Economics Demand and Supply Curves: Shifts, Causes, and Market Effects

Why does the Demand curve slope downward?

Because of diminishing marginal utility—as people consume more of a good, the additional satisfaction (utility) from each extra unit decreases, so they're only willing to pay lower prices for additional units.

Why does the Supply curve slope upward?

Due to increasing marginal opportunity costs—as producers supply more, they have to use resources that are less efficient or more costly, so they require a higher price to justify production.

What causes the demand curve shift?

Change in income, Tastes and preferences, Prices of related goods (complements/substitutes), Expectations about future prices, Number of buyers.

What causes the supply curve to shift?

Input/resource cost changes, Technology, Number of producers, Taxes/subsidies, Expectations, Natural events (e.g., weather, disease).

Why is equilibrium important? What causes us to move away from it?

Equilibrium ensures efficient allocation: marginal benefit = marginal cost. Changes in supply or demand shift the curves, moving the market out of equilibrium until price/quantity adjust.

What happens if the price of root beer increases and it's a complement to pizza?

Demand for pizza decreases. If root beer becomes more expensive, people consume less of it, and since pizza and root beer are consumed together, demand for pizza also drops (shift left).

What happens in the pizza market if the price of mozzarella cheese increases ?

This affects supply, not demand. An increase in the cost of mozzarella (an input) raises the cost of producing pizza, causing the supply curve to shift left. Price of pizza goes up; quantity supplied falls.

Suppose avian flu kills 1/3 of egg-laying hens. What happens to the market for eggs?

Supply decreases. The loss of hens reduces egg production → supply shifts left, leading to higher prices and lower quantity.

More people start buying leather goods. What happens in the beef market?

Supply of beef increases. To meet leather demand, more cows are slaughtered → more beef is available as a byproduct → supply shifts right, lowering beef prices.

The price of jelly falls and peanut butter & jelly sandwiches are consumed in equal amounts. What happens to peanut butter?

Demand for peanut butter increases. Lower jelly prices = more jelly consumption → more PB&J → increased demand for peanut butter (shift right).

Effect of income increase on cheap ramen (an inferior good)?

Demand decreases. As income rises, consumers switch to higher-quality foods → demand for ramen (an inferior good) shifts left.

If the price of oatmeal decreases, will the demand of oatmeal increase?

No. A price decrease does not shift demand. It causes a movement along the demand curve meaning the quantity demanded will increase but demand itself does not increase.

The market is for watermelons. What happens after flooding in Florida and Georgia wipes out 25% of the crop?

Supply decreases. Flooding destroys crops, supply shifts left, price increases, quantity decreases.

Flooding

Destroys crops → supply shifts left → price increases, quantity decreases.

If the price of bottled water increases, would you substitute by drinking from fountains?

Yes. Higher price causes movement along the demand curve and encourages use of substitutes (free fountain water), indicating elastic demand.

Increase in Cream of Wheat price

Demand for oatmeal increases. Consumers shift from Cream of Wheat to oatmeal → demand curve for oatmeal shifts right.

What happens when income increases and oatmeal is a normal good?

Demand increases. People buy more oatmeal → demand shifts right.

What happens to pizza demand if Surgeon General warns that pizza causes spontaneous combustion?

Demand decreases. Negative information changes preferences → demand curve shifts left.

The price of smart phones decreases significantly. What happens to the demand for smartphone cases?

Demand for smartphone cases increases. Smartphones and cases are complementary goods. Lower phone prices mean more people buy phones, so demand for accessories like cases shifts right.

The Government offers subsidies to dairy farmers. What happens to the milk market?

Supply increases. Subsidies reduce production costs, incentivizing farmers to produce more. Supply curve shifts right leading to lower prices and higher quantity.

A new fitness trend increases almond butter popularity. What happens to the peanut butter market?

Demand for peanut butter decreases. Almond butter is a substitute. As it becomes more popular, people switch from peanut butter, so demand for peanut butter shifts left.

Hurricane destroys oil refineries. What happens in the gasoline market?

Supply decreases. Destruction of production capacity reduces output → supply shifts left, raising prices and reducing quantity.

Increase in auto workers' wages. What happens to the supply of cars?

Supply decreases. Higher wages increase production costs → supply curve shifts left, raising prices and reducing quantity.

Income levels rise nationwide and walmart clothing is considered an inferior good. What happens to the market for walmart clothing?

Demand decreases. As income rises, people buy less walmart clothing (inferior good) → demand curve shifts left.

There is a drop in avocado prices which is usually eaten with toast. What happens to the demand for bread?

Demand for bread increases. Avocados and bread are complements. Lower avocado prices mean more avocado toast so demand for bread shifts right.

Recession leads to falling incomes and generic cereal is an inferior good. What happens to the generic cereal market?

Demand increases. As income falls, people buy more of the cheaper cereal → demand curve shifts right, increasing quantity and price.

A major study shows that red meat consumption increases the risk of heart disease. What happens to the demand for beef?

Demand decreases. Negative health news changes consumer preferences → demand for beef shifts left, reducing price and quantity.

The government imposes a tax on sugary drinks. What happens in the soda market?

Supply decreases. Taxes raise production costs → supply curve shifts left, increasing prices and reducing quantity sold.