Author: John Bouman

Reasons for a Shift in the Demand Curve Demand can increase or decrease. In this case, the demand curve shifts to the right or to the left, respectively. The following are reasons: 1. A change in buyers’ real incomes or wealth The demand for a normal product increases if buyers experience an increase in real incomes or wealth. If buyers’ real incomes increase, they can afford to purchase more electronic devices, clothes, food, and other products. Consequently, the demand for these products increases. However, some products may experience a decrease in demand as buyers’ real incomes increase. These products are called inferior products. A person who is forced to eat macaroni and cheese each day on a minimal budget may choose to buy steak when her/his income increases. This means that the demand for macaroni and cheese decreases as this buyer’s income increases. In this case, macaroni and cheese is considered an inferior product, and steak is considered a normal product. Another example of an inferior product is public transportation. Typically, as buyers’ incomes increase, the demand for public transportation decreases (and vice versa). The term “inferior” in economics is a bit of a misnomer because it does not mean that the quality of the product is inferior (the quality of the macaroni and cheese may be perfectly fine). It merely refers to the product’s demand changes as a...

An Increase in Demand Demand changes for any of the five reasons listed in the previous section. When the demand curve shifts to the right demand increases. The market price increases, as does the equilibrium quantity (in the short run). A Decrease in Demand When the demand curve shifts to the left, equilibrium price and quantity decrease (in the short run). Video Explanation For a video explanation of how a change in buyers’ incomes changes the demand (and the equilibrium price and quantity) for a normal good, please...

Reasons for a Shift in the Supply Curve Supply can increase or decrease. In this case, the supply curve shifts to the right or to the left respectively. The following are reasons: 1. An advance in technology. An advance in the technology of making the product will lower the cost of producing it. This means that the firm increases its profits, and it has more incentive to increase its supply. 2. A change in the price of an input used to make the product. When the price of an input, such as labor, raw materials, machinery, or land, decreases, the firm makes more profit per product and is willing and able to increase the supply of the product (and vice versa). 3. A change in taxes, subsidies, or regulations. Taxing or imposing additional regulations on the manufacturing of a product lowers the supply, because the total cost of making the product increases. A subsidy, a government grant to a business or individual, or a reduction in regulations increases supply. Public schools, community colleges, and public universities receive subsidies from local and state governments. These additional funds allow schools to supply more courses and hire more teachers and professors than would be the case if they did not receive government funds. 4. The number of suppliers. When more firms decide to enter the market, the supply of the product increases...

An Increase in Supply Supply changes for any of the four reasons listed in the previous section. An increase in supply is illustrated by a rightward shift of the supply curve. This decreases the price and increases the quantity sold. A Decrease in Supply A decrease in supply is illustrated by a leftward shift of the supply curve. This increases the price and decreases the quantity...

A Summary of how Demand and Supply Changes Affect Prices and Quantities The following summarizes the important relationships between changes in demand and supply and their corresponding equilibrium prices and equilibrium quantities changes. These are changes that take place in the short-term (usually within several months). Long run price changes are discussed in more detail in a later section in this unit. When we refer to “equilibrium price” it represents the  price or market price, meaning the price that the grocery store, department store, gas station, etc. charges in a free market. When we mention “equilibrium quantity”, it represents the quantity or the amount of a certain product bought and sold in a store or where ever goods and services are sold. When Demand Increases ==> Price Increases and Quantity Increases When Demand Decreases ==> Price Decreases and Quantity Decreases When Supply Increases ==> Price Decreases and Quantity Increases When Supply Decreases ==> Price Increases and Quantity Decreases A Simultaneous Increase in Demand and Supply So we know that an increase in demand increases equilibrium price and quantity (and vice versa), and an increase in supply decreases equilibrium price and increases quantity (and vice versa). What happens if both demand and supply change at the same time? Let’s analyze the following examples.  Example 1 Problem: Suppose that consumers’ incomes have gone up, and that an advance in technology has...