Economics is a study of people. By exploring economics, we are able to explain the production, distribution, and consumption of goods and services. Economics can be separated into macroeconomics and microeconomics, with the main difference being that microeconomics is the study of individual and business decisions, whereas macroeconomics is the study of decisions made by governments and countries. To fully understand economics, it is necessary to understand the base of decision making and how consumers and producers interact in regards to certain situations. This fundamental concept is known as “Demand & Supply”.
Diving into Demand:
The law of demand states that the quantity of goods demanded varies inversely with price. Further explaining that, with an increase in the price of a good or service, there would be a decrease in the quantity demanded of that good or service, vice versa. An example of this would be: If the price of an ice cream cone was $5, one would buy 2 or 3. However, if the price of the ice cream was $15, people would only prefer buying one. This law is graphically represented through a demand curve, which is downward sloping. We can remember this by: “Demand dives downwards”!
Scaling into Supply:
The law of supply states that the quantity supplied varies directly with price. Further, an increase in the price of a good or service, results in an increase in the quantity supplied of that good or service, and vice versa. An example of this would be: If there was a drought, the availability of strawberries would be lesser, causing the demand for strawberries to be larger than the availability of strawberries. Due to the lower availability and high demand of strawberries, sellers would increase the price of strawberries, thus increasing their profit. This would play as an incentive for suppliers (producers) to supply more strawberries. Therefore, an increase in the price of strawberries would cause the supply of strawberries to also increase. This law is graphically represented through a supply curve, which is upward sloping. We can remember this by: “Supply scales upwards”!
Movements along a demand & supply curve:
A change along the curve is referred to as a movement. These changes occur due to a change in price, while all other factors remain constant. Therefore, if a change in the price of goods or services took place in a demand curve, the quantity demanded would simultaneously and inversely change. As shown in figure below, if the price increases, the quantity demanded would contract (decrease). But if the price decreases, the quantity demanded would extend (increase).
The same way, if a change in the price of goods or services took place in a supply curve, the quantity supplied would simultaneously change. In this case, an increase in the price of a good or service would extend (increase) the quantity supplied. While a decrease in the price of a good or service would contract (decrease) the quantity supplied. This is further shown in the figure below.
A shift in the curve occurs due to changes in any non-price determinants/factors. This is shown through the quantity demanded changing while the price remains constant. Shifts can be both rightward and leftward depending on its situation.
Shifts in a demand curve:
A shift in a demand curve would mean that the quantity demanded has changed without a change in the price. An example of a rightward shift in a demand curve would be: An increase in advertisements for Coke, shows more people the brand and builds desire for the product. This would increase the quantity demanded for Coke, while the price of Coke remains the same, causing a rightward shift. However, if there is a decrease in advertisements for coke, people are more likely to try other goods that are advertised, causing the quantity demanded to decrease (leftward shift). We can remember this by, increase: right & decrease: left. The table below shows various factors that cause a shift in the demand curve; both leftward and rightward.
Non-Price Determinants Causing Shifts In The Demand Curve
|Rightward/Outward Shift||Leftward/Inward Shift|
|Increase in consumer income||Decrease in consumer income|
|Fall in taxes on income||Rise in taxes on income|
|A rise in the price of substitutes||A fall in the price of substitutes|
|A fall in the price of complements||A rise in the price of complements|
|Change in consumer taste & fashion||Change in consumer taste & fashion|
|Increased advertising for the product||Decreased advertising for the product|
|Rise in population||Fall in population|
|Seasonal changes||Seasonal changes|
The figure below shows the diagrammatic representation of both rightward and leftward shifts in a demand curve:
Shifts in a supply curve:
A shift in a supply curve would mean that the quantity supplied has changed without a change in the price. An example of a rightward shift in a supply curve would be: A more efficient printer in a newspaper factory would improve production efficiency causing the quantity supplied to increase, which is shown through a rightward shift of the supply curve. However, if there is a technological error in the printer, it will reduce the efficiency, decreasing the quantity supplied (leftward shift). The table below shows various factors that cause a shift in the supply curve; both leftward and rightward.
Non-Price Determinants Causing Shifts In The Supply Curve
|Rightward/Outward Shift||Leftward/Inward Shift|
|Decrease in the cost of factors of production||Increase in the cost of factors of production|
|Technological advancements||Technological errors|
|Fall in the price of other products that the firm supplies||Rise in the price of other products that the firm supplies|
|Imposition of indirect taxes||Granting of a subsidy|
|Optimistic outlook||Pessimistic outlook|
The figure below shows the diagrammatic representation of both rightward and leftward shifts in a supply curve:
All in all, the base of economics demonstrates the relation between the price and decisions made by consumers and producers, in regards to their desires and decisions. What the law of demand and supply demonstrates remains very important to understand economics further: the law of demand portrays an inverse relationship between the price and quantity demanded while the law of supply portrays a direct relationship between the price and quantity supplied. Understanding why and how an event occurs in economics stands beneficial to understanding what happens after.
- Hayes, Adam. “Economics.” Investopedia, 2019, www.investopedia.com/terms/e/economics.asp.
- “Law of Supply Definition.” Investopedia, 2019, www.investopedia.com/terms/l/lawofsupply.asp.