Changes to supply and demand

Introduction

This lesson explains the concept of a shift in demand and supply and makes the distinction between a movement and a shift. 

I find that there are a few issues with supply and demand that students will often get confused. Firstly, students forget that supply and demand are different and not dependant on each other.  You can have companies willing and able to supply without any demand as well as consumers willing and able to purchase a good or service, without there being supply available.  Many students also get confused with questions such as the impact of a rise in oil prices or a fall in the value of the local currency.  Both would appear to reduce demand levels when in reality they impact on the costs of production.  The consumer, paying in the local currency is not effected if the firms production costs rise - they still remain equally willing and able to purchase the good or service.  Although consumption levels will fall because of the rise in price.

A second common misconception is when supply falls or rises.  A fall in supply is illustrated by a left shift upwards and a rise in supply is represented by a right shift downwards.  Both look strange to many IB students but it is important to train your students the correct way to draw them.

Enquiry question

The difference between a movement along the demand or supply curve and a shift in either demand or supply?

Lesson notes

Lesson time: 1 hour

Lesson objectives:

Illustrate using diagrams the difference between a movement and a shift in either supply or demand.

Teacher notes:

1. Beginning activity - start the lesson with the opening short video and then ask the question 'what is the difference between a shift and a movement in demand and / or supply'.  (10 minutes)

2. Processes - technical Vocabulary - students can learn the required terminology by reading the class handout, which can be printed off and distributed to your classes.  (5 minutes)

3. Assessment - activities 2 - 5 include a series of short answer questions and an economic riddle, which will test your classes' knowledge of the enquiry question.  (20 minutes)

6. Link to the examination - contains examples of related paper one and paper three type questions, on this area of the syllabus. (10 minutes)

7. Reflection - the final reflection contains an entertaining short video and asks your students to reflect on relevant factors that may impact on either the supply or the demand for orange juice. (5 minutes)

Key terms:

A change in demand: when the demand curve shifts (either to the left or right) caused by a change in either the popularity of the product, a change in income e.t.c.

A change in supply: when the supply curve shifts (either to the left or right) caused by a change in the costs of production.

Movement in demand - when there is a movement along the original demand curve.  This is a change in the quantity demanded of the product, as a result of a change in supply, not a change in demand.

Movement in supply - when there is a movement along the original supply curve.  This is a change in the quantity supplied of the product, as a result of a change in demand, not a change in supply.

Extension in supply / demand – a movement along the original supply / demand curve, leading to a rise in the quantity demanded / supplied of the product, not an increase in supply or demand.

Contraction in supply / demand – a movement along the original supply / demand curve, leading to a fall in the quantity demanded / supplied, not a decrease in supply or demand.

The activities are available as a worksheet at: Changes to supply and demand 

Activity 1: Beginning exercise

Watch the following video that explains the concept of changes in demand and supply.  After watching the video explain the difference between a shift and a movement in demand and / or supply.

The Oxford dictionary describes a movement as:

Firstly movement which is the act of changing position, either voluntary or involuntary.

 While a shift is defined as:

To move, or move something, from one position or place to another.

Activity 2

The diagram to the right illustrates a rise in demand for the good or service, from Q1 to Q2.

(a) Does this represent a shift or a movement in demand?

A shift, i.e. a rise in demand.

(b) What may have caused the rise in demand?

The shift in demand could be caused by a rise in either the popularity of the product, an increase in income, a rise in the popularity of a complimentary product or a rise in the price of a substitute.

(c) Does this represent a shift or a movement in supply?

An extension in supply because the price of the product has risen as a result of increased demand.  At the higher price the firm will choose to supply more of the good or service.

Activity 3

The diagram to the left illustrates a fall in supply of the good or service, from Q1 to Q2.

(a) Does this represent a shift or a movement in supply?

A shift, i.e. a fall in supply.

(b) What may have caused the fall in supply?

the shift in supply would be caused by a rise in the costs of production e.g. a rise in labour or raw material costs.

(c) Does this represent a shift or a movement in demand?

A contraction in demand because the price of the product has risen as a result of lower supply.  At the higher price the consumer will choose to purchase less of the good or service.  There has been no change in the demand curve as consumers are no less willing and able to purchase the product than before

4. Activity: Short answer questions

Outline the impact of the following on demand and supply:

A rise in income levels within an economy?

A shift in demand to the right / a rise in demand, causing an extension in supply.

A rise in the price of the good due to rising production costs

A contraction in demand, caused by a left shift in supply.

A fall in the popularity of the product?

A shift in the demand curve to the left or a fall in demand, leading to a contraction in supply.

Activity 5

Complete the following table:

Initial effect Effect on supplyEffect on demand

Fall in production costs

rise in supply

no impact on the demand curve but an extension in demand caused by a fall in price

Rise in production costs

fall in supply

no impact on the demand curve but a contraction in demand caused by a rise in price

Increase in the popularity of the product

no impact on the supply curve but an extension in supply caused by a rise in the price of the good or service

rise in demand

Decrease in the popularity of the product

no impact on the supply curve but a contraction in supply caused by a fall in the price of the product

fall in demand

Important note about supply

Note that when supply falls the curve moves to the left which confuses some IB students, who believe that a left shift instead represents a rise in supply.  Similarly some IB students believe that both supply and demand go together so that in order to have one, you also need the other.  In reality firms may be willing and able to supply a product for which there is little or no demand and similarly consumers may be willing and able to purchase a product when there is no supply.

6. An economic riddle?

Why is it that when the supply of a product rises, price falls but when the price falls, quantity supplied falls?

When the supply of a product rises price falls and this can be shown by a right shift in the supply curve.  However, when the price falls, caused by a fall in demand, there would be a fall in quantity supplied (a contraction in supply

7. Link to the examination

As one of the key components of the economics course, questions on demand can be found throughout the three economics papers with candidates required to apply demand theory to a given situation e.g.

Paper one (part A)

1. Explain using a relevant diagram why an increase in the price of a good or service will lead to a decrease in the quantity demanded for a product whilst an increase in demand leads to an increase in price.

Hint:

This question illustrates the difference between a shift in demand and a movement along the demand curve.  Illustrate this difference with two demand curves.  On the first illustrate the impact of a contraction in demand (a fall in quantity demanded caused by an increase in price).  On the next draw a right shift in demand to illustrate a rise in demand and the corresponding increase in price.

Paper three (HL only)

On paper three candidates may be asked to calculate the level of demand from a given set of data.  An example might be: A supermarket notices that demand for one of its favourite items can be expressed as QD = 1000 − 40P.  Use this information to answer the following questions:

(i) Calculate quantity demanded at the following prices - $5, $6, $7, $8, $9, $10

i. 1000 - (40 x $5) = 800, 1000 - (40 x $6) = 760, $7 = 720, $8 = 680, $9 = 640, $ 10 = 600

(ii) Calculate the price resulting in a demand of 740 units per week.

ii. $6.50

(iii) Following a rise income levels demand is expressed as QD = 1200 - 40P, calculate the new quantity demanded levels at the same prices.

iii. 1200 - (40 x $5) = 1000, 1200 - (40 x $6) = 960, $7 = 920, $8 = 880, $9 = 840, $ 10 = 80

8. Final reflection activity

Watch the following video about the production of orange juice in Florida and outline as many factors as you can think of which will impact on either the supply or demand for the soft drink?

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