Lecture Notes on Supply and Demand Shifts

Introduction

• Focus: Predict changes in equilibrium prices and quantities when world conditions change.
• Example: Tacos market with basic supply and demand curves.
  • Equilibrium: 100 tacos at $3.

Demand Shifts

Increase in Demand

• Scenario: Influx of students increases population.
• Effect on Demand Curve:
  • Shifts to the right.
  • More people willing to buy tacos at every price.
• Effect on Market Equilibrium:
  • Old price ($3) results in fewer tacos supplied than demanded.
  • Prices rise and quantity supplied increases.
  • New equilibrium: $3.50 and 120 tacos.

Decrease in Demand

• Scenario: Shift in preference to chicken fingers.
• Effect on Demand Curve:
  • Shifts to the left.
• Effect on Market Equilibrium:
  • Surplus of tacos (more supplied than demanded).
  • Price falls until equilibrium is reached.
  • New equilibrium: $2 and 60 tacos.

Supply Shifts

Increase in Supply

• Scenario: Price of flour falls.
• Effect on Supply Curve:
  • Shifts to the right.
  • Lower marginal cost of tacos.
• Effect on Market Equilibrium:
  • Surplus at old price.
  • Price falls, new equilibrium: $2 and 120 tacos.

Decrease in Supply

• Scenario: Wages increase.
• Effect on Supply Curve:
  • Shifts left.
  • Higher marginal cost of making tacos.
• Effect on Market Equilibrium:
  • Shortage at old price, increase in price, fall in quantity.

Key Takeaways

• Avoid memorizing; understand underlying principles.
• Demand increase = Price and quantity increase (ceteris paribus).
• Demand decrease = Price and quantity decrease (ceteris paribus).
• Supply increase = Price falls and quantity rises.
• Supply decrease = Price rises and quantity falls.
• Importance of textbook examples for understanding equilibrium shifts.