3.2 Shifts in Demand and Supply for Goods and Services

Demand and supply are the building blocks of markets. They're shaped by various factors like income, preferences, and costs. Understanding these influences helps predict how markets will react to changes.

When demand or supply shifts, it causes ripple effects throughout the market. Prices and quantities adjust to find a new balance. This constant dance between buyers and sellers is what makes markets tick.

Factors Affecting Demand and Supply

Factors shifting demand curves

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• Changes in consumer income shift demand curves
  • Higher income increases demand for normal goods (cars) causing a rightward shift
  • Lower income decreases demand for normal goods leading to a leftward shift
  • Higher income decreases demand for inferior goods (instant noodles) resulting in a leftward shift
  • Lower income increases demand for inferior goods causing a rightward shift
• Shifts in consumer preferences alter demand
  • Favorable changes in tastes boost demand (plant-based meat) with a rightward shift
  • Unfavorable changes in preferences reduce demand (fur coats) via a leftward shift
• Price changes in related goods affect demand
  • Substitute goods: higher price for one good raises demand for its substitute (Pepsi vs. Coca-Cola) with a rightward shift
  • Substitute goods: lower price for one good lowers demand for its substitute causing a leftward shift
  • Complementary goods: higher price for one good reduces demand for its complement (smartphones and phone cases) via a leftward shift
  • Complementary goods: lower price for one good boosts demand for its complement resulting in a rightward shift
• Elasticity of demand influences the magnitude of these shifts

Demand shifts and market equilibrium

• Rightward shift in demand curve represents an increase in demand
  • Leads to a higher equilibrium price ($P_1 > P_0$)
  • Results in a larger equilibrium quantity ($Q_1 > Q_0$)
• Leftward shift in demand curve indicates a decrease in demand
  • Causes a lower equilibrium price ($P_1 < P_0$)
  • Produces a smaller equilibrium quantity ($Q_1 < Q_0$)

Factors Affecting Supply

Causes of supply curve shifts

• Input cost changes shift supply curves
  • Higher input costs (wages, materials) decrease supply causing a leftward shift
  • Lower input costs increase supply resulting in a rightward shift
• Technological progress affects supply
  • Advancements in technology (automation) boost productivity and supply with a rightward shift
  • Technological setbacks or obsolescence reduce supply via a leftward shift
• Government policies and regulations impact supply
  • Subsidies and tax breaks for producers increase supply causing a rightward shift
  • Taxes, tariffs, and strict production regulations decrease supply with a leftward shift
• Scarcity of resources can lead to a leftward shift in supply

Supply shifts and market outcomes

• Rightward shift in supply curve shows an increase in supply
  • Results in a lower equilibrium price ($P_1 < P_0$)
  • Leads to a larger equilibrium quantity ($Q_1 > Q_0$)
• Leftward shift in supply curve represents a decrease in supply
  • Causes a higher equilibrium price ($P_1 > P_0$)
  • Produces a smaller equilibrium quantity ($Q_1 < Q_0$)

Market Dynamics

• Market forces of supply and demand interact to determine equilibrium prices and quantities
• The price mechanism helps allocate resources efficiently in a market economy
• Changes in supply and demand affect consumer surplus and producer surplus