A demand shift moves price and quantity together
- An increase in demand creates excess demand at the old price, so the price rises until the gap closes.
- The higher price brings out extra supply along the existing supply curve, so the quantity traded rises as well.
- Price and quantity therefore move in the same direction after a demand shift, and both fall if demand decreases.
- Nothing moved the supply curve, so the extra output is a movement along it rather than a change in supply.
A supply shift moves them in opposite directions
- A decrease in supply creates excess demand at the old price too, so again the price rises.
- This time the higher price cuts the quantity buyers want along the existing demand curve, so the quantity traded falls.
- Price and quantity therefore move in opposite directions after a supply shift, which is what distinguishes the two cases in the data.
- Given only a price rise and a quantity fall you can work backwards and say supply must have shifted, which is how real data is read.
Common Mistake
- Do not describe the extra output after a demand rise as an increase in supply, because supply has not shifted at all.
- Do not assume a price rise means demand rose, since a supply fall raises the price too and the quantity tells them apart.
Work out the size from the schedule
- With a schedule you can give the new equilibrium as numbers rather than a direction, which is what an analyse question rewards.
- Apply the shift to every row of the affected column first, then look again for the row where the two quantities agree.
Example
- Demand for butter rises by 300 thousand tubs a week at every price, with supply unchanged.
| Price per tub | Qd before | Qd after | Quantity supplied |
|---|---|---|---|
| £1.00 | 900 | 1,200 | 300 |
| £2.00 | 600 | 900 | 600 |
| £2.50 | 450 | 750 | 750 |
| £3.00 | 300 | 600 | 900 |
Step 1: at the old price of £2.00, subtract supply from the new demand:
900−600=+300 thousand tubs a week 900 - 600 = +300\text{ thousand tubs a week} 900−600=+300 thousand tubs a weekStep 2: that positive answer is excess demand, so read down for the row where the new demand equals supply, which is £2.50 at 750.
Step 3: state both changes:
£2.50−£2.00=£0.50750−600=150 \pounds2.50 - \pounds2.00 = \pounds0.50 \qquad 750 - 600 = 150 £2.50−£2.00=£0.50750−600=150- The price rises by 50p to £2.50 and the quantity traded rises by 150 thousand tubs a week to 750, both upwards as a demand shift requires.
Judging how far equilibrium moves
- It depends on the size of the shift, because a small change in tastes moves the equilibrium far less than a harvest failure.
- It depends on how steep the other curve is, since a demand rise meeting inelastic supply comes out mostly as price, as covered in 2.3.8.
- It depends on how much time has passed, because supply becomes more responsive over months and years and the price gives back some of its rise.
- Overall: market forces always push a market towards equilibrium and the direction of the change is predictable from which curve moved, but the size of the change depends on the elasticities and on how long the market has had to adjust.
Exam technique
- Name which curve shifted before saying anything about price, because the two cases give different answers for quantity.
- Quote the new price and the new quantity from the schedule when one is given, rather than describing the direction only.
Self review
- Demand increases. What happens to equilibrium price and quantity?
- Supply decreases. What happens to equilibrium price and quantity?
- Price has risen and quantity has fallen. Which curve must have shifted?
- Using the butter table, what is the excess demand at £2.00 after the shift?
- Why does the size of the price change depend on the elasticity of supply?
