Changes in Supply and Demand

LEARNING OBJECTIVES

 Describe the differences between changes in demand and changes in the

quantity demanded
 Describe the differences between changes in supply and changes in quantity
supplied

It’s hard to overstate the importance of understanding the difference between shifts
in curves and movements along curves. Remember, when we talk about changes in
demand or supply, we do not mean the same thing as changes in quantity
demanded or quantity supplied.

A change in demand refers to a shift in the entire demand curve, which is caused by

a variety of factors (preferences, income, prices of substitutes and complements,
expectations, population, etc.).  In this case, the entire demand curve moves left or
right:

Figure 1. Change in Demand. A change in demand means that the entire demand curve shifts either left
or right. The initial demand curve D 0 shifts to become either D1 or D2. This could be caused by a shift in
tastes, changes in population, changes in income, prices of substitute or complement goods, or changes
future expectations.
A change in quantity demanded refers to a movement along the demand curve,
which is caused only by a change in price.  In this case, the demand curve doesn’t
move; rather, we move along the existing demand curve:

Figure 2. Change in Quantity Demanded. A change in the quantity demanded refers to movement along
the existing demand curve, D0. This is a change in price, which is caused by a shift in the supply curve.

Similarly, a change in supply refers to a shift in the entire supply curve, which is

caused by shifters such as taxes, production costs, and technology.  Just like with
demand, this means that the entire supply curve moves left or right:
Figure 3. Change in Supply. A change in supply means that the entire supply curve shifts either left or
right. The initial supply curve S0 shifts to become either S1 or S2. This is caused by production conditions,
changes in input prices, advances in technology, or changes in taxes or regulations.

A change in quantity supplied refers to a movement along the supply curve, which

is caused only by a change in price.  Similar to demand, a change in quantity
supplied means that we’re moving along the existing supply curve:
 Figure 4. Change in Quantity Supplied. A change in the quantity supplied refers to movement along the
existing supply curve, S0. This is a change in price, caused by a shift in the demand curve.

Here’s one way to remember: a movement along a demand curve, resulting in a

change in quantity demanded, is always caused by a shift in the supply curve.
Similarly, a movement along a supply curve, resulting in a change in quantity
supplied, is always caused by a shift in the demand curve.

Changes in equilibrium price and

quantity: the four-step process
Key points
 There is a four-step process that allows us to predict how an event
will affect the equilibrium price and quantity using the supply and demand
framework.

 Step one: draw a market model (a supply curve and a demand curve)
representing the situation before the economic event took place.

 Step two: determine whether the economic event being analyzed

affects demand or supply.

 Step three: decide whether the effect on demand or supply causes the
curve to increase (shift to the right) or decrease (shift to the left) and to
sketch the new demand or supply curve on the diagram.

 Step four: identify the new equilibrium price and quantity and then
compare the original equilibrium price and quantity to the new equilibrium
price and quantity.

Changes in equilibrium price and quantity:

the four-step process
Let's start thinking about changes in equilibrium price and quantity by
imagining a single event has happened. It might be an event that affects
 demand—like a change in income, population, tastes, prices of substitutes
or complements, or expectations about future prices. Or, it might be an
event that affects supply—like a change in natural conditions, input prices,
technology, or government policies that affect production.

How do we know how an economic event will affect equilibrium price and
quantity? Luckily, there's a four-step process that can help us figure it out!

Step 1. Draw a demand and supply model representing the situation

before the economic event took place.

Establishing this model requires four standard pieces of information:

 A downward sloping demand curve

 An upward sloping supply curve
 Correctly labeled axes: a vertical axis labeled price and a horizontal
axis labeled quantity
 An initial equilibrium price and quantity. It is a good practice to
indicate these on the axes, rather than in the interior of the graph.
Step 2. Decide whether the economic event being analyzed affects
demand or supply.

In other words, does the event refer to something in the list of demand
factors or supply factors?

Step 3. Decide whether the effect on demand or supply causes the

curve to shift to the right or to the left, and sketch the new demand or
supply curve on the diagram.

You can think about it this way: Does the event change the amount
consumers want to buy or the amount producers want to sell?

Step 4. Identify the new equilibrium and then compare the original
equilibrium price and quantity to the new equilibrium price and
quantity.
The best way to get at this process is to try it out a couple of times! Let’s
first consider an example that involves a shift in supply, then we'll move
on to one that involves a shift in demand. Finally, we'll consider an
example where both supply and demand shift.
The algebraic approach to equilibrium. The algebraic approach to equilibrium
analysis is to solve, simultaneously, the algebraic equations for demand and supply.
In the example given above, the demand equation for good X was 

Qd=12-2P
and the supply equation for good X was 

Qs=2P

To solve simultaneously, one first rewrites either the demand or the supply equation
as a function of price. In the example above, the supply curve may be rewritten as
follows:

In equilibrium Qs=Qd

2P=12-2P

4P = 12

Pe =12/4

=RM3 per unit

Qe=2(3)= 6 units

Let say new demand curve is Qd1=16- 2P

New equilibrium will be

Qs=Qd1

2P= 16-2P

4P= 16

Pe1=16/4=RM 4 per unit

Qe1= 2(4) = 8 units

Drawing
Equilibrium point (6,3)

And the intercept, for demand curve, when Qd=0, P=?

0=12-2P; 2P=12; P=6; the point ia (0,6)

for supply curve, when Qs=0, P=?

0=2P; P=0/2=0, the point is (0,0)

The changes in equibrium, demand curve changes to Qd1=16-2P

New Equilibrium point (8,4)

And the intercept, for demand curve, when Qd=0, P=?

0=16-2P; 2P=18; P=8; the point ia (0,8)

P/RM per unit

6
E1
Qs=2P
4 E0

3 Qd1=16-2P
Qd=12-2P
Q/units

6 8