Shifts in Demand and Supply

Idea

Two changes must never be conflated. A change in a good’s own price causes a movement along a curve — a change in quantity demanded or supplied. A change in a non-price determinant of demand or supply causes a shift of the whole curve — a change in demand or supply. A shift creates a shortage or surplus at the old price, which the price mechanism clears at a new equilibrium.

Diagram

A shift in demand. An increase from D0 to D1 creates a shortage at P0, raising price to P1 and quantity to Q1; a decrease to D2 creates a surplus at P0, lowering price to P2 and quantity to Q2. Supply S0 is unchanged.

A shift in supply. An increase from S0 to S1 creates a surplus at P0, lowering price to P1 and raising quantity to Q1; a decrease to S2 creates a shortage at P0, raising price to P2 and lowering quantity to Q2. Demand D0 is unchanged.

Mechanism

Increase in demand (D0 → D1). At the old price P0 quantity demanded now exceeds quantity supplied — a shortage — so price is bid up from P0 to P1 and quantity supplied rises along S0 from Q0 to Q1. Both consumer and producer surplus increase.
Decrease in demand (D0 → D2). At P0 a surplus appears; price falls to P2 and quantity to Q2. Both surpluses decrease.
Increase in supply (S0 → S1). At P0 quantity supplied exceeds quantity demanded — a surplus — so price falls to P1 and quantity demanded rises along D0 to Q1. Both surpluses increase.
Decrease in supply (S0 → S2). At P0 a shortage appears; price rises to P2 and quantity falls to Q2. Both surpluses decrease.

Considerations

A demand shift moves price and quantity in the same direction; a supply shift moves them in opposite directions. The magnitude of each change, and hence the effect on total revenue, depends on the gradient of the unmoved curve — its elasticity — which is why a supply shift is read through PED and a demand shift through PES. When demand and supply move together, the analysis combines into simultaneous shifts.