- Types of Markets in Economics
- Demand Function and Demand Curve
- Supply Function and Supply Curve
- Shifts in Demand and Supply Curves
- Aggregating Demand and Supply Curves and Concept of Equilibrium
- Excess Demand and Excess Supply
- Stable and Unstable Equilibrium
- Types of Auctions
- Four Methods of Distributing Government Securities
- Consumer and Producer Surplus
- Effects of Government Regulation on Demand and Supply
- Price Elasticity of Demand
- Income Elasticity of Demand
- Cross Price Elasticity of Demand
Shifts in Demand and Supply Curves
Shifts in Demand Curve
We learned that the demand function expressed the quantity demanded as a function of price, while the other factors are held constant.
If the price of a good or service changes, and there is no change in the other factors affecting demand such as income levels, and prices of related products, then there will be a movement along the existing demand curve.
This movement along the curve indicates that when prices decrease, consumption increase (demand increases), and when prices increase, consumption decreases.
However, if any of the other factors affecting the quantity demanded also changes, then the complete demand curve will shift to a new level either to the left or to the right. There is a change in the quantity demanded at every price level.
A shift in demand curve to the right indicates that the demand for goods and services has increased due to a change in one of the determinants of demand. For example, the overall income of consumers may have increased or a substitute product may have become expensive.
A shift in demand curve to the left indicates that the demand for goods and services has decreased due to a change in one of the determinants of demand. For example, the overall income of consumers may have decreased, people might have lost jobs or people may be expecting a price fall in the future.
The following chart illustrates both a movement and a shift in demand curve.
Shifts in Supply Curve
Just like in demand curve we can have movements or shifts in supply curve.
If there is only a change in price, we will have a movement along the existing supply curve. This will change the quantity supplied at the new price level.
However, if one of the determinants of supply changes such as technology, labour cost, taxes, etc., then there will be a change in supply causing a shift in the supply curve. At each price level there will be a new level of quantity supplied creating a new supply curve.
A shift in supply curve to the left indicates that there is a decrease in quantity supplied due to a change in one of the determinants. For example, there could be an increase in labor cost.
A shift in supply curve to the right indicates that there is an increase in quantity supplied due to a change in one of the determinants. For example, there may have been an improvement in technology, or a reduction in taxes.
The following chart illustrates both a movement and a shift in supply curve.