Chapter 17: Changes in Supply and Demand
Core idea
Price changes the quantity supplied and the quantity demanded — they slide along the existing curves. But many other forces change the curves themselves: an entire shift of supply or demand at every possible price. Supply shifts come from nature, input prices, competition, expectations, related-product profitability, government policy, technology, and capital deepening. Demand shifts come from tastes, prices of substitutes and complements, income (normal vs. inferior goods), the number of buyers, and expected future prices. Knowing the difference between “the price moved, so people bought more” (movement along) and “people are buying more at every price now” (a shift) is the difference between a sharp economic argument and a sloppy one. The COVID-19 era was a master class in both kinds of move happening simultaneously across hundreds of markets.
Authors’ framing: “Supply” is not a quantity. It is a willingness to produce at various prices. The current price never affects supply itself — it picks out the quantity supplied at that point on the curve. Mix this up and almost every economic argument that follows is corrupted.
Why it matters
It immunises you against the most common bad-economics arguments
Pundits routinely conflate “the price went up” with “supply went down” or “demand went up.” Sometimes that’s right; often it isn’t. Knowing the difference lets you check the claim against the actual drivers: did an input price change? Did consumer income shift? Did a substitute become cheaper? Did expectations move? Once you can name the cause of a shift, you can predict the next move — because the same driver usually has follow-on effects on related markets.
It explains why price and quantity sometimes move together and sometimes opposite
If demand rises (curve shifts right), price and quantity both rise. If supply rises, price falls but quantity rises. If demand falls, price and quantity fall. If supply falls, price rises but quantity falls. The pattern of co-movement is itself a diagnostic for which side moved. Reading price and quantity together is how economists reverse-engineer what happened in a market they cannot directly observe.
It is the playbook for forecasting under shocks
COVID-19, the 2022 chip shortage, an OPEC production cut, a viral product launch — each is a story about which curve moved, in which direction, by how much. Forecasters who can map a news story onto “this is a supply-shifter in this market and a demand-shifter in this other market” reliably out-predict those who cannot. The next chapter on costs and the chapters on macroeconomics all build on this skill.
Key takeaways
Key takeaways
- Movement along a curve (price changes the quantity supplied/demanded) is different from a shift of the whole curve (something other than price changes willingness at every price).
- Supply shifters: nature, input prices, competition, expectations, profits in related markets, government policy (taxes/subsidies/regulation), technology, capital deepening.
- Demand shifters: tastes and preferences, prices of substitutes and complements, income (normal vs. inferior goods), number of buyers, expected future prices.
- Substitutes move in opposite directions (price of beef up → demand for chicken up). Complements move in the same direction (price of movie tickets up → demand for popcorn down).
- Normal goods: demand rises with income (organic produce, restaurant meals, vacations). Inferior goods: demand falls as income rises (instant noodles, generic-brand cereal, bus travel).
- Expectations cut both ways: producers withhold supply expecting higher future prices; consumers stockpile expecting shortages. Both behaviours can be self-fulfilling.
- Supply chain shocks and panic demand are the same mechanism viewed from two sides: the system can't meet current orders, so it rations through shortage, price spikes, and hoarding.
Mental model — what shifts each curve
Read it as: Two boxes of shifters. The supply side is dominated by costs of producing (inputs, technology, regulation) and opportunity costs of producing (alternative uses, expectations). The demand side is dominated by what buyers want (tastes, complements, substitutes) and what they can afford (income, number). Anything on either list moves a whole curve and produces a new market price.
Mental model — how the four basic shifts move price and quantity
Practical application
Walking through a real news story
-
Identify the market. Whose buyers and sellers are interacting? Cars, oil, eggs, rental apartments, programmer salaries?
-
Spot the shifter. What changed? An input cost (chips for cars), a tax (carbon levy), a taste (electric vehicles), an income shock (recession), an expectation (panic-buying), a number-of-buyers shock (remote workers leaving the city)?
-
Classify it. Is the shifter on the supply side or the demand side? Is it shifting the curve right or left?
-
Predict the signature. Use the chart above: which way should price and quantity move?
-
Check. Match against observed price and quantity. If they don’t match the prediction, both curves probably moved (chip shortage + EV demand spike both hit auto in 2021–22 — prices up, quantities down).
Substitutes and complements are the next-order effect
Example: The 2020–2022 used car bonanza
In 2019 the typical used car in the US depreciated about 15–20% per year — predictable. In 2021 used car prices rose, sometimes above their original sticker price. Three simultaneous shifts produced this:
- Supply shifter (left shift, auto market). The chip shortage cut new-car production. Fewer new cars meant fewer leased cars returning to the used market in subsequent years. Used supply shrank.
- Demand shifter (right shift, used cars). Remote work made commuting from suburbs newly attractive; stimulus checks raised income; expected future prices encouraged buyers to act now. Demand surged.
- Substitute-market shifter. With new cars scarce and expensive, buyers who would have bought new shifted to used. The new-car shortage was the demand shifter for the used-car market.
Price and quantity in the used market moved in different patterns at different points — quantity rose in 2021 as demand outpaced contracted supply, then fell in 2022 as the supply shortfall finally bit. A naive observer who said “prices went up because there’s high demand” would have been only one-third right. A diagnostician who could separate the three shifters could see when prices would peak and start to fall (early 2023, as both shortages began to unwind).
The pattern is general: any market crisis is usually multiple simultaneous shifts. The skill is decomposing them.
Caveats
Related lessons
Jump to…
Type to filter; press Enter to open