Basic Principles of Supply and Demand

A change in the quantity demanded of a good or service is caused by a change in the price of the good or service. When supply decreases and the price rises, consumers’ willingness to purchase the good or service decreases. When supply increases and the price falls, consumers’ willingness to purchase the good or service increases. When the quantity demanded of a good or service changes, the set of prices and quantities of the original demand schedule remains constant. The demand curve does not shift, instead, changes in quantity demanded are depicted by a movement along the demand curve, from one price-quantity pair on the curve to a new price-quantity pair on the curve.

By contrast, a change in demand occurs when consumers’ willingness to purchase a good or service increases or decreases because of some factor other than a price change, such as a change in consumers’ income levels, a change in the size of the population, changes in the prices and availability of substitute goods, changes in the prices and availability of complementary goods, changes in individual, cultural, and social tastes, or other special influences. If, for example, everyone suddenly wanted an iPhone because they saw Sean Connery using one in a movie, the shift in cultural taste would trigger an increase in demand for iPhones and a decrease in demand for Blackberrys, despite the fact that the prices of iPhones and Blackberrys hadn’t changed. When demand changes, the set of prices and quantities changes from the set of prices and quantities of the original demand schedule. Changes in demand are depicted by a shift of the demand curve from its original position – to the right if demand increases and to the left if demand decreases.

A change in the quantity supplied occurs when the price of the good or service changes. As demand for a good or service increases and the price rises, producers tend to supply more of that good or service, because they profit from utilizing more input factors and increasing output. If demand decreases and the price of the good or service falls, producers supply less of the good or service, because utilizing more inputs to supply a larger quantity is no longer profitable. When the quantity supplied of a good or service changes, the set of prices and quantities of the original supply schedule remains constant. Changes in quantity supplied are depicted by a movement along the supply curve, from one price-quantity pair on the curve to a new price-quantity pair on the curve.

By contrast, a change in supply occurs when producers’ willingness to supply a good or service changes because of factors other than the price of the good or service, such as technology, input prices, sellers’ expectations, taxes, subsidies, the number of sellers, or other special influences. Producers are primarily concerned with production costs: when they increase, producers tend to supply less; when they decrease, producers tend to supply more. If, for example, the cost of electricity goes up, producers will supply less because production costs have increased. If the government lowers the minimum wage, producers will supply more because production costs have decreased. When supply changes, the set of prices and quantities changes from the set of prices and quantities of the original supply schedule. Changes in supply are depicted by a shift of the supply curve – to the right if supply increases and to the left if supply decreases.