The Basics of Supply and Demand
where QD denotes the quantity of shoes demanded (in thousands of pairs) and P is the dollar price per pair. Let the market supply curve be given by Q S .4P 2. Then, if we set supply equal to demand (QS QD), we have 13 .2P .4P 2, or .6P 15; therefore, P 15/.6 $25. Inserting P $25 into either the demand equation or the supply equation, we confirm that QD QS 8 thousand units.3
Shifts in Demand and Supply Changes in important economic factors can shift the positions of the demand and/or supply curves, causing, in turn, predictable changes in equilibrium price and quantity. For example, suppose the local economy is coming out of a recession and that consumer incomes are rising. As a result, a greater quantity of shoes would be demanded even at an unchanged price. An increase in demand due to any nonprice factor is depicted as a rightward shift in the demand curve. Shifting the entire curve means that we would expect an increase in the quantity demanded at any prevailing price.4 Such a shift is shown in Figure 7.2a. What is the result of the shift in demand? We see from the figure that the new equilibrium occurs at a higher price and greater quantity of output. This is hardly surprising. The increase in demand causes price to be bid up. In the process, the amount supplied by firms also increases. The change from the old to the new market equilibrium represents a movement along the stationary supply curve (caused by a shift in demand). Now consider economic conditions that might shift the position of the supply curve. Two principal factors are changes in input prices and technology improvements. For instance, increases in input prices will cause the supply curve to shift upward and to the left. (Any effect that increases the marginal cost of production means that the firm must receive a higher price to be induced to supply a given level of output.) Technological improvements, however, allow firms to reduce their unit costs of production. As a consequence, the supply curve shifts down and to the right. Such a shift is shown in Figure 7.2b. The result is a greater market output and a lower price. The favorable shift in supply has moved the equilibrium toward lower prices and greater quantities along the unchanged demand curve. 3 The same answer would be found if we began with the curves expressed in the equivalent forms P 65 5QD and P 5 2.5QS. Setting these equations equal to one another, we find 65 5Q 5 2.5Q. It follows that Q 60/7.5 8 thousand. Inserting this answer into either equation, we find P $25. 4 It is important to distinguish between shifts in the demand curve and movements along the curve. The effect of a change in price is charted by a movement along the demand curve. (An increase in price means fewer units demanded, but the demand curve has not shifted.) By contrast, the demand curve shifts with a change in any nonprice factor that affects demand.
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