, or price supports, and are intended to influence market conditions and outcomes.
Market Forces: Market forces refer to the supply and demand factors that determine the price and quantity of a good or service in a free market economy. These forces drive the equilibrium price and quantity in the market, and influence the allocation of resources within the economy.
Market Dynamics: Market dynamics refers to the constantly changing interactions between supply and demand that determine the prices and quantities of goods and services traded in a market. It encompasses the factors that drive these changes and the resulting impacts on the overall market equilibrium.
Substitutes: Substitutes are goods or services that can be used in place of one another to satisfy a similar need or desire. They are products that consumers view as interchangeable or comparable, and can be substituted for each other in consumption.
Shortage: A shortage occurs when the quantity demanded of a good or service exceeds the quantity supplied at the prevailing market price. This imbalance between supply and demand results in a scarcity of the item, leading to increased competition and potential price increases.
Complements: Complements are goods or services that are used together, where the demand for one increases as the demand for the other increases. They are closely related and interdependent, such that a change in the price or availability of one affects the demand for the other.
Consumer Sovereignty: Consumer sovereignty refers to the principle that consumers, through their purchasing decisions, have the ultimate power to determine what goods and services are produced in an economy. It suggests that producers must cater to the preferences and demands of consumers in order to be successful.
Supply Curve: The supply curve is a graphical representation of the relationship between the price of a good or service and the quantity supplied of that good or service. It depicts the willingness and ability of producers to offer their products for sale at different price levels in a given market.
Equilibrium: Equilibrium is a state of balance where the forces acting on a system are in perfect harmony, resulting in no net change or movement. In the context of economics, equilibrium refers to the point where the quantity supplied and the quantity demanded of a good or service are equal, leading to a stable market price and quantity.
Equilibrium Quantity: Equilibrium quantity refers to the quantity of a good or service that is demanded and supplied at the point where the market demand curve and market supply curve intersect, resulting in a balance between the quantity demanded and the quantity supplied. This concept is central to understanding the dynamics of markets for goods and services.
Surplus: Surplus refers to the amount by which the quantity supplied of a good or service exceeds the quantity demanded at a given price. It represents a situation where there is an excess of supply over demand in the market.
Technological Advancements: Technological advancements refer to the continuous improvements and innovations in various fields of technology, leading to the development of more efficient, effective, and advanced tools, processes, and systems that can enhance productivity, communication, and quality of life.
Input Prices: Input prices refer to the costs associated with the various resources or factors of production used to create goods and services. These input prices play a crucial role in determining the overall supply and demand dynamics within an economy.