Causes of Supply and Demand Changes in Microeconomics

Causes of Supply and Demand Changes in Microeconomics
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  • 0:01 Definition of Market Forces
  • 1:52 Demand Force Along Curve
  • 3:40 Supply Force Along Curve
  • 6:02 Lesson Summary
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn what causes movements along the supply and demand curves. See how market forces work to cause these movements and the important role that price plays in this.

Definition of Market Forces

You may experience market forces at work every day and not even realize it. When does this happen? Let's say last week you were shopping for a new business suit for some job interviews you had coming up. You found the one you like, but it was a little pricier than what you could currently afford. Two weeks later, you see the suit is marked down 25% and you buy it, feeling good about your purchase! In this case, market forces rewarded your patience!

So how do we define market forces? Market forces are the way behavior of buyers and sellers affect the level of prices for goods and services, without any government or artificial influence. It is simply the actions of people acting in their own self-interest, which creates the forces of demand and supply.

When there is excess demand for a product or service, this puts upward pressure on prices and the quantity supplied. Excess supply puts downward pressure on prices. These natural market forces of supply and demand help drive the market towards equilibrium price, which is where the supply of a product and the demand for that product are in balance. It is the spot where the supply and demand curve intersect.

The rest of this lesson will now focus primarily on the demand and supply forces that cause a movement along the supply and demand curve, which is when there are changes in the quantity demanded or quantity supplied as a result of price changes. Additional lessons will focus on factors and market forces that cause entire shifts of those curves, such as changes in income, advancements in technology, and changes in tastes and preferences. For this lesson, we focus on the forces of demand, supply, and price changes along the existing curves.

Demand Force Along Curve

Demand forces can cause us to move up and down the demand curve. Remember, we are talking about moving along an existing curve, not shifting the curve. This movement happens when the price of the product rises and falls. If the price were to rise, then we would be moving up the demand curve. If the price were to fall, we would be moving down the demand curve. Since the demand curve slopes downward and to the right, as the price falls, a greater number of people would demand the product.

What causes this movement? Ultimately, a price change. Price is one of the strongest market forces in all of economics. But why did the price change, you might ask? A few reasons may be the producer or seller is trying to see if they can make more money by raising prices. They may also be looking to move out old inventory for new seasonal merchandise. Either way, the quantity demanded for the product changes as the price changes. Let's look at a quick example to illustrate this market force.

If a hammer is sold at $3, it might have 500 buyers. However, if the hammer manufacturer or seller were to change the price to $4, then the hammer might have only 300 people interested in buying it. On the other hand, if the seller were to drop the price to $2, then the hammer might have 1,000 buyers at that price point. These changes in price by a seller or producer all represent movements along the demand curve. As the price changes, natural market forces cause more or less people to now see the hammer as affordable or a good deal. Each price change results in quantity demanded going up or down for the product.

Supply Force Along Curve

Just like a movement along the demand curve, a movement along the supply curve means that the supply relationship has remained constant. We are moving up or down the existing supply curve because once again the price for the good or service has changed.

So why would quantity supplied change? Just like quantity demanded, the quantity supplied changed because of price. Let's look at an example.

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