Comprehensive Notes on Demand and Supply: Movement vs Shifts and Determinants

Demand: Movement vs. Shifts

• Movement along the demand curve vs a shift of the demand curve
  • Movement along the demand curve occurs when the quantity demanded changes as a result of a change in price, holding all else constant. Example: rise in price leads to a lower quantity demanded along the same demand curve.
  • A shift of the demand curve occurs when a non-price factor changes the quantity demanded at every price, so the entire curve moves.
  • In the lecture: going from point a to point b is a rise in quantity demanded (movement). Going from point a to point c reflects a change in demand (a shift). A rightward shift means higher demand at any given price; a leftward shift means lower demand.
• Summary: movement along demand curve = price effect on quantity demanded; shift of demand curve = change in demand due to non-price determinants.

Five determinants that shift the demand curve

• Changes in the price of related goods or services (P_RG):
  • Substitutes: If the price of good B rises, demand for good A increases (rightward shift). If the price of B falls, demand for A decreases (leftward shift).
  • Complements: If the price of good B rises, demand for good A decreases (leftward shift). If the price of B falls, demand for A increases (rightward shift).
  • Example given: substitutes coffee and tea; complements peanut butter and jelly.
• Changes in income (I):
  • Normal goods: higher income increases demand (rightward shift).
  • Inferior goods: higher income decreases demand (leftward shift).
• Changes in tastes (T):
  • Shifts in preferences or tastes affect demand independent of price (e.g., changing fashion, health information, cultural trends).
  • Commentary in the lecture: what you liked as a kid vs. as an adult, etc.; tastes shift demand.
• Changes in expectations (E):
  • If consumers expect prices to rise in the future, they buy more today (increase current demand).
  • If they expect prices to fall in the future or see a sale coming, they delay purchases (decrease current demand).
• Changes in the number of buyers (N):
  • More buyers in the market increase overall demand; high unemployment tends to reduce demand.
  • Population growth or new housing/development can increase demand in a region as more people move in.

Substitutes vs. Complements; Normal vs. Inferior goods

• Substitutes:
  • If goods A and B are substitutes, a rise in the price of B increases demand for A; a fall in the price of B decreases demand for A.
• Complements:
  • If goods A and B are complements, a rise in the price of B decreases demand for A; a fall in the price of B increases demand for A.
• Normal vs. Inferior goods (income effects):
  • Normal good: higher income → higher demand.
  • Inferior good: higher income → lower demand.

Demand curves: individual versus market demand

• Individual demand: shown by one consumer (e.g., Darla or Dino) for a good (e.g., coffee beans).
• Market demand: the horizontal sum of individual demand curves (e.g., Darla + Dino = market demand for coffee beans).
• When related goods’ prices change, the shift in the market demand curve reflects the aggregate effect of the determinants on all consumers.

Demand determinants and practical illustrations

• If A and B are substitutes and the price of B rises, demand for A increases (shift right).
• If A and B are substitutes and the price of B falls, demand for A decreases (shift left).
• If A and B are complements and the price of B rises, demand for A decreases (shift left).
• If A and B are complements and the price of B falls, demand for A increases (shift right).
• If income rises, demand for normal goods rises; if income rises, demand for inferior goods falls.
• If new baby boom occurs, disposable diapers demand increases.
• If the price of a good is expected to fall in the future, current demand may fall (buyers wait).
• If the price of a good is expected to rise in the future, current demand may rise (buyers buy now).
• Example scenario prompts in class:
  • Which would increase demand for a normal good? A decrease in price (note: price changes affect quantity demanded, not demand; non-price determinants shift demand). However, a decrease in price does move along the demand curve increasing quantity demanded.
  • A new baby boom increases diaper demand.
  • A decrease in the price of butter would likely decrease the demand for margarine (a substitute).
  • An increase in income leading to a decrease in demand signals an inferior good.

Graphing demand: practice prompts

• Draw a correctly labeled demand graph for apples.
• If a Surgeon General report says an apple a day keeps the doctor away, illustrate the shift in demand. Likely a rightward shift (increased demand at each price).

Supply: Movement vs. shifts

• Law of supply: as price rises, quantity supplied increases (upward-sloping supply curve).
• Movement along the supply curve vs a shift:
  • Movement along the supply curve occurs when price changes, causing a change in quantity supplied.
  • A shift of the supply curve occurs when a non-price determinant changes the quantity supplied at every price.

Five determinants that shift the supply curve

• Changes in input prices (e.g., wages, raw materials, machinery, transportation):
  • Higher input prices increase production costs, reducing quantity supplied at each price (supply shifts left).
  • Lower input prices reduce costs, increasing quantity supplied (supply shifts right).
• Changes in technology (T):
  • Technological improvements reduce production costs or increase efficiency, shifting supply to the right (increase in supply).
• Changes in expectations (E):
  • If suppliers expect higher prices in the future, they may restrict current supply to sell more later at higher prices (supply shifts left).
  • If they expect lower prices in the future, they may release more today (supply shifts right).
• Changes in the number of producers (N_p):
  • More producers increase total market supply (shift right).
  • Fewer producers reduce supply (shift left).
• Prices of related goods in production (substitutes and complements in production):
  • Substitutes in production: if the price of a co-produced good rises, producers may shift resources to that good, reducing supply of the other good (e.g., heating oil price rise makes gasoline supply fall, a leftward shift for gasoline). If the price of the co-produced good falls, gasoline supply can rise (rightward shift).
  • Complements in production: if the price of a byproduct rises, more of the main product is produced (e.g., a higher price for natural gas from oil wells leads to more oil production).

Quick concepts on shifts, movements, and equilibrium

• Shifts vs movements recap:
  • Demand: shift due to non-price determinants; movement due to price change.
  • Supply: shift due to non-price determinants; movement along the curve due to price change.
• Equilibrium concept (market-clearing):
  • At equilibrium, quantity demanded equals quantity supplied: Qd = Qs at price P^* .
  • If price is below equilibrium, a shortage occurs (quantity demanded exceeds quantity supplied) and price tends to rise.
  • If price is above equilibrium, a surplus occurs (quantity supplied exceeds quantity demanded) and price tends to fall.
• Relationship notation:
  • Demand function: Qd = D(p, I, T, E, N, Pr)
  • Supply function: Qs = S(p, w, T, Np, Es, Pr)
  • Equilibrium condition: Qd = Qs at price P^* .
  • Shift indicators: a rightward demand shift is represented as D'(p) > D(p) for all p; a leftward shift as D'(p) < D(p) .
  • Similarly, a rightward supply shift is S'(p) > S(p) for all p; a leftward shift is S'(p) < S(p) .

Quick worked-style examples discussed in the session

• Example: 2 goods as a production pair (gasoline and heating oil):
  • If the price of heating oil rises, the supply of gasoline shifts left (producers allocate resources to heating oil).
  • If the price of heating oil falls, the supply of gasoline shifts right.
• Example: Byproduct/complement in production:
  • Oil wells may also produce natural gas; higher natural gas prices lead to more oil production (more oil supplied at a given oil price).
• Example: Market response to a policy or data shift (dish diaper demand):
  • A baby boom increases the demand for diapers (rightward shift of the diaper demand curve).

Practice and comprehension checks (from the transcript)

• Which of the following would decrease the supply of good x? (Underline: cost-based determinants, not a pure price move.)
  • An increase in input prices would decrease supply (shift left). A fall in price of good x would move along the supply curve (quantity supplied), not shift supply.
• If technology improves for a product (e.g., textual material or textbooks), supply shifts to the right (increase in supply).
• When a price is below equilibrium, the market price tends to rise toward equilibrium.
• If consumers expect future prices to fall, current demand decreases; if they expect prices to rise, current demand increases.
• An increase in income increases demand for normal goods and can decrease demand for inferior goods.
• A new baby boom increases demand for diapers.

Graph-drafting prompts (summary guidance)

• Draw and label a demand graph for apples.
• Show a rightward shift (D to D') if new information makes apples more valuable today (e.g., health claim).
• For supply, sketch S and a rightward shift S' if production becomes cheaper or more producers enter the market.

Practical implications and note on exam-style understanding

• Distinguish clearly between changes in quantity demanded (or supplied) caused by price movements (movements along the curve) and changes in demand/supply caused by non-price determinants (shifts).
• Be able to identify the determinant responsible for a given shift in either the demand or supply curve.
• Use equilibrium logic to explain shortages and surpluses and how market prices adjust toward equilibrium.
• Recognize real-world examples: substitutes/complements, normal/inferior goods, expectations, and production-side factors like input costs and technology.

Qd = D(p, I, T, E, N, Pr)
Qs = S(p, w, T, Np, Es, Pr)
Qd = Qs ext{ at } P^*

• Rightward shift of demand: D'(p) > D(p) ext{ for all } p
• Leftward shift of demand: D'(p) < D(p) ext{ for all } p
• Rightward shift of supply: S'(p) > S(p) ext{ for all } p
• Leftward shift of supply: S'(p) < S(p) ext{ for all } p
• Shortage: Qd > Qs \ ext{Surplus: } Qs > Qd
• Example: substitution effect example in butter/margarine