Fresh Take 2.3: Microeconomics

  • Understand the law of demand and how it is visually represented
  • Understand the law of supply and how it is visually represented
  • Understand surpluses and shortages
  • Understand equilibrium price and quantity
  • Identify factors that can change supply and demand

Supply and Demand

You can view the transcript for “Supply and Demand: Crash Course Economics #4” here (opens in new window).

Factors That Shift Demand Curves

Six factors that can shift demand curves are summarized below. The direction of the arrows indicates whether the demand curve shifts represent an increase in demand or a decrease in demand. Notice that a change in the price of the good or service itself is not listed among the factors that can shift a demand curve. A change in the price of a good or service causes a movement along a specific demand curve, and it typically leads to some change in the quantity demanded, but it does not shift the demand curve.

The graph on the left lists events that could lead to increased demand (the demand curve would shift to the right). These include taste shift to greater popularity, population likely to buy rises, income rises (for a normal good), price of substitution rises, price of complements falls, and future expectations encourage buying. The graph on the right lists events that could lead to decreased demand (the demand curve would shift to the left). These include a taste shift to lesser popularity, population likely to buy drops, income drops (for a normal good), the price of substitutes falls, the price of complements rises, future expectations discourage buying.
A list of factors that can cause an increase in demand from D0 to D1. (b) The same factors, if their direction is reversed, can cause a decrease in demand from D0 to D1. 

Factors That Shift Supply Curves

Changes in the cost of production affect how much firms are willing to supply at any given price. Notice that a change in the price of the product itself is not among the factors that shift the supply curve. Although a change in price of a good or service typically causes a change in quantity supplied or a movement along the supply curve for that specific good or service, it does not cause the supply curve itself to shift.

Two graphs. One showing the supply curve shifting to the right and a list of factors that would cause an increase in supply. The other graph shows the supply curve shifting to the left and lists the factors that would cause a decrease in supply. Factors that could increase supply include: Favorable natural conditions for production, a fall in input prices, improved technology, and lower product taxes / less costly regulations. Factors that could decrease supply include: poor natural conditions for production, a rise in input prices, a decline in technology (not common), and higher product taxes / more costly regulations.
A list of factors that can cause an increase in supply from S0 to S1. (b) The same factors, if their direction is reversed, can cause a decrease in supply from S0 to S1.

Because demand and supply curves appear on a two-dimensional diagram with only price and quantity on the axes, you might think that economics is about only four topics: demand, supply, price, and quantity. However, demand and supply are really “umbrella” concepts. Demand covers all the factors that affect demand, and supply covers all the factors that affect supply. Factors other than price that affect demand and supply are included by using shifts in the demand or the supply curve. In this way, the two-dimensional demand and supply model becomes a powerful tool for analyzing a wide range of economic circumstances.