Changes to supply and demand
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.
The difference between a movement along the demand or supply curve and a shift in either demand or supply?
Lesson time: 1 hour
Illustrate using diagrams the difference between a movement and a shift in either supply or demand.
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:
While a shift is defined as:
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?
(b) What may have caused the rise in demand?
(c) Does this represent a shift or a movement in supply?
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?
(b) What may have caused the fall in supply?
(c) Does this represent a shift or a movement in demand?
4. Activity: Short answer questions
Outline the impact of the following on demand and supply:
A rise in income levels within an economy?
A rise in the price of the good due to rising production costs
A fall in the popularity of the product?
Complete the following table:
|Initial effect||Effect on supply||Effect on demand|
Fall in production costs
Rise in production costs
Increase in the popularity of the product
|Decrease in the popularity of the product|
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?
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.
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
(ii) Calculate the price resulting in a demand of 740 units per week.
(iii) Following a rise income levels demand is expressed as QD = 1200 - 40P, calculate the new quantity demanded levels at the same prices.