Supply and Demand Curve

Supply and Demand Curve: Shifts and Movements

Demand is, in basic terms, that quantity of a certain product/good that consumers are able and willing to buy/purchase at the prevailing price (Hirschey, 2008). A product's market demand function relates its aggregate quantity demanded to the various parameters, including price, that influence the said quantity (Hirschey, 2008). The demand curve is an expression of "the relation between the price charged for a product and the quantity demanded, holding constant the effects of all other variables" (Hirschey, 2008, p. 137). When it comes to supply, the term according to Hirschey refers to the quantity of a product that sellers are able and willing to bring to the market, under the prevailing economic conditions (Hirschey, 2008). A supply curve, therefore, is an expression of the relation between the quantity supplied and the price charged, ceteris paribus (Taylor & Weerapana, 2011). Equilibrium is achieved "when the quantity demanded and the quantity supplied is in perfect balance at a given price" (Hirschey, 2008, p. 137).

Shifts and Movements in Demand and Supply Curves

Shifts and movements disrupt market equilibrium, resulting in new equilibrium quantities and prices (Taylor & Weerapana, 2011). A shift in one curve automatically causes a movement in the other. According to Hirschey, "a movement along the demand curve occurs when the quantity demanded changes as a result of a change in price" only (Hirschey, 2008). A movement along the demand curve, therefore, traces out the impacts that different prices have on the quantity demanded (Taylor & Weerapana, 2011). A shift of the demand curve essentially takes place or comes about when the quantity demanded of a product changes as a result of changes in factors other than its price (Hirschey, 2008). Shifts in the demand curve could be caused by changes in consumer incomes, population, consumer tastes and preferences, the prices of substitutes and complements, and future price expectations (Wessels, 2006).

In the words of Wessels, "a movement along the supply curve occurs when the quantity supplied changes, as a result of a price change" (Wessels, 2006). A shift of the supply curve, on the other hand, occurs when the quantity supplied changes due to a change in factors other than price (Wessels, 2006). Shifts in the supply curve could result from changes in the levels of technology, input prices, the number of firms, the prices of substitute and joint products, and future price expectations.

Graphical Representations of Movements and Shifts in Demand and Supply Curves

Initial Equilibrium

Fig 1

Price Dd Ss

E

Pe

Ss Dd

0 Qe Quantity

Fig 2 (Shift of the Demand Curve / Movement along the supply curve- Increase in demand)

P Dd1 Ss0

Dd0 E1

P1 E0

P0 Dd1

Ss0 Dd0

0 Q0 Q1 Quantity

Fig 3 (Decrease in Demand)

P Dd0 Ss0

P0 E0

P1 E1

Ss0 Dd1 Dd0

Q1 Q0 Quantity

Factors such as increased consumer incomes, increased population, increased prices of substitutes, and expectations of future inflation have the tendency to increase demand, causing the demand curve to shift outwards (to the right), as illustrated in fig 2. The quantity demanded increases, due to the shift, and so does the price, resulting in the new equilibrium E1. Segment E0-E1 represents the movement along the supply curve. If the aforementioned factors decrease instead, demand falls, and the demand curve shifts to the left (fig 3). E1 becomes the new equilibrium point; and P1 and Q1 the new equilibrium price and quantity respectively.

Fig 4 (Shift of the Supply Curve / Movement along the Demand Curve- Increase in Supply)

Price Dd0 Ss0 Ss1

P0 E0

P1 E1

Ss0 Ss1

Q0 Q1 Quantity

Fig 5 (Decrease in supply)

Price Ss1 Ss0

P1 E1

P0 E0

Ss0 Dd0

Q1 Q0 Quantity

Factors that cause an increase in supply result in an outward shift of the supply curve, according to fig 4. On the other hand, factors that decrease supply shift the curve inwards, as shown in fig 5. The segments E0 E1 represent the movement along the demand curve due to the shift.

The demand and supply behavior illustrated can be used to analyze the consumer behaviors discussed in the subsequent sections of this text.

It is days before Halloween, what has happened to the price and quantity of Halloween costumes? Is there a movement or a shift?

There has been an increase in the quantity of Halloween costumes demanded. This increase in demand has been induced by the seasonal effect of Halloween. As a result of the increased demand, prices of Halloween costumes have gone up, in line with the law of demand. The supply of Halloween costumes has, however, remained more or less constant, since the factors that influence supply have not changed. There will, therefore, be an outward shift in the demand curve, because the increase in demand is attributed to the Halloween seasonal effect; and it is this increased demand that causes a price increase.

Halloween Costume Price Dd1 Ss0

P1

P0

Ss0 Dd0

Q0 Q1 Quantity of Costumes demanded

The effect on the demand curve for airline tickets immediately after the September 11 tragedy.

The demand for airline tickets, for both domestic and international flights, is likely to go up immediately after the September 11 tragedy. People within America, as well as those from other countries who either lost friends and relatives in the 2011 tragedy, or who are simply interested in observing the developments that have been made since then, are deemed to come to America just before September 11th. These same people will be returning to their states or countries immediately after. This rush would translate to increased demand (Q0 to Q1); and since the supply of airline tickets will be more or less constant, the prices will rise from P0 to P1 so as to internalize the excess demand. This has been illustrated below.

Airline ticket price Dd1 Ss0

P1 E1

P0 E0

Ss0 Dd0 Dd1

Q0 Q1 Quantity of Airline tickets

The effect on the demand curve for Coors light when the price of Bud light declines (substitutes).

Since Bud light and Coors Light are perfect substitutes, consumers would automatically shift to the latter if the price of the former goes up (Wessels, 2006). The demand for Bud light will fall, in line with the law of demand, as that of Coors Light rises. There will be a movement in the Bud light demand curve (since the fall in quantity demand is due to a price increase), and an outward shift in the Coors Light demand curve, as illustrated in the graphical representations below. The movement in the Bud light demand curve (in red) will cause an inward shift in the supply curve, as producers shy away from producing the same for fear of making losses. With time, however, the price of Coors light will rise due to excess demand.