Causes of Shift in Supply Demand Curves

What You Need to Know

Supply and demand graphs are AP Macro’s fastest way to predict what happens to equilibrium price P_e and **equilibrium quantity** Q_e when the world changes.

Core rule:

• A shift happens when something changes other than the good’s own price.
• A movement along a curve happens only when the good’s own price changes.

Vocabulary you must use correctly (exam loves this):

• Change in demand = demand curve shifts (left or right).
• Change in quantity demanded = move along the demand curve.
• Change in supply = supply curve shifts.
• Change in quantity supplied = move along the supply curve.

Critical reminder: If the prompt says “the price of the good changes,” you do not shift demand or supply. You move along whichever curve is relevant.

Market vs Aggregate (AP Macro)

AP Macroeconomics uses two related frameworks:

1. Market (micro-style) supply & demand for a specific product (also used to build intuition).
2. Aggregate Demand (AD) and Aggregate Supply (SRAS/LRAS) for the whole economy.

This sheet covers what causes each curve to shift and the direction of the shift.

Step-by-Step Breakdown

Use this every time you see a “what happens to P and Q?” question.

1. Identify what changed.

   • Technology? Income? Input costs? Taxes? Expectations? Number of buyers/sellers?

2. Decide which curve is affected.

   • Buyer-side factor ⟶ usually Demand.
   • Seller-side/cost-of-production factor ⟶ usually Supply.

3. Decide shift direction (Right = increase, Left = decrease).

   • Demand right means at every price, buyers want more.
   • Supply right means at every price, sellers produce more.

4. Translate the shift into equilibrium changes.

   • If only demand shifts:
     • Demand right ⟶ P_e up, Q_e up
     • Demand left ⟶ P_e down, Q_e down
   • If only supply shifts:
     • Supply right ⟶ P_e down, Q_e up
     • Supply left ⟶ P_e up, Q_e down

5. If both curves shift, do it in two moves.

   • Shift one curve, find the new intersection directionally, then shift the other.
   • Memorize this: When both shift, one of the outcomes becomes ambiguous (either P_e or Q_e), depending on relative sizes.

Mini worked example (market)

“New drilling technology lowers the cost of producing gasoline.”

1. Change: cost ↓ due to tech.
2. Affects: suppliers.
3. Direction: supply increases ⟶ Supply shifts right.
4. Result: P_e ↓, Q_e ↑.

Mini worked example (aggregate)

“Government increases spending on infrastructure.”

1. Change: G ↑.
2. Affects: total spending (AD components).
3. Direction: AD shifts right.
4. Short run: price level up, real GDP up (on standard AD/SRAS graph).

Key Formulas, Rules & Facts

The only “math” you need here

You’ll often label equilibrium and compare before/after.

• Equilibrium is where Q_d = Q_s.
• Use labels like P_1, P_2, Q_1, Q_2 to show direction.

Rule: What causes a shift vs movement?

Demand Shifters (Market Demand for a good)

Demand shifts when buyers’ willingness/ability to buy changes.

Direction shortcut:

• If the story makes consumers want/able to buy more at every price ⟶ demand right.

Supply Shifters (Market Supply for a good)

Supply shifts when production conditions or seller incentives change.

Direction shortcut:

• If the story makes it cheaper/easier to produce ⟶ supply right.
• If it makes production costlier/harder ⟶ supply left.

Aggregate Demand (AD) Shifters (AP Macro specific)

AD is total planned spending on domestic output:
AD = C + I + G + (X - M)
A change in any component shifts AD.

Trap: A change in the price level causes a movement along AD, not a shift (via wealth effect, interest rate effect, net export effect). A shift needs a non-price-level factor.

SRAS and LRAS Shifters (AP Macro specific)

SRAS shifts when short-run production costs or expected prices change.

Examples & Applications

Example 1 (Market demand: substitutes)

Prompt: “The price of coffee rises. What happens to demand for tea?”

• Tea and coffee are substitutes.
• Coffee price ↑ ⟶ demand for tea shifts right.
• New equilibrium in tea market: P_e ↑, Q_e ↑.

Example 2 (Market demand: income + inferior vs normal)

Prompt: “Incomes rise. What happens to demand for instant ramen?”

• If ramen is treated as inferior (common AP assumption), income ↑ ⟶ demand shifts left.
• Result: P_e ↓, Q_e ↓.

Exam tip: If the problem doesn’t specify inferior vs normal, be careful. Many everyday goods are normal unless clearly described as “budget” or “low-end substitute.”

Example 3 (Market supply: input costs)

Prompt: “A new union contract increases wages for auto workers.”

• Wages are an input cost.
• Input cost ↑ ⟶ supply shifts left.
• Result: P_e ↑, Q_e ↓.

Example 4 (Aggregate: negative supply shock)

Prompt: “Oil prices spike economy-wide.”

• Oil is a major input; costs ↑ for many firms.
• SRAS shifts left.
• Short run result: price level ↑ and real GDP ↓ (stagflation pattern).

Common Mistakes & Traps

1. Mixing up shift vs movement

   • Wrong: “Price rises so demand shifts left.”
   • Why wrong: a price change causes movement along demand.
   • Fix: ask “Did the good’s own price change, or a determinant?”

2. Forgetting normal vs inferior goods

   • Wrong: “Income rises so demand rises for all goods.”
   • Why wrong: inferior goods go the other way.
   • Fix: decide if the good is a “trading-up” good (normal) or “budget fallback” good (inferior).

3. Confusing substitutes and complements

   • Wrong: “Gas price rises so demand for cars rises.”
   • Why wrong: cars and gas are complements ⟶ gas price ↑ makes cars less attractive ⟶ demand for cars left.
   • Fix: say out loud: “Do you use them together or instead?”

4. Treating taxes as demand shifters (usually)

   • Wrong: “A per-unit tax on producers shifts demand left.”
   • Why wrong: taxes on production raise costs ⟶ supply left.
   • Fix: identify who pays the tax legally, then remember: producer tax typically shifts supply.

5. Assuming higher price means higher demand

   • Wrong: “Price increased; therefore demand increased.”
   • Why wrong: demand is the entire schedule; higher price reduces quantity demanded.
   • Fix: use correct wording: “quantity demanded falls” (movement along).

6. Expectations direction errors

   • Wrong: “If consumers expect future prices to rise, demand falls today.”
   • Why wrong: they usually buy more now to avoid future higher prices ⟶ demand right.
   • Fix: think timing: “Buy now vs later.”

7. Two-shift ambiguity ignored

   • Wrong: “Demand and supply both increase so price definitely increases.”
   • Why wrong: if both shift right, Q_e definitely rises but P_e is ambiguous.
   • Fix: memorize which outcome is certain vs uncertain.

8. AD vs SRAS mix-up in macro prompts

   • Wrong: “Oil prices rise so AD shifts left.”
   • Why wrong: oil is an input cost ⟶ SRAS left, not AD.
   • Fix: spending change ⟶ AD; production-cost change ⟶ SRAS.

Memory Aids & Quick Tricks

Quick Review Checklist

• You only shift curves when a non-price determinant changes.
• Price of the good changes ⟶ movement along, not a shift.
• Demand shifters (market): tastes, income, related goods, expectations, number of buyers.
• Supply shifters (market): input costs, tech/productivity, taxes/subsidies, number of sellers, expectations, regulation, weather/shocks.
• One-shift outcomes:
  • Demand right ⟶ P_e ↑, Q_e ↑
  • Demand left ⟶ P_e ↓, Q_e ↓
  • Supply right ⟶ P_e ↓, Q_e ↑
  • Supply left ⟶ P_e ↑, Q_e ↓
• Two shifts: identify what’s certain (often Q_e) and what’s **ambiguous** (often P_e).
• AD shifts with changes in C, I, G, (X-M) and expectations/wealth/interest rates/exchange rates.
• SRAS shifts with input costs, expected inflation, productivity, and supply shocks.

You’re aiming for clean wording and clean arrows—get those right and most questions collapse instantly.