Demand and supply: movements along and shifts of the curves

Last time

Before we start: last time, in Scarcity, the economic problem and free goods, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Demand and supply

Every market has two sides. Buyers make up demand, and sellers make up supply. Most of the diagrams you draw in economics come from these two curves, so in this lesson we learn exactly what moves each one.

What demand means

Demand is the willingness and ability to buy a product at a given price. Wanting a car is not demand. Wanting it and being able to pay is. Individual demand is one person's demand. Market demand is the total of everyone's demand in the market. The law of demand: as price falls, quantity demanded rises. The product is cheaper compared with others, and people can afford more of it.

Moving along the demand curve

Here is a demand curve. When the price falls from 6 dollars to 4 dollars, quantity demanded rises from 4 to 6: the move from A to B. A change in the product's own price causes a movement along the curve. A rise in quantity demanded is an extension; a fall is a contraction.

What shifts demand

Anything other than the product's own price shifts the whole curve. Income: when incomes rise, demand for most goods rises. Prices of related goods: substitutes, which are used instead, and complements, which are used together. Tastes and fashion, often changed by advertising. And the size and age of the population. Taxes on income and interest rates matter too, because they change how much people can spend.

A shift of demand

Now incomes rise. At every price, people want more, so the whole demand curve shifts right, from D to D1. At a price of 6 dollars, quantity demanded rises from 4 to 6. A rise in demand is a shift to the right; a fall in demand is a shift to the left.

Substitutes and complements

Substitutes are bought instead of each other, like tennis and badminton racquets. If badminton racquets become dearer, demand for tennis racquets rises. Complements are bought together, like football shirts and football shorts. If more football shirts are demanded, demand for shorts rises too. That is joint demand. So for each related good, first say which kind it is, then the direction its demand moves.

What supply means

Supply is the willingness and ability to sell a product at a given price. The mark scheme gives one mark each for willingness and ability. The law of supply: as price rises, quantity supplied rises, because selling more becomes more profitable. So the supply curve slopes upwards, the opposite way to the demand curve.

Moving along the supply curve

When the price rises from 4 dollars to 6 dollars, quantity supplied rises from 4 to 6: an extension in supply, from A to B. As with demand, only a change in the product's own price moves us along the curve.

What shifts supply

Costs of production: higher wages or raw material prices raise costs, so supply falls and the curve shifts left. Better technology lowers costs, so supply rises. Subsidies raise supply; indirect taxes lower it. Weather and natural disasters affect farm supply. And more firms entering the market raise supply.

A shift of supply

New machines cut costs, so at every price firms offer more. The supply curve shifts right, from S to S1. At a price of 4 dollars, quantity supplied rises from 4 to 6. A fall in supply is a shift to the left.

Movement or shift?

This table is the rule for the whole topic. The product's own price moves you along a curve; everything else shifts it.

Mistakes that lose marks

Mistake one: saying a fall in price causes demand to rise. It causes quantity demanded to rise, a movement along the curve. Mistake two: shifting the demand curve when a cost changes. Costs move the supply curve. Mistake three: mixing up substitutes and complements, or only saying demand changes without saying which way. The fix: name the curve, the direction, and the cause.

The full-marks tip

The full-marks tip: define demand and supply with both words: willingness and ability. Then say exactly which curve moves, which way, and why.

On one card

So, on one card: demand and supply. Keep it for revision.