What happens to price and quantity when supply or demand shifts?
When demand increases, price and quantity both rise; when supply increases, price falls and quantity rises (and the reverse for decreases). When both curves shift at once, one of price or quantity changes in a known direction and the other depends on which shift is bigger.
Shift versus movement along a curve
A change in the good's own price moves you along a curve: that is a change in quantity demanded or quantity supplied. Anything else that changes how much buyers want or sellers offer at every price shifts the whole curve.
- Demand shifters: income, prices of substitutes and complements, tastes, expectations about future prices, and the number of buyers.
- Supply shifters: input costs, technology, expectations, the number of sellers, and taxes or subsidies on producers.
After a shift, the market moves to a new equilibrium where the new curve crosses the other one. Price adjusts until quantity demanded equals quantity supplied again.
A worked example: coffee
A frost damages the coffee crop in a major growing region. That is a supply shifter, so supply shifts left. At the old price there is now a shortage, buyers bid the price up, and the market settles at a higher price and a lower quantity.
Now add a second change: a study makes coffee more popular, so demand shifts right at the same time. Both shifts push price up, so price rises for certain. But supply falling cuts quantity while demand rising raises it, so the change in quantity is indeterminate without knowing the sizes of the shifts.
- Demand up, supply up: quantity rises, price uncertain.
- Demand down, supply down: quantity falls, price uncertain.
- Demand up, supply down: price rises, quantity uncertain.
- Demand down, supply up: price falls, quantity uncertain.
Common exam mistakes
- Writing "price rose, so demand fell." A higher price lowers quantity demanded; demand itself has not shifted.
- Shifting both curves for one event. A frost affects sellers, not buyers' willingness to pay, so only supply moves.
- Calling a rightward shift "up." For supply, a rightward shift (more offered at each price) is drawn lower on the graph, which is why up and down get confusing. Say left and right.
- Giving a definite answer for the indeterminate variable in a double shift. Say it depends on the relative size of the shifts.
Applied to a whole economy, the same logic underlies aggregate demand and inflation, covered in why printing money causes inflation.
Seeing it move
A static graph shows only the before and after. In Isotoon you can type something like "What happens to the price of coffee if a frost hits and coffee gets more popular?" and get a short video where one curve slides, the shortage appears, the price climbs, and then the second curve moves. On Pro, a 2D interactive lets you drag each curve yourself and watch the equilibrium follow. More topics are on the economics page.
Questions
- What is the difference between a change in demand and a change in quantity demanded?
- A change in quantity demanded is a movement along the demand curve caused by the good's own price changing. A change in demand is a shift of the whole curve caused by something else, such as income or the price of a substitute.
- Why does a shortage push the price up?
- At a price below equilibrium, buyers want more than sellers offer. Buyers who miss out are willing to pay more, and sellers notice they can charge more, so the price rises until the shortage disappears.