Shifts in demand and supply

In OpenStax's car example, higher incomes raise the quantity of cars demanded at $20,000 from 18 million to 20 million.

What moves a demand curve

A demand curve holds everything except the price fixed. When one of those other things changes, buyers want a different quantity at every price, and the whole curve moves. A move to the right is an increase in demand; a move to the left is a decrease. OpenStax names the main causes.

• Income. For a normal good, higher income raises demand. For an inferior good, such as generic groceries or used cars for some buyers, higher income lowers it.
• Tastes and preferences. From 1980 to 2021 Americans' chicken consumption per person rose from 47 to 97 pounds a year and beef fell from 76 to 59 pounds (USDA figures quoted by OpenStax).
• Population size and make-up. More older people means more demand for hearing aids and care homes.
• Prices of related goods. A cheaper substitute (tablets for laptops) lowers demand; a dearer complement (golf clubs for golf balls) lowers it too.
• Expectations. If people expect coffee prices to rise, they buy more now.

Look at the car numbers. On the original curve D0, 18 million cars are demanded at $20,000. When incomes rise the curve moves to D1 and 20 million are demanded at that same price. When the economy slows and incomes fall it moves to D2, and only 14.4 million are demanded at $20,000. The price did not change in either case. What changed is how much people want at that price.

What moves a supply curve

Supply shifts when the cost of producing changes. Dearer inputs such as steel for cars shift supply left: at $20,000 car makers offer 16.5 million cars on S1 instead of 18 million on S0. Cheaper steel shifts it right to S2, 19.8 million at the same price. Weather matters for farm goods; in 2014 the worst drought in 50 years hit the Manchurian Plain, an important region for growing corn and soybeans, and a drought shifts supply left. New technology lowers costs; by the early 1990s more than two thirds of the wheat and rice in low-income countries came from Green Revolution seeds, and harvests per acre had doubled. Governments matter too: taxes and costly regulations shift supply left, and subsidies shift it right.

Four steps for any news story

OpenStax suggests a routine. One: draw the market before the change. Two: decide whether the event affects demand or supply. Three: decide whether that curve moves right or left. Four: find the new crossing point and compare the price and quantity with the old ones. In the model, choose D1 with S0. The new equilibrium is about $21,333 and 19.3 million cars: both price and quantity rose. Choose S1 with D0 instead: the price rises to $21,000 but the quantity falls to 17.5 million.

When both curves move at once, one of the two results can go either way. If demand and supply both increase, the quantity certainly rises, but the price can rise, fall or stay the same depending on which shift is bigger. Try D1 with S2: the price ends near $20,125, almost unchanged, while the quantity jumps to about 19.9 million. Then try dragging the curves by equal amounts in the gasoline market from the earlier units; equal shifts to the right leave the price exactly where it was.

A common trap

Read this headline: "Steel prices jump; car prices rise; buyers purchase fewer cars." It is tempting to say that demand for cars fell. It did not. Nothing changed for buyers: their incomes, tastes and the prices of other goods are the same. The supply curve moved left, the price rose, and buyers responded by moving up along their unchanged demand curve. The quantity demanded fell; demand did not. Keeping the two phrases apart is the single most useful habit in this subject, and the model helps: only the curve you dragged leaves a faint dashed copy behind.