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The next Clear It Up feature focuses on the difference between shifts of supply or demand and movements along a curve.

What is the difference between shifts of demand or supply versus movements along a demand or supply curve?

One common mistake in applying the demand and supply framework is to confuse the shift of a demand or a supply curve with movement along a demand or supply curve. As an example, consider a problem that asks whether a drought will increase or decrease the equilibrium quantity and equilibrium price of wheat. Lee, a student in an introductory economics class, might reason:

“Well, it is clear that a drought reduces supply, so I will shift back the supply curve, as in the shift from the original supply curve S 0 to S 1 shown on the diagram (called Shift 1). So the equilibrium moves from E 0 to E 1 , the equilibrium quantity    is lower and the equilibrium price is higher. Then, a higher price makes farmers more likely to supply the good, so the supply curve shifts right, as shown by the shift from S 1 to S 2 , on the diagram (shown as Shift 2), so that the equilibrium now moves from E 1 to E 2 . The higher price, however, also reduces demand and so causes demand to shift back, like the shift from the original demand curve, D 0 to D 1 on the diagram (labeled Shift 3), and the equilibrium moves from E 2 to E 3 .”

Shifts of demand or supply versus movements along a demand or supply curve

The graph shows the difference between shifts of demand and supply, and movement of demand and supply.
A shift in one curve never causes a shift in the other curve. Rather, a shift in one curve causes a movement along the second curve.

At about this point, Lee suspects that this answer is headed down the wrong path. Think about what might be wrong with Lee’s logic, and then read the answer that follows.

Answer: Lee’s first step is correct: that is, a drought shifts back the supply curve of wheat and leads to a prediction of a lower equilibrium quantity and a higher equilibrium price. This corresponds to a movement along the original demand curve (D 0 ), from E 0 to E 1 . The rest of Lee’s argument is wrong, because it mixes up shifts in supply with quantity supplied, and shifts in demand with quantity demanded. A higher or lower price never shifts the supply curve, as suggested by the shift in supply from S 1 to S 2 . Instead, a price change leads to a movement along a given supply curve. Similarly, a higher or lower price never shifts a demand curve, as suggested in the shift from D 0 to D 1 . Instead, a price change leads to a movement along a given demand curve. Remember, a change in the price of a good never causes the demand or supply curve for that good to shift.

Think carefully about the timeline of events: What happens first, what happens next? What is cause, what is effect? If you keep the order right, you are more likely to get the analysis correct.

In the four-step analysis of how economic events affect equilibrium price and quantity, the movement from the old to the new equilibrium seems immediate. As a practical matter, however, prices and quantities often do not zoom straight to equilibrium. More realistically, when an economic event causes demand or supply to shift, prices and quantities set off in the general direction of equilibrium. Indeed, even as they are moving toward one new equilibrium, prices are often then pushed by another change in demand or supply toward another equilibrium.

Key concepts and summary

When using the supply and demand framework to think about how an event will affect the equilibrium price and quantity, proceed through four steps: (1) sketch a supply and demand diagram to think about what the market looked like before the event; (2) decide whether the event will affect supply or demand; (3) decide whether the effect on supply or demand is negative or positive, and draw the appropriate shifted supply or demand curve; (4) compare the new equilibrium price and quantity to the original ones.

Problems

Demand and supply in the market for cheddar cheese is illustrated in [link] . Graph the data and find the equilibrium. Next, create a table showing the change in quantity demanded or quantity supplied, and a graph of the new equilibrium, in each of the following situations:

  1. The price of milk, a key input for cheese production, rises, so that the supply decreases by 80 pounds at every price.
  2. A new study says that eating cheese is good for your health, so that demand increases by 20% at every price.

Price per Pound Qd Qs
$3.00 750 540
$3.20 700 600
$3.40 650 650
$3.60 620 700
$3.80 600 720
$4.00 590 730
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Supply and demand for movie tickets in a city are shown in [link] . Graph demand and supply and identify the equilibrium. Then calculate in a table and graph the effect of the following two changes.

  1. Three new nightclubs open. They offer decent bands and have no cover charge, but make their money by selling food and drink. As a result, demand for movie tickets falls by six units at every price.
  2. The city eliminates a tax that it had been placing on all local entertainment businesses. The result is that the quantity supplied of movies at any given price increases by 10%.

Price per Pound Qd Qs
$5.00 26 16
$6.00 24 18
$7.00 22 20
$8.00 21 21
$9.00 20 22
Got questions? Get instant answers now!

References

Pew Research Center. “Pew Research: Center for the People&the Press.” http://www.people-press.org/.

Questions & Answers

production possibility curve
Mama Reply
graphs about production possibility curve?
Mama
what are the concept of economic
dauda Reply
demand suply and population
dauda
graphs on about ppc
Mama
with the aid of diagrams illustrate movement along and shifts in demand curve
Mercy Reply
what is scarcity
ISAH Reply
limited in supply relative to demand
doris
scarcity means resources available to provide our daily needs are limited
Terkimbi
shortage of resources that we need for our demand. basically price go up due to this problem.
Jean
scarcity means our resources r not enough for us or our resources r limited
Adam
discuss the effects of price controls int the economy
Charmaine
• It stimulates excess demand, which cannot be statified ie shortage in the market. • It encourages hoarding of commodities by wholesales and retailers. • It leads to the creation of " black market" or undercounter sales and its attendant high prices. • It encourage conditional sales of products.
BAMBA
What are the reasons for the existence of monopoly?
Gerry Reply
Because such barriers occur in different forms, there are therefore varying reasons for the existence of monopolies. Ownership of a Key Resource: When one company exerts sole control over a resource that is necessary for the production of a specific product, the market may become a monopoly.
Kenneth
Thanks Kenneth
Gerry
what is international trade
Syed Reply
what is imperfect compition
Syed
what is crowding out effect
LAXMI Reply
what is federal finance?
LAXMI Reply
what is populic
Kute
what is imperfect compition
Syed
Explain five importance of the study of economic
Francis Reply
study of economics help a person to make rational choice in multiple wants. help individual to be a well all-round thinker.
Bitrus
the five important of the study of economics are as follows (1)time (2)management of resources (3)choice making (4)business(5)scarcity
Terkimbi
an increase in demand (while supply remains constant) what will happen to deh graph?
Thabiso Reply
what is going to happen to the graph if there is an increase in demand, While supply remains constant .
Thabiso
What will happen to the graph if there is an increase in demand While supply remains constant?
Thabiso
price will increase high than automatically demand will decrease
takshaveer
equilibrium ?
Issum
is when the supply and demand are balanced
ISAH
what is demand
Sarkwah Reply
demand is the willingness to buy a commodity backed by the ability to pay.
Runwell
demand is mere desire on commodity with ability to back up with purchasing power
Terkimbi
demand is the want of commodity back by the ability to pay for that commodity
Adenira
demand is the willingness to buy any type of commodity for the exchange of something that is valuable to the seller.
Jean
demand is any valuable commodity that people are willing to buy at prices.
ISAH
Equilibrium is when there's an equality between quantity demanded and quantity supplied
Victory Reply
Again the consumer will be in equilibrium if the price of the commodity is equal to Marginal utility of that product
daniel
wat is the law of supply
Agnes Reply
It's what* -The law of supply states that price and supply is relative. As all factors are equal, if price increases then quantity of supply there for increases.
Nathaniel
the law of suppy state that when prise is high, more commodity with be supply and when p is low less of the same commodity will be supply.
BEGE
It states that, "other things being equal, move supplied at a higher price than at a lower price ".
Murewah
okay
Agnes
it's state that the increased in prices will lead to decreased in supply
Asuquo
what is the theory of supply and the determinants of demand
Murewah
And please what is change in quantity supplied?
Agnes
guys why are you so quiet
Murewah
A woman has a television set which cost her $800 two years ago. A new set would cost her $1000 and she could sell her television set for $450. What is the opportunity Cost of keeping the old TV?
Murewah Reply
Maybe the opportunity cost of the TV is 800
ISAH
principle of effective demand?
Abubakar Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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