3.2 Shifts in Demand and Supply for Goods and Services
3 min read•june 24, 2024
Demand and supply are the building blocks of markets. They're shaped by various factors like income, preferences, and costs. Understanding these influences helps predict how markets will react to changes.
When demand or supply shifts, it causes ripple effects throughout the market. Prices and quantities adjust to find a new balance. This constant dance between buyers and sellers is what makes markets tick.
Factors Affecting Demand and Supply
Factors shifting demand curves
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- Changes in consumer income shift demand curves
- Higher income increases demand for (cars) causing a
- Lower income decreases demand for normal goods leading to a
- Higher income decreases demand for (instant noodles) resulting in a leftward shift
- Lower income increases demand for inferior goods causing a rightward shift
- Shifts in consumer preferences alter demand
- Favorable changes in tastes boost demand (plant-based meat) with a rightward shift
- Unfavorable changes in preferences reduce demand (fur coats) via a leftward shift
- Price changes in related goods affect demand
- : higher price for one good raises demand for its substitute (Pepsi vs. Coca-Cola) with a rightward shift
- Substitute goods: lower price for one good lowers demand for its substitute causing a leftward shift
- : higher price for one good reduces demand for its complement (smartphones and phone cases) via a leftward shift
- Complementary goods: lower price for one good boosts demand for its complement resulting in a rightward shift
- of demand influences the magnitude of these shifts
Demand shifts and market equilibrium
- Rightward shift in represents an increase in demand
- Leads to a higher ()
- Results in a larger ()
- Leftward shift in demand curve indicates a decrease in demand
- Causes a lower equilibrium price ()
- Produces a smaller equilibrium quantity ()
Factors Affecting Supply
Causes of supply curve shifts
- Input cost changes shift supply curves
- Higher (wages, materials) decrease supply causing a leftward shift
- Lower input costs increase supply resulting in a rightward shift
- affects supply
- Advancements in technology (automation) boost productivity and supply with a rightward shift
- Technological setbacks or obsolescence reduce supply via a leftward shift
- and regulations impact supply
- and tax breaks for producers increase supply causing a rightward shift
- Taxes, , and strict production regulations decrease supply with a leftward shift
- of resources can lead to a leftward shift in supply
Supply shifts and market outcomes
- Rightward shift in shows an increase in supply
- Results in a lower equilibrium price ()
- Leads to a larger equilibrium quantity ()
- Leftward shift in supply curve represents a decrease in supply
- Causes a higher equilibrium price ()
- Produces a smaller equilibrium quantity ()
Market Dynamics
- of supply and demand interact to determine equilibrium prices and quantities
- The helps allocate resources efficiently in a market economy
- Changes in supply and demand affect and
Key Terms to Review (22)
Complementary Goods: Complementary goods are two or more products that are typically consumed together, as the demand for one good increases the demand for the other. These goods have a close relationship, where the consumption of one item directly influences the consumption of the other.
Consumer Surplus: Consumer surplus is the difference between the maximum amount a consumer is willing to pay for a good or service and the actual price they pay. It represents the additional benefit or satisfaction a consumer derives from a purchase beyond the cost incurred.
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, while holding all other factors constant.
Elasticity: Elasticity is a measure of the responsiveness or sensitivity of one economic variable to changes in another. It is a crucial concept in understanding the behavior of consumers, producers, and markets as it quantifies the degree to which demand, supply, and other economic factors react to changes in price, income, or other determinants.
Equilibrium Price: Equilibrium price is the price at which the quantity demanded of a good or service is exactly equal to the quantity supplied. It is the point where the demand and supply curves intersect, representing the market-clearing price that balances the interests of buyers and sellers.
Equilibrium Quantity: Equilibrium quantity refers to the quantity of a good or service that is demanded and supplied at the point where the market is in equilibrium, where the quantity demanded is exactly equal to the quantity supplied. This concept is central to understanding the dynamics of supply and demand in a market for goods and services.
Government Policies: Government policies refer to the actions, regulations, and initiatives undertaken by the government to influence economic, social, and environmental outcomes. These policies shape the economic landscape and impact the supply and demand dynamics within a market.
Inferior Goods: Inferior goods are a type of consumer good for which demand decreases as a person's income rises. In other words, as a person's income increases, they tend to consume less of an inferior good and more of a normal good. This is in contrast to normal goods, for which demand increases as income rises.
Input Costs: Input costs refer to the expenses incurred by a business or producer in acquiring the necessary resources, materials, and services to create a product or provide a service. These costs are a crucial factor in determining the overall production costs and, consequently, the pricing and profitability of the goods or services offered.
Leftward Shift: A leftward shift refers to a change in the demand or supply curve that results in a decrease in the equilibrium quantity and a decrease in the equilibrium price. This shift occurs when there is a change in one or more of the determinants of demand or supply, causing the entire demand or supply curve to move to the left.
Market Equilibrium: Market equilibrium is the point at which the quantity demanded of a good or service is exactly equal to the quantity supplied, resulting in a stable market price. This concept is central to understanding how markets function and how supply and demand interact to determine prices and quantities in a market economy.
Market Forces: Market forces refer to the supply and demand factors that determine the prices and quantities of goods and services traded in a market. These forces shape the equilibrium price and quantity in a market through the interaction of buyers and sellers.
Normal Goods: Normal goods are a type of consumer good where demand increases as consumer income increases. As people have more money to spend, they tend to purchase more of these goods, which are considered essential or desirable for their standard of living.
Price Mechanism: The price mechanism is the system by which the market determines the appropriate price for goods and services based on the interaction of supply and demand. It serves as an efficient information transmission system that coordinates the decisions of buyers and sellers, leading to the allocation of resources in the most optimal way.
Producer Surplus: Producer surplus refers to the difference between the minimum price a producer is willing to accept for a good and the actual market price. It represents the additional benefit or profit that producers receive beyond their minimum willingness to sell, and is a key concept in understanding the efficiency and distribution of gains in a market system.
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 occurs when factors that influence the supply or demand for a product change, causing the entire curve to move to the right.
Scarcity: Scarcity is the fundamental economic problem that arises from the fact that there are limited resources to satisfy unlimited human wants. It is the core concept that drives economic decision-making and the study of economics as a whole.
Subsidies: Subsidies are financial assistance or support provided by the government or other entities to individuals, businesses, or industries, with the aim of promoting certain economic activities, offsetting costs, or influencing market conditions. Subsidies can have significant impacts on the demand and supply of goods and services, as well as on income inequality and trade policies.
Substitute Goods: Substitute goods are products or services that can be used in place of one another to satisfy a similar need or desire. They are considered close alternatives that can be interchanged by consumers based on factors such as price, quality, or personal preference.
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 how producers are willing to sell different quantities of a product at various price levels in a market.
Tariffs: Tariffs are taxes or duties imposed on imported goods and services. They are a type of trade policy tool used by governments to influence the flow of international trade and protect domestic industries from foreign competition.
Technological Progress: Technological progress refers to the continuous advancements and improvements in technology, including tools, techniques, and processes, that enhance productivity, efficiency, and the overall standard of living. It is a crucial driver of economic growth and development, enabling the production of goods and services at a higher quality and lower cost.