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Changes In Supply And Demand

Updated: Apr 12, 2021

Supply and demand are concepts that matter to both producers and consumers. It plays into our lives without us even knowing. It is essential to understand supply and demand in order to advance further into economics.


Watch these to YouTube videos I made to better understand graphing supply and demand.

Video 1 and Video 2

 

Before we dive into what causes shifts in supply and demand, we need to understand the main differences between supply/demand and quantity supplied/demanded.


Quantity demanded is the will of consumers to purchase goods at a specific price. A change in quantity demanded is a result of a change in price. Quantity supplied is the amount of goods that sellers are willing to sell at a certain price. Similarly to quantity demanded, change in quantity supplied is a result of a change in price.


Demand is the will of consumers to purchase different quantities of goods at varying prices. Change in demand is not caused by price, and is instead caused by the shifters of demand. Supply is the will of sellers to sell different quantities of goods at varying prices. Similarly to demand, changes in supply are determined by the shifters of supply. We will discuss these how these shifters work later in the article.


Change in Quantity Demanded

As stated above, quantity demanded changes based off of a change in price. According to the Law of Demand, there is an inverse relationship between quantity demanded and price. This means that quantity demanded increases when price decreases, and quantity demanded decreases when price increases. There are three reasons why the Law of Demand occurs: the substitution effect, the income effect, and the Law of Diminishing Marginal Utility.


The substitution effect is an increase in quantity demanded when a substitute, or similar product, decreases in price. This decreases the quantity demanded of a higher priced good. Consumers will switch to another product simply because it costs less.


The income effect is the ability to buy more goods due to a decrease in price. If prices are lower, consumers are able to buy more since they are paying less for an individual good.


Finally, the Law of Diminishing Marginal Utility states that consumers will be be less satisfied for every other good they consume. As someone buys more of one thing, they will gradually become less satisfied with it. For instance, if you buy three apples, you would pay the most for the first because it brings the most satisfaction, and you would pay the least for the third because it brings the least satisfaction.


Change In Demand

Demand changes in conjunction with the shifters of demand. They are changes in substitutes, expectations of buyers, population, tastes and preferences, income, and complements. They can be memorized through the acronym SEPTIC.


Substitutes are goods that can replace others. If we return to the Law of Demand, it says that consumers will buy more if prices are lower. This means that when substitutes of a good are cheaper, demand rises for the substitute, and demand drops for the original good.


Expectations of buyers are what buyers expect prices to be for a good in the future. If a good will be more expensive in the future, the current demand will rise. Likewise, if a good will be cheaper in the future, the current demand will fall.


Population is the amount of people who engage in a market for a good. A larger population will result in a higher demand since there are more people willing to buy a good. A smaller population will result in a lower demand since there are less people willing to buy a good.


Tastes and preferences are the levels of enjoyment that consumers get from a good. If consumers enjoy a good, the demand of that good will increase. If consumers dislike a good, the demand for that good will decrease.


Income is the amount of money that consumers make. This affects the demand in a market depending on the type of good. Normal goods are goods where demand increases when income of consumers increases. These goods are more expensive. Inferior goods are goods where demand increases when income of consumers decreases. These goods are less expensive than normal goods.


Complements are multiple goods that are used together. Consumers usually by a good and its complement together. This demand of a good will decreases when its complement's price increases since consumers would not want to pay more.


Change In Quantity Supplied

Like quantity demanded, quantity supplied changes based on price. According to the Law of Supply, there is a direct relationship between price and quantity supplied. This means that price increases as quantity supplied increases, and price decreases as quantity supplied decreases.


The Law of Supply occurs since firms are able to gain more profit when selling at higher prices. More profit gives firms a greater incentive to produce more. In economics, the main goal of a firm is to make profit.


Change In Supply

Supply will change in accordance with the shifters of supply. They are changes in technology, input costs, expectations of sellers, and amount of suppliers. They can be memorized through the acronym TIES.


Improvements in production technology will result in an increase in supply. Better technology allows firms to produce cheaper and faster. With this, more goods can be produced, and supply increases.


Input costs are the costs of producing goods. They range from the costs of materials and resources to the costs of labor. Supply will increase when the input prices decrease, and supply decreases when the input prices increase.


Similarly to demand, supply is also affected by expectations, but now it is that of the suppliers. The expectations of suppliers are what suppliers anticipate the future prices of goods will be. If prices are expected to rise, firms will keep their supply of goods in reserve, so that they may sell it at a higher price in the future. If prices are expected to fall, firms will accumulate as much supply as possible and sell it, so that they may maximize their profit.


The amount of sellers in a market greatly affects the supply available. With more sellers, there will be a larger supply since it is necessary to produce more for each individual firm. With fewer seller, there will be a smaller supply since there are less firms need to be supplied with goods.

 

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