Site Loader

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.

Best services for writing your paper according to Trustpilot

Premium Partner
From $18.00 per page
4,8 / 5
4,80
Writers Experience
4,80
Delivery
4,90
Support
4,70
Price
Recommended Service
From $13.90 per page
4,6 / 5
4,70
Writers Experience
4,70
Delivery
4,60
Support
4,60
Price
From $20.00 per page
4,5 / 5
4,80
Writers Experience
4,50
Delivery
4,40
Support
4,10
Price
* All Partners were chosen among 50+ writing services by our Customer Satisfaction Team

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.

Changes in taxes and subsidies – This shift factor is much like the change in price of raw materials. Some goods, such as tobacco, alcohol, and food, can have various taxes placed on them to produce. When these taxes increase, this increases the cost to produce the product and in turn makes it harder for sellers to make as much money. This causes a decrease in supply. On the other hand, if tobacco farmers and sellers were to see a tax decrease or subsidy from the government, this would help their bottom line and encourage them to produce and supply more of a product.

Impact on Equilibrium ; Price

Now that we have discussed some of the most common shift factors in supply and demand, let’s take a closer look through a few examples to see how these shifts affect equilibrium and price.Let’s look at a demand example first. Assume we are a movie theater owner and that the disposable income, the money people have to spend after taxes, increases over the course of a year.

As we learned in the previous section, this will shift demand to the right. More people now can afford to go see a movie and are willing to pay a slightly higher price to do so. If you look at the graph below, the original equilibrium was the intersection of P1,Q1. After the shift in demand, the new equilibrium and price is now at P2,Q2. Higher quantity and higher price are the result. If disposable income decreased, the opposite effect would occur.

The demand curve would shift inward to the left and a new lower equilibrium price and quantity would result.

Graph for demand example
graph of demand

Let’s look at a supply example now. Assume we manufacture and sell baseball bats.

We find out that the price of aluminum, a key input material in our bats, has decreased. As a result of cheaper input costs, we can now make more bats. As you can see from the graph below, this causes a shift to the right. Originally, equilibrium was located at P1,Q1. After the shift, our new equilibrium is at P2,Q2. This means that the equilibrium price is now lower and we are supplying more bats at even lower prices than before.

You can also see from the graph that the intersection and new equilibrium is lower on the demand curve, meaning we now have a higher quantity of people demanding our bats at the new low prices.

Graph for supply example
graph for supply

Lesson Summary

In summary, there are many things other than the price that can affect the demand and supply of goods and services. Certain shift factors, such as change in disposable income, the price of other goods, changes in tastes, and changes in expectations, can cause demand to shift. An increase, or shift of demand to the right, creates a new equilibrium that results in a higher price, more demand, and as a result a higher quantity supplied by sellers.

A shift to the left, or decrease in demand, would have just the opposite effect on equilibrium price, demand, and overall quantity supplied.On the supply side, changes in the cost of raw materials and inputs, changes in technology, changes in suppliers’ expectations, and changes in taxes and subsidies can all cause the supply curve to shift. An increase in the supply, or shift to the right, creates a new equilibrium that intersects at a lower price, higher supply, and higher quantity demanded.

A decrease in supply, or shift to the left, would have just the opposite effect.

Learning Outcomes

Once you’ve finished with this lesson, you should have the ability to:

  • Describe factors other than price that affect supply and demand
  • Explain how shifts in both supply and demand affect equilibrium and price

Post Author: admin

x

Hi!
I'm Eric!

Would you like to get a custom essay? How about receiving a customized one?

Check it out