Economics Lecture Review: Supply and Demand
Understanding Price Changes vs. Curve Shifts
Disequilibrium: Surplus
Occurs when there is a surplus, meaning quantity supplied exceeds quantity demanded.
More units are produced than consumers want to buy.
This is a state of disequilibrium, not equilibrium.
Effects of a Change in Price
A change in the product's own price does not shift either the demand or the supply curve.
Only the quantity demanded and quantity supplied will change.
Example: If the price falls:
Demand: Nothing happens to the demand curve itself.
Quantity Demanded: Increases (P ext{ falls}
ightarrow Q_D ext{ rises}).Quantity Supplied: Decreases (P ext{ falls}
ightarrow Q_S ext{ falls}).
This movement is along the existing demand or supply curve, not a shift of the curve.
Curve Shifts
A curve (demand or supply) shifts only when there is a change in a non-price factor (something other than the price of the actual product).
Demand Curve Shifts:
Shift to the right signifies an increase in demand.
Shift to the left signifies a decrease in demand.
Graphing Strategy for Shifts: Always draw the initial equilibrium, then draw the curve shift, and finally identify the new equilibrium price and quantity.
Practice Scenarios: Applying Supply and Demand Principles
Note on Practice: This video is for review and practice, not initial teaching. If concepts like curve shifting or moving along the curve are completely new, it's recommended to revisit foundational supply and demand materials.
Scenario 1: Demand Shift (Taste and Preference)
Context: People prefer that their children are smart.
Shifter: Taste and preference (a demand shifter).
Effect: Leads to a shift in the demand curve for related products (e.g., educational toys, books).
Scenario 2: Supply Shift (Resource Cost Increase)
Context: Bearings (a key resource for fidget spinners) become more expensive.
Shifter: Input costs (a supply shifter).
Effect:
Producers cannot produce as many fidget spinners with the increased cost.
The supply curve shifts to the left (a decrease in supply).
This causes the equilibrium price to increase and the equilibrium quantity to decrease.
Common Mistake: Do not shift the curve downward for a decrease in supply; a decrease is always to the left. An increase is always to the right for both demand and supply curves.
Scenario 3: Demand Shift (Substitute Good Price Decrease)
Context: The price of fidget cubes (a substitute for fidget spinners) falls significantly (e.g., to 3 ext{ cents}).
Shifter: Price of a substitute good (a demand shifter).
Effect:
Consumers will buy fewer fidget spinners because the substitute is cheaper.
The demand for fidget spinners falls (demand curve shifts to the left).
Both the equilibrium price and equilibrium quantity of fidget spinners will decrease.
Scenario 8: Double Shift (Demand and Supply Both Increase)
Context: The demand for fidget spinners increases, and the supply of fidget spinners also increases.
Individual Effects:
Demand increases (shifts right): Equilibrium price goes up, quantity goes up.
Supply increases (shifts right): Equilibrium price goes down, quantity goes up.
Combined Effect (New Equilibrium):
Price: Is indeterminate (or ambiguous). It might go up, go down, or stay the same; it depends on the magnitude of the shifts. You cannot tell for certain without more information.
Quantity: Will definitively go up (since both shifts push quantity higher).
Rule for Double Shifts: Whenever there's a double shift, one variable (either price or quantity) will always be indeterminate.
Real-World Example: Fidget Spinners
When fidget spinners first became popular, demand increased (shift right).
Producers quickly responded by making more, leading to an increase in supply (shift right).
The actual effect observed was that prices did not rise drastically (as the increased supply counteracted the upward pressure from demand), but the quantity sold increased significantly.