Supply and Demand Curve Shifts
A demand or supply curve shifts when something other than the product's own price changes, such as income, tastes, input costs or technology. A shift moves the whole curve left or right and creates a new equilibrium. A change in the product's own price only moves you along the existing curve.
Supply and demand shifts explained simply
A supply or demand curve shifts when something other than the product's own price changes, such as income, tastes, input costs or technology. A change in the product's own price only moves you along the curve. In the example, rising incomes shift demand right, so price rises from 20 to 25 and quantity from 60 to 70.
What this supply and demand lesson covers
- The difference between a shift and a movement along a curve
- What causes the demand curve to shift right or left
- What causes the supply curve to shift right or left
- How each shift changes equilibrium price and quantity
- How to reason through two shifts happening at once
Equilibrium condition, explained
- Qd
- quantity demanded
- Qs
- quantity supplied
- P*
- equilibrium (market-clearing) price
How to find the new equilibrium step by step (worked example)
Demand is Qd = 100 − 2P and supply is Qs = 20 + 2P. Rising incomes shift demand to Qd = 120 − 2P. What happens to equilibrium price and quantity?
- Original equilibrium: 100 − 2P = 20 + 2P, so P = 20
- Original quantity: Q = 100 − 2(20) = 60
- New equilibrium: 120 − 2P = 20 + 2P, so P = 25
- New quantity: Q = 120 − 2(25) = 70
Answer: Demand shifts right, so price rises from 20 to 25 and quantity rises from 60 to 70.
Shift of the curve vs movement along the curve
| Shift of the curve | Movement along the curve | |
|---|---|---|
| Caused by | Income, tastes, input costs, technology, number of buyers or sellers | A change in the product's own price |
| What you draw | A whole new curve, left or right | A new point on the same curve |
| Wording on exams | A change in demand (or supply) | A change in quantity demanded (or supplied) |
| In the example | Qd = 100 − 2P becomes 120 − 2P | — |
Does lower demand always mean lower prices? David's take
Supply and demand says that when nobody is buying, sellers lower the price to attract buyers. In reality, especially in developing markets and survival-mode businesses, the opposite happens all the time: fewer customers, higher price. Picture a taxi driver who has waited six hours without a fare. He has a number in his head, what he needs to make today for his family to eat, and he's going to hit it. So he quotes you triple. It sounds backwards, but it follows a predictable logic. I call it reverse demand pricing. Learn the graph, and remember that real sellers don't always behave like the curve.
From David's concept: Reverse Demand Pricing. This is David's opinion, alongside the standard textbook answer above.
Harder supply and demand questions
What if supply also rises to Qs = 40 + 2P after the demand shift?
Set 120 − 2P = 40 + 2P, so P = 20 and Q = 80. Price ends up back where it started, while quantity rises a lot. When both curves shift, the direction of one variable depends on which shift is bigger.
How price-sensitive is demand at the original equilibrium?
Price elasticity = (change in Q ÷ change in P) × P ÷ Q = −2 × 20 ÷ 60 ≈ −0.67. Demand is inelastic there: a 1% price rise cuts quantity by about 0.67%.
What happens with a price ceiling of 18 in the original market?
Buyers want 100 − 36 = 64 units but sellers offer only 20 + 36 = 56, so there's a shortage of 8 units.
Common supply and demand questions
What causes a shift in the demand curve?
Anything other than the good's own price that changes how much people want to buy: income, tastes, prices of substitutes and complements, expectations about future prices, and the number of buyers. More demand at every price shifts the curve right.
What causes the supply curve to shift?
Changes in input costs, technology, taxes and subsidies, the number of sellers, and producers' expectations. Cheaper inputs or better technology let firms supply more at every price, shifting the curve right. Higher costs shift it left.
What is the difference between a shift and a movement along the curve?
A movement along the curve happens when the good's own price changes; economists call it a change in quantity demanded or supplied. A shift happens when another factor changes, so the whole curve moves and you get a change in demand or supply.
What happens when supply and demand both shift?
If both increase, quantity definitely rises but the price change depends on which shift is bigger. If demand rises and supply falls, price definitely rises but quantity is uncertain. One variable is always clear; the other depends on sizes.