The laws of demand and supply
Changes in any of the variables, other than price, that influence quantity demanded or supplied will cause a shift in supply curve, the demand curve, or both. There are four possible shifts:
An increase in demand - a shift of the demand curve to the right.
A decrease in demand - a shift of the demand curve to the left.
An increase in supply - a shift of the supply to the right.
A decrease in supply - a shift of the supply curve to the left.
In order to examine the effects of each of the possible shifts, we use the method known as comparative statics. With this method, we derive predictions by analysing the effect on the equilibrium of some changes in which we are interested. We start from a position of equilibrium and then introduce the change to be studied. We then determine the new equilibrium position and compare it with the original one.
The difference between the two positions of equilibrium must result
from the change that was introduced because everything else has been held constant. Each of the four possible curve shifts causes changes that are described by one of the four "laws" of demand and supply. Each of the laws summarizes what happens when an initial position of equilibrium is disturbed by a shift in either the demand curve or the supply curve.
from the change that was introduced because everything else has been held constant. Each of the four possible curve shifts causes changes that are described by one of the four "laws" of demand and supply. Each of the laws summarizes what happens when an initial position of equilibrium is disturbed by a shift in either the demand curve or the supply curve.
By using the term "law" to describe what happens, economists do not
mean that they are absolutely certain of the outcome. The term "law" in science is used to describe a theory that has stood up to substantial
testing. The laws of demand and supply are thus hypotheses that predict certain kinds of behaviour in certain situations, and the predicted behaviour occurs sufficiently often that economists continue to have confidence in the underlying theory. The laws are as follows:
mean that they are absolutely certain of the outcome. The term "law" in science is used to describe a theory that has stood up to substantial
testing. The laws of demand and supply are thus hypotheses that predict certain kinds of behaviour in certain situations, and the predicted behaviour occurs sufficiently often that economists continue to have confidence in the underlying theory. The laws are as follows:
An increase in demand causes an increase in both the equilibrium price and the equilibrium quantity exchanged. An increase in demand creates a shortage at the initial equilibrium price, and the unsatisfied buyers bid up the price. This rise in price causes a larger quantity to be supplied with the result that at the new equilibrium, more is exchanged at a higher price.
Causes a decrease in both the equilibrium i i in quantity exchanged. A
decrease in demand creates a glut at the initial equilibrium price, and the unsuccessful sellers bid the price down. As a result, less of the product is supplied and offered for sale. At the new equilibrium, both price and quantity exchanged are lower than they were originally.
Quantity
A decrease in supply causes an increase in the equilibrium price and a
decrease in the equilibrium quantity exchanged. A decrease in supply
creates a shortage at the initial equilibrium price that causes the price to be bid up. This rise in price reduces the quantity demanded, and the new equilibrium is at a higher price and a lower quantity exchanged.
An increase in supply causes a decrease in the equilibrium price and an increase in the equilibrium quantity exchanged. An increase in supply creates a glut at the initial equilibrium price, and the unsuccessful suppliers force the price down. This drop in price increases the quantity demanded, and the new equilibrium is at a lower price and a higher quantity exchanged.
An increase in supply causes
a decrease in the equilibrium price and an increase in the equilibrium quantity
exchanged. An increase in supply creates a glut at the initial equilibrium
price, and the unsuccessful suppliers force the price down. This drop in price
increases the quantity demanded, and the new equilibrium is at a lower price
and a higher quantity exchanged.
