Supply and Demand: Shifters, Curves, and Market Dynamics (Video)
Key Concepts
Market models use price to allocate scarce resources between buyers and sellers; the interactions are captured by the demand curve (how much buyers want to purchase at each price) and the supply curve (how much sellers are willing to offer at each price).
Non-price factors can shift these curves. These are called shifters. A shift moves the entire curve left or right, not a movement along a curve.
Movement along a curve occurs when price changes but other determinants stay the same; a shift occurs when a non-price factor changes, causing a different quantity to be supplied or demanded at every price.
Supply schedules list quantity supplied at each price (the table version); the supply curve is the graphical representation of that schedule.
The left-right direction of a shift indicates the change in willingness or ability to supply at any given price.
Wages and other input costs are prices of inputs (factors of production). Higher input costs reduce the profitability of production and typically shift the supply curve to the left (less supply at each price).
In addition to prices, expectations about future prices can affect demand (consumers may delay purchases or buy now depending on expected price changes).
In practice, we analyze changes with a concrete example (e.g., toilet paper market) to see how non-price factors affect demand or supply.
The transcript uses a notational approach with a basic illustrative example: a price level P = 6 and initial quantity supplied Qs = 300; after a rise in input costs, the same price yields Qs = 200, illustrating a leftward shift of the supply curve.
The star notation (a, b) denotes points on the new (shifted) supply curve; a is to the left of the original a, and b* is the corresponding new quantity at the same price level.
In the discussion, a shift left in supply is described as: "If supply becomes less, the direction of the shift is to the left." This leads to a new supply schedule with potentially zero or reduced selling plans at certain prices.
Non-Price Factors (Shifters) and Demand vs. Supply
Non-price factors for demand include: consumer expectations about future prices, tastes, number of buyers, income, and related variables. These factors cause the demand curve to shift rather than move along a fixed curve.
Non-price factors for supply include: input prices (e.g., wages), technology, prices of related outputs, taxes/subsidies, expectations about future prices, number of sellers, and weather/other shocks that affect production ability.
In the toilet paper market example, the question discussed how a change in a non-price factor affects demand (the transcript notes: "demand will be affected. And demand will be positive. Right?"), followed by the behavior that buyers may postpone purchases until they anticipate future prices in the market.
The takeaway is that non-price factors can either increase or decrease demand or supply, causing shifts in the corresponding curves.
The Toilet Paper Market Example (Demand Shifts)
Scenario: market for toilet paper; identify what changes here due to a non-price factor.
Claim from transcript: this change affects demand (not true price-forcing demand, but a shift due to a non-price factor).
Effect on demand: described as positive (demand increases) as a result of the non-price factor.
Behavioral note: consumers may delay purchases until they expect future global prices to be in the market; this is an example of how expectations influence demand.
Supply Shifts Due to Input Costs (Wages/Costs)
Core idea: when the price of inputs (e.g., wages) rises, production at each price becomes more expensive, reducing the profitability of supplying the good.
Result: the supply curve shifts left (a decrease in supply at every price).
Graphical interpretation:
Original supply curve: $S$ (or $S_1$)
New supply curve after higher input costs: $S^*$ (or $S2$) to the left of $S1$
Example numbers used in the transcript:
Original: at price $P = 6$, quantity supplied $Q = 300$.
After cost increase: at same price $P = 6$, quantity supplied $Q = 200$.
The new points are referred to as $a^$ and $b^$ on the shifted supply curve.
How to locate $a^$ and $b^$:
At a given price, the new quantity is smaller than before, so $Q{s,new} < Q{s,old}$ at that price.
The point $a^$ lies to the left of the old point $a$ on the same price level; $b^$ lies similarly for another price level.
General rule stated in the transcript: if supply changes due to a shift in costs or other shifters, the supply curve shifts; if supply becomes less, the shift is to the left.
Important phrasing from the transcript:
"Supply curve shifts" when non-price factors change.
On the left, you can see the effect of shifters; there is no intention to supply at the old full capacity if conditions are worse.
The total supply schedule can show zero selling plans at certain price levels, illustrating that sometimes no production occurs at those prices under the given conditions (Zero plus zero is zero).
Mathematical and Graphical Representations (LaTeX)
Demand function (illustrative): where
$P$ is price,
$I$ income,
$E$ expectations about future prices,
$T$ tastes, and
$N$ number of buyers.
Supply function (illustrative): where
$w$ is the wage (price of labor),
$K$ is capital, and
$Tech$ represents technology.
Leftward shift of supply (due to higher input costs): for all price levels $P$,
Q{s,new}(P) < Q{s,old}(P) ext{ for all } P.Example coordinate notation (illustrative):
Original: $a = (P0, Q0) = (6, 300)$
After shift: $a^* = (P0, Q^*0) = (6, 200)$
The star points denote the new positions on the shifted curve.
Direction of shift:
If supply becomes less, the shift is to the left:
Table vs. Curve: How You Analyze the Change
Supply schedule (table): rows of price and the corresponding quantity supplied; shifting the curve corresponds to changing the entire table, not just one row.
Supply curve (graph): a leftward shift means the entire curve moves left; at each price, the quantity supplied is smaller than before.
Non-price factors and shifters are the inputs that move the curve (e.g., wages, input costs, technology, expectations).
Input Costs, Wages, and Practical Implications
Statement from transcript: "If you want to hire some people, you need to pay the wages. The wage is the price of labor."
Practical implication: Higher wages raise unit costs of production, reducing profit margins and causing a contraction in supply (shift left).
The logic applies across industries (the transcript references a generic market for a startup or an industry).
Practice Takeaways and Final Notes
The central mechanism: non-price factors (shifters) alter supply or demand, causing shifts of the entire curve, not just movement along the curve.
A rise in input costs leads to a leftward shift in the supply curve: the same price yields a lower quantity supplied.
Expectations about future prices can affect demand, causing shifts in the demand curve when consumers anticipate price changes.
In a worked example, a price level may remain constant (e.g., $P = 6$) while the quantity supplied changes from $Q = 300$ to $Q = 200$ due to a shift, illustrating the leftward movement of the supply curve.
The transcript emphasizes the terminology: non-price factors (shifters), supply curve S1, shifted supply curve S2 (left of S1), and star points $a^$ and $b^$ representing new coordinates on the shifted curve.
A reminder from the lecture: when supply shifts, the entire supply schedule/curve changes; the leftward shift indicates a decrease in supply at every price level.
Final practice note: the discussion ends with the observation that the last question about the market for a startup was analyzing how an input-price change affects supply, leading to a leftward shift in the supply curve.
Quick Summary of Key Points
Non-price factors are shifters that move demand or supply curves.
A rise in input costs (like wages) typically shifts the supply curve left (less supply at each price).
Demand can be influenced by expectations about future prices, potentially changing current demand.
Points a, b on the original supply curve become a, b on the shifted curve when costs rise.
The leftward shift implies higher equilibrium price and/or lower equilibrium quantity, depending on the accompanying demand curve movement.
The distinction between table-based supply schedules and graphical supply curves is essential for interpreting shifts vs. movements along curves.