Supply and Demand: Impact on Market Equilibrium
Factors Shifting the Demand Curve
Shifts in the Demand Curve: When a determinant of demand, other than price, changes, the demand curve shifts. For example, imagine a scientific study reveals that eating ice cream leads to better health and longer life. How would this impact the ice cream market? This new information would change consumer tastes, thus increasing the demand for ice cream.
In conclusion: Any change that increases the quantity demanded at a given price shifts the demand curve to the right. Conversely, any change that decreases the quantity demanded at a given price shifts the demand curve to the left. For instance, government campaigns to reduce tobacco consumption, if successful, shift the demand curve for tobacco to the left. However, a change in the price of tobacco itself does *not* shift the curve; it only represents a movement *along* the existing demand curve.
Supply and Quantity Supplied
Quantity Supplied: The quantity of a good or service that sellers are willing and able to sell. Key factors determining the quantity supplied include:
- Price: When the price of a product (e.g., ice cream) is high, selling it is profitable, leading to a higher quantity supplied. When the price is low, the business is less profitable, and the quantity supplied decreases. Because the quantity supplied increases when the price rises and decreases when the price falls, we say that the quantity supplied is positively related to the price of the good. This relationship is known as the Law of Supply, which states that, all else being equal, the quantity supplied of a good rises when its price rises.
- Input Prices: When the price of one or more inputs (raw materials) rises, production becomes less profitable, and firms offer less of the product. If input prices rise significantly, a business might even shut down, offering no product at all. The supply of a good is negatively related to the price of the factors used to produce it. For example, producing ice cream requires cream, sugar, machinery, buildings, and labor. If the price of any of these factors increases, producing ice cream becomes less profitable, leading to a lower quantity of ice cream supplied.
- Technology: Technological advancements reduce the amount of labor needed to produce goods, lowering production costs. This increase in efficiency leads to a higher quantity of goods supplied.
- Expectations: The quantity of a product offered today can depend on the seller’s expectations about the future. If a seller expects the price of a product (like ice cream) to rise in the future, they might store some of their current production, offering less to the market today. Another example is the sale of firewood.
Supply Schedule and Supply Curve
Supply Schedule: A table showing the relationship between the price of a good and the quantity supplied.
Supply Curve: A graph illustrating the relationship between the price of a good and the quantity supplied.
For example, a table and graph could show how the quantity of ice cream offered changes with its price, holding all other factors constant.
Market Supply Versus Individual Supply
Market supply is the sum of the supplies of all sellers in the market. It depends on all the factors that influence individual sellers’ supplies, as well as the number of sellers.
Shifts in the Supply Curve
Whenever any determinant of supply, other than the good’s price, changes, the supply curve shifts. For example, consider a change in the price of sugar. How does this affect the supply of ice cream? A decrease in the price of sugar increases the profitability of selling ice cream, leading to an increase in the supply. At any given price, sellers are willing to produce a larger quantity, shifting the supply curve to the right. Similarly, any change that reduces the quantity that sellers wish to produce at a given price shifts the supply curve to the left.