Demand and Supply: Shifts, Movements, and Market Equilibrium

Understanding Demand and Supply

A shift in the demand curve signifies a change in the quantity demanded at any given price. This is visually represented by a shift of the demand curve to a new position, resulting in a new demand curve.

Movements Along the Demand Curve

A movement along the demand curve represents a change in the quantity demanded of a good as a result of a change in its price.

Shifts in the Demand Curve

• A rightward shift reflects an increase in the quantity demanded at any price level.
• A leftward shift reflects a decrease in the quantity demanded at any price level.

Supply Curve Dynamics

A shift in the supply curve represents a variation in the quantity supplied at any given price. This is reflected in a shift of the supply curve to a new position, defining a new supply curve.

Movements Along the Supply Curve

A movement along the supply curve represents a variation in the quantity supplied of a good as a result of a variation in its price.

Shifts in the Supply Curve

• Any event that increases supply shifts the supply curve to the right, reflecting an increase in the quantity supplied at any price.
• Any event that causes a decrease in supply shifts the supply curve to the left, reflecting a drop in the quantity supplied at any price.

Types of Goods

Substitute Goods

Two goods are substitutes if a price decline of one makes the purchase of the other goods less attractive.

Complementary Goods

Two goods are complements if a decrease in the price of one makes the purchase of the other more attractive (e.g., gasoline and cars).

Normal and Inferior Goods

• When a rise in income increases the demand for a good, it is said to be a normal good.
• When a rise in income reduces the demand for a good, it is said to be an inferior good.

Market Equilibrium

A competitive market is in equilibrium when prices reach a level at which the quantity demanded of a good equals the quantity supplied of that good. The price at which this occurs is the equilibrium price, also known as the clearing price.

The quantity sold and bought at that price is the equilibrium quantity.

Market Imbalances

• Surplus (Excess Supply): There is a surplus or excess supply of goods when the quantity supplied of the good exceeds the quantity demanded. This excess occurs only when the price is above equilibrium.
• Shortage: There is a shortage of goods when the quantity demanded of the good exceeds the quantity supplied. A shortage occurs only when the price is below its equilibrium level.