Demand and Supply Shifts - Comprehensive Notes

Labeling and Graphing Etiquette

  • Always label everything on graphs to avoid losing points (e.g., axes labels, curve labels, and which graph is which). The instructor emphasized that forgetting to label the graph can cost you points.
  • Use clear labels for the curves and axis: Demand curve (D) and Supply curve (S); initial vs. new shifts (e.g., D1, D2, S1, S2) and the initial and new equilibrium points.
  • It’s common to show two identical graphs side-by-side to compare shifts before and after. This helps visualize how shifts affect price and quantity.
  • Color coding example used in lecture: Demand in red, Supply in green.
  • Key variables to track: price (P) and quantity (Q); original equilibrium (P1, Q1) and new equilibrium (P2, Q2).
  • Notation for graphs:
    • Initial demand and supply: D1, S1
    • New demand and supply after shifts: D2, S2
    • Equilibriums: (P1, Q1) and (P2, Q2)
  • Graph labels and careful labeling are essential for accurate analysis and for communicating results clearly in exams/homework.

Two scenarios: simultaneous shifts in demand and supply

  • When both curves shift, there are two main scenarios to compare depending on the relative magnitudes of the shifts:
    • Scenario A: Demand increases more than supply (|ΔD| > |ΔS|)
    • Scenario B: Demand increases less than supply (|ΔD| < |ΔS|)
  • In both scenarios, we shift the curves to the right (since both increases in this example), but the extent of each shift differs:
    • Scenario A: Shift D to the right a lot; shift S to the right only a little.
    • Scenario B: Shift D to the right a little; shift S to the right a lot.
  • After the shifts, you look at the new intersection S2 ∩ D2 to determine the new equilibrium (P2, Q2).

Scenario A: Demand increases more than supply (D shifts right more than S)

  • Graph moves:
    • Demand curve shifts to the right by a larger amount: D1 → D2 (D2 is far to the right of D1).
    • Supply curve shifts to the right by a smaller amount: S1 → S2 (S2 is to the right of S1, but not as far as D2).
  • Resulting equilibrium:
    • New intersection: S2 ∩ D2
    • Price outcome:
    • Price increases: P2 > P1 (가격이 상승)
    • Quantity outcome:
    • Quantity increases: Q2 > Q1 (수량이 증가)
  • Summary for Scenario A:
    • Price: 상승 (↑)
    • Quantity: 증가 (↑)
  • Conceptual takeaway: When both demand and supply increase, if demand’s shift dominates, price tends to rise; if demand’s shift dominates, quantity rises as well.

Scenario B: Demand increases less than supply (D shifts right less than S)

  • Graph moves:
    • Demand curve shifts to the right by a smaller amount: D1 → D2
    • Supply curve shifts to the right by a larger amount: S1 → S2
  • Resulting equilibrium:
    • New intersection: S2 ∩ D2
    • Price outcome:
    • Price decreases: P2 < P1 (가격이 하락)
    • Quantity outcome:
    • Quantity increases: Q2 > Q1 (수량이 증가)
  • Summary for Scenario B:
    • Price: 하락 (↓)
    • Quantity: 증가 (↑)
  • Conceptual takeaway: When both demand and supply increase, but supply’s shift dominates, price falls while quantity still rises.

Ambiguity in price direction when both curves shift

  • In these mixed-shift scenarios, the direction of price change can be ambiguous from the description alone:
    • Price could go up or down depending on the relative magnitudes of the shifts.
    • Quantity always increases in these two scenarios (as both curves shift to the right and the market clears at a higher quantity).
  • Term used in homework/exams: Ambiguous price direction. So you’ll often see the conclusion: "Price could go up or down, but quantity will always increase."

Homework assignment for next time

  • Task: Demand increase, supply decrease
    • Draw two graphs: one for each scenario, with the same axes and labeling conventions.
    • Determine what happens to price and what happens to quantity in each graph.
  • Note: We’ve finished the demand and supply chapter (Lesson 2). Next up is Chapter 3.
  • Homework plan: Work on this before the next class; we’ll review on Thursday morning right at the start of the session.

Practical application: eye-clicker example

  • Question type: Identify whether the factor affects demand, supply, or both.
  • The scenario described: The cost of wood falls.
    • This is an input price, a factor that shifts the supply curve.
    • Interpretation: The supply curve shifts to the right (S1 → S2).
  • Consequences:
    • Price moves: P2 < P1 (price decreases)
    • Quantity moves: Q2 > Q1 (quantity increases)
  • Correct answer in the example: Supply (the shift is a supply-side factor).
  • Rule highlighted: Don’t assume both curves shift unless the question explicitly mentions multiple factors that affect both sides.
    • Five factors that shift demand: income, prices of related goods, tastes (preferences), number of buyers, expectations.
    • Five factors that shift supply: input prices, technology, prices of related goods produced, number of sellers, expectations.
  • If the problem only mentions an input price (or a single supply factor) and not any demand factors, then you should shift only the supply curve.

How to analyze similar questions moving forward

  • Step 1: Identify whether the scenario affects demand, supply, or both by listing the possible factors mentioned.
  • Step 2: Apply the shifts accordingly: D1 → D2 if demand factors are present; S1 → S2 if supply factors are present.
  • Step 3: Compare the magnitudes of the shifts to predict the direction of the price change:
    • If |ΔD| > |ΔS|, expect P2 > P1 (price rises) and Q2 > Q1.
    • If |ΔS| > |ΔD|, expect P2 < P1 (price falls) and Q2 > Q1.
  • Step 4: In many cases where both curves shift simultaneously, the quantity will increase; the price direction may be ambiguous unless you know the relative magnitudes of the shifts.
  • Step 5: Always label graphs clearly and consistently; maintain color conventions and denote initial vs new curves and equilibrium points.

Connections to core concepts and real-world relevance

  • Equilibrium concept: Price and quantity adjust to balance supply and demand; when both sides shift, the new equilibrium is found at the intersection of D2 and S2.
  • Law of supply and demand remains the baseline: Ceteris paribus, higher price incentivizes quantity supplied and reduces quantity demanded; shifts alter the entire curves and thus the equilibrium.
  • Real-world relevance: Changes in input costs (e.g., cheaper wood) affect supply; consumer incomes or preferences affect demand; understanding the relative magnitudes of shifts helps explain why prices may rise or fall even when both supply and demand increase.
  • Practical implications for businesses and policymakers: Recognizing whether changes are more supply- or demand-driven helps forecast price signals, plan production, and understand market outcomes under different scenarios.

Notation recap (quick reference)

  • Demand curve: D
  • Supply curve: S
  • Price: P
  • Quantity: Q
  • Initial equilibrium: P1, Q1 where D(P1) = S(P1)
  • New equilibrium after shifts: P2, Q2 where D'(P2) = S'(P2)
  • Shifted curves: D2, S2 (after shifts) with corresponding magnitudes determining price direction.
  • Ambiguity term: price direction is ambiguous when both curves shift but the dominant shift is not specified.

Study plan reminder

  • On MyEHA Lab, use the left-hand menu to access the Study Plan and take the related quiz to practice these concepts.
  • Keywords to search within the study plan: study plan, quiz, practice questions on demand increases and supply increases (and decreases).