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Shifts in Demand & Supply Curves

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Shifts in Demand Curves

Shifts in Supply Curves

Shifts in Demand Curves

Diagram Explanations: 

=> Non- price determinants of demand -> causes shifts in demand curves

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1. Change in Incomes

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Case #1: Change in income on normal goods

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  • Normal goods: demand of good varies directly with consumer’s income

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  • When consumer income increases, Qd of this good increases -> shifts rightward  D1 to D2

  • When consumer income decreases, Qd of this good decreases -> shifts leftward D1 to D3

 

Case #2: Change in income on inferior goods 

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  • Inferior goods: demand of good varies inversely with consumer’s income (e.g second handed clothes)

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  • When consumer income increases -> more disposable income -> switch to more expensive alternatives -> Qd of inferior good decreases -> shifts leftward D1 to D3

  • When consumer income decreases -> less disposable income -> switch to more cheaper alternatives -> Qd of inferior good increases -> shifts rightward D1 to D2

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2. Change in Tastes & Preferences

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  • If change in consumer’s taste & preferences favors the good -> good becomes more popular -> demand increases -> demand curve shifts rightward from D1 to D2

  • If change in consumer’s taste & preferences goes against the good -> becomes less popular -> less demand -> demand curve shifts leftward from D1 to D3

 

 

3. Future price expectations

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  • If consumers expect the price to increase in the future -> consumers will be more willing to buy it in the present -> demand increases -> demand curve shifts rightward from D1 to D2

  • If consumers expect the price to decrease in the future -> consumers will wait for lower prices to buy -> less demand in the present -> demand curve shifts leftward from D1 to D3

 

4. Price of substitutes & complementary good

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Case #1: Price of substitute goods

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  • Substitute goods: goods that satisfy similar needs (e.g coke & pepsi)

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  • If substitute good X has lower price than good Y -> consumers will switch to cheaper alternative X -> lower demand for current good Y -> demand curve shifts leftward from D1 to D3

  • If substitute good X has higher price than good Y -> consumers will purchase good Y as it has cheaper price compared to good X -> demand for good Y increases -> demand curve shifts rightward from D1 to D2

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Case #2: Price of complementary goods

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  • Complementary goods: goods that tend to be used together (e.g computer & computer software)

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  • If P of complementary good increases -> consumers buy less of the complementary good -> as two goods are used together -> consumers also buy less of good X -> demand for good X decreases -> demand curve for good X shifts leftward from D1 to D3

  • If P of complementary good decreases -> consumers buy more of the complementary good -> as two goods are used together -> consumers also buy more of good X -> demand of good X increases -> demand curve for good X shifts rightward from D1 to D2

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5. Number of consumers

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  • If there is an increase in number of consumers -> demand increases -> market demand shifts rightward from D1 to D2

  • If there is a decrease in the number of consumers -> demand decreases -> market demand shifts leftward from D1 to D3

Shifts in Supply Curves

Diagram Explanations: 

=> Non- price determinants of supply -> causes shifts in supply curves

1. Changes in Costs of Inputs

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  • Input: g&s that is used to produce another g&s

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  • If there is an increase in input prices -> production of final good becomes more expensive for firms -> cost of production increases -> producers are less willing to supply -> supply curve shifts leftward from S1 to S3

  • If there is an decrease in input prices -> production of final good becomes cheaper for firms -> cost of production decreases -> producers are willing to supply more -> supply curve shifts rightward from S1 to S2

 

2. Prices of Related Goods

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Case #1: Changes in price of joint supply

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  • Joint supply: goods that are derived from one single product (e.g petrol & diesel)

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  • Since both goods derived from one single product (petro & diesel both produced from crude oil):

    • If price of one increase -> incentive for firms to earn more profits -> willing to supply more -> quantity supplied for both goods increases -> supply curve shifts rightward from S1 to S2

    • If price of one decrease -> less profits -> no/less incentives for firms to supply more -> quantity supplied for both goods decreases -> supply curve shifts leftward from S1 to S3

 

Case #2: Changes in price of competitive supply

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  • Competitive supply: goods that compete for the use of same resources (e.g roller skate & skateboards)

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  • If price of a good in competitive supply increases -> producing that good becomes more profitable -> producers have incentives & allocates more resources to produce that good -> less resources available to produce good X -> supply of good X decreases -> supply curve for good X shifts leftward from S1 to S3

  • If price of a good in competitive supply decreases -> producing that good becomes less profitable -> producers has less incentives to produce this good & reallocates resources to produce good X -> more available resources to produce good X -> supply of good X increases -> supply curve for good X shifts rightward from S1 to S2

 

3. Indirect Taxes & Subsidies

 

Case #1: Indirect taxes

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  • If gov imposes a new tax/increases an existing tax -> cost of production increases -> production becomes less profitable -> firms are less willing to supply more at every price -> supply decreases -> supply curve shifts leftward from S1 to S3

  • If gov cuts/ removes existing tax -> cost of production decreases -> production becomes more profitable -> firms are willing to supply more at every price -> supply increases -> supply curve shifts rightward from S1 to S2

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Case #2: Subsidy

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  • If gov introduces/increases a subsidy -> cost of production decreases -> production becomes more profitable -> firms are willing to supply at every price -> supply increases -> supply curve shifts rightward from S1 to S2

  • If gov removes/ decreases a subsidy -> cost of production increases -> production becomes less profitable -> firms are less willing to supply at every price -> supply decreases -> supply curve shifts leftward from S1 to S3

 

4. Future Price Expectations

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  • If firms expect their product price to rise in the future -> withhold some of their current supply from the market to sell it in the future -> current supply decreases -> supply curve shifts leftward from S1 to S3

  • If firms expect their product price to fall in the future -> supply increases in the present to take advantage of the current higher price -> current supply increases -> supply curve shifts rightward from S1 to S2

 

5. Changes in Technology

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  • If tech improves -> production becomes more efficient -> cost of production decrease -> firms can produce more output with the same resources -> supply increases -> supply curve shifts rightward from S1 to S2

  • If tech worsens -> production becomes less efficient -> cost of production increases -> firms can produce less output with the same resources -> supply decreases -> supply curve shifts leftward from S1 to S3

 

6. Number of Firms

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  • If number of firms increases -> more producers supply product -> supply curve shifts rightward from S1 to S2

  • If number of firms decreases -> less producers supply product -> supply curve shifts leftward from S1 to S3

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