Microeconomic Shifts in Supply and Demand Curves

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  • 0:01 Shift Factors of Demand
  • 3:34 Shift Factors of Supply
  • 5:54 Impact on Equilibrium & Price
  • 7:53 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 about the important forces that can cause the demand and supply curve to shift. Discover how this affects equilibrium and the prices you pay for goods and services.

Shift Factors of Demand

In your study of economics, you may have already learned how price can affect demand for a good or service. It certainly makes sense and is probably something you relate with every day. For example, if the price of a cup of coffee doubled, you may think twice about drinking coffee in the morning or potentially switch to another caffeine substitute. If the price of used vehicles dropped dramatically, you may think about purchasing a car and stop taking the bus or subway to work.

There's no doubt that the price impacts the demand for goods, but there are also other shift factors of demand, which are forces other than price that affect how much of a good is demanded. Let's discuss a few important shift factors that can cause the demand curve to move and the prices you pay to change.

Disposable income - This is the amount of money people have left over after paying taxes or after taxes have been withheld from their paycheck. When the economy is strong and employment is healthy, disposable income for individuals typically increases. Disposable income could increase for individuals when they get a raise at work, promotion, or inherit money from a family member. As income rises, people have more money to spend and increase their demand for goods and services. This can cause an outward/right shift of the demand curve, meaning people are more willing to buy goods at higher prices than they were before.

Tastes - Have you ever seen a popular singer, artist, or sports figure endorse a certain product and as a result, the demand for that product increased? It happens all the time with sports drinks, clothing lines, perfumes, and so on. As people's tastes change and a product becomes more popular, this shifts demand for the product to the right. People are now willing to pay more for that product than before.

Prices of other goods - This is the price you may pay for substitute or complementary goods. For example, if you enjoy eating a lot of red meat, and the price of chicken drops dramatically as compared to red meat, you may substitute more chicken in place of red meat. The price drop in chicken can likely cause a shift of the demand curve inward/left, meaning less people are willing to pay the same price for red meat as they were before. They now have another option! A complementary good example may be if the price of peanut butter increases, this may cause a corresponding shift in demand for jelly. If less people buy peanut butter, less jelly will also likely be sold.

Expectations - Expectations about the future of a product, your job status, the state of the economy, and many other things can shift the entire demand for specific goods and services. For example, if you expect that a new cheaper and more efficient laptop will be coming out in the next year, you might put off the purchase of the new computer you need. If enough people expect this, this can shift the demand for laptops to the left, which lowers the overall number of people across the board willing to purchase laptops at various price points. On the other hand, if enough people thought prices were going to rise or that there may be a shortage of laptops in the future, this could cause a shift of the demand curve to the right. More people would demand laptops and would be willing to pay higher prices across the board.

Shift Factors of Supply

Much like demand, the supply curve can be influenced by shift factors of supply, which are the forces other than price that affect how much of a good is supplied. Let's discuss four of the most common ones.

Changes in the price of raw materials or inputs - This can be increases or decreases in the prices of things like gas, oil, fabrics, cotton, steel, and so on. For example, if the price of cotton increased, which made it more expensive to make t-shirts, less t-shirts would be made, all things constant. If the price of cotton went down, more t-shirts would be produced, all else constant.

Changes in technology - These are any advancements with computers, machines, and software that can affect the efficiency and cost of producing a product. Things that help suppliers and manufacturers make things cheaper and quicker increase supply, causing a shift to the right. This means suppliers are now willing to produce more units at various price points than they were before.

Changes in supplier's expectations - The decision to sell or manufacture a certain good today depends on expectations of future prices. If a seller expects the price to rise in the future, they are inclined to sell less now, decreasing the overall supply of goods. If a seller expects the price to decline in the future, they are inclined to sell more now, increasing the supply of goods.

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