Demand and supply curves shift due to various factors, affecting market equilibrium. Changes in consumer preferences, income, and related goods prices impact demand. Supply shifts result from changes in input costs, technology, and producer numbers.

Market dynamics involve movements along curves due to price changes and shifts caused by non-price factors. Equilibrium occurs where supply meets demand. Real-world events can be analyzed using supply-demand diagrams to predict new equilibrium prices and quantities.

Factors Affecting Demand and Supply

Factors shifting demand curves

• Changes in consumer preferences shift demand curves
  • Evolving tastes and preferences over time lead to demand shifts (organic products)
  • Increased health consciousness shifts demand for organic products to the right
• Changes in the number of buyers shift demand curves
  • Rising population or consumer numbers in the market shift demand to the right
  • Falling number of buyers shifts demand to the left (aging population)
• Changes in consumer income shift demand curves
  • Normal goods experience rising demand (shifts right) with higher income and falling demand (shifts left) with lower income (luxury cars)
  • Inferior goods face falling demand (shifts left) with higher income and rising demand (shifts right) with lower income (generic brands)
• Changes in the prices of related goods shift demand curves
  • Substitutes see demand for one good shift right when the price of the substitute rises (Lyft and Uber)
  • Complements have demand for one good shift left when the price of the complement rises (smartphones and phone cases)
• Changes in consumer expectations shift demand curves
  • Expectations about future prices, income, or product availability shift current demand
  • Anticipating future price increases shifts current demand to the right (buying before a sales tax hike)
• Consumer sovereignty influences demand shifts
  • Consumer preferences and choices drive market demand, affecting product offerings and prices

Graphical changes in supply

• Shifts in the supply curve represent changes in supply
  • Rightward shift (increase in supply) means suppliers will produce more at each price level (good weather for crops)
  • Leftward shift (decrease in supply) means suppliers will produce less at each price level (rising costs)
• Factors that shift the supply curve impact supply
  • Rising input prices shift supply left, while falling input prices shift supply right (oil prices for plastics)
  • Technological advancements that lower production costs shift supply to the right (automation)
  • More producers entering the market shift supply right, while fewer producers shift supply left (number of farms)
  • Government subsidies shift supply right, while taxes or regulations shift supply left (agricultural subsidies vs environmental regulations)
  • Expectations of future price changes or production conditions can shift current supply (anticipating a minimum wage increase)
• Producer incentives affect supply shifts
  • Changes in profit potential or market conditions influence suppliers' willingness to produce

Equilibrium and Market Dynamics

Movements vs shifts in curves

• Movements along the demand curve are caused by price changes
  • Falling prices cause downward movements along the demand curve, increasing quantity demanded (summer sales)
  • Rising prices cause upward movements along the demand curve, decreasing quantity demanded (surge pricing)
• Movements along the supply curve are caused by price changes
  • Higher prices lead to upward movements along the supply curve, increasing quantity supplied (rare collectibles)
  • Lower prices lead to downward movements along the supply curve, decreasing quantity supplied (off-season produce)
• Shifts of the demand curve are caused by non-price factors
  • Rightward shifts represent increasing demand, while leftward shifts represent decreasing demand (changing consumer preferences)
• Shifts of the supply curve are caused by non-price factors
  • Rightward shifts represent increasing supply, while leftward shifts represent decreasing supply (number of producers)

Market equilibrium through supply-demand diagrams

• Equilibrium is where quantity demanded equals quantity supplied ($Q_d = Q_s$) at the equilibrium price ($P_e$)
• Shifts in demand impact equilibrium
  1. Increasing demand (shifts right) raises both equilibrium price and quantity (more buyers enter market)
  2. Decreasing demand (shifts left) lowers both equilibrium price and quantity (close substitutes become cheaper)
• Shifts in supply impact equilibrium
  1. Increasing supply (shifts right) lowers equilibrium price but raises quantity (bumper crop harvest)
  2. Decreasing supply (shifts left) raises equilibrium price but lowers quantity (input shortages)
• Simultaneous shifts in demand and supply have differing impacts
  • Final impact depends on the relative size of the demand and supply shifts
  • Increasing demand and decreasing supply raises price, but quantity change depends which shift dominates (oil markets)
• Real-world events can be analyzed with supply and demand diagrams
  • Natural disasters (hurricanes), policy changes (tariffs), or technological changes (fracking) can shift supply and demand
  • Diagrams illustrate the new equilibrium price and quantity after the shifts (avocado prices after a bad harvest)

Market Forces and Equilibrium

• The price mechanism facilitates market equilibrium
  • Prices adjust to balance supply and demand, allocating resources efficiently
• Market dynamics involve the interaction of supply and demand
  • Changes in market conditions lead to price and quantity adjustments
• Economic shocks can disrupt market equilibrium
  • Sudden events or changes in economic conditions cause rapid shifts in supply or demand
• Ceteris paribus assumption in analysis
  • Examining the effect of one variable while holding all others constant