Question

List the variables that affect supply and indicate which causes a shift and which cause movement along the demand curve?

Answer 1

List the variables that affect supply and indicate which causes a shift and which cause movement along the demand curve?

Price and the quantity supplied of a product are positively related. This means that higher the price of the product, higher the quantity supplied. Supply for a product refers to the quantity that is available in the market at a given price at a certain point of time. It refers to the seller’s willingness to sell a certain amount of the product in that price and time. Since quantity supplied and price of the good is positively related, the supply curve is upward rising.

The list of variables that affect supply of a product are as follows:

• Price
• Cost of production
• Climatic conditions and transportation
• Technology
• Prices of inputs used in the production process and their availability
• Price of related goods
• Government policies

On the other hand, according to the law of demand, price and the quantity demanded of a product are inversely related. This means that higher the price of the product, lower the quantity demanded. Demand for a product refers to the quantity that consumers want to buy at that price or more specifically, refers to consumer’s willingness to pay. Since quantity demanded and price of the good is inversely related, the demand curve is downward sloping.

Now, let us answer the question that what causes a shift and which cause movement along the demand curve?

A change in price of the product causes the quantity demanded to change, not the demand for the good. Demand changes when factors except price changes. These factors include income of the consumer, change in taste and preferences, age, availability of related products, etc.

When quantity demanded changes due to change in price, the movement takes place along the demand curve, but does not shift the demand curve.

However, when demand changes for factors except price, the demand curve shifts to the right or left. When the demand curve shifts to the left (inward), then there is fall in quantity demanded. Similarly, when the demand curve shifts outward to the right, the quantity demanded increases.

Let us consider the following two examples and identity what is change in quantity demanded and what is change in demand!

Example 1 – Let us consider the previous example used to explain the law of demand. When price of apples is $1 per pound, quantity demanded at $1 is 100 apples. Now, if the seller increases the price of apples from $1 to $3, then quantity demanded at $3 is 50 apples. So, according to the law of demand, when price of apples increases, the quantity demanded falls from 100 apples to 50 apples, causing movement along the demand curve.

Example 2 – Now suppose price of apples is $1 per pound and quantity demanded at $1 = 100 apples. A health report published that fertilizers and pesticides used in apples causes health issues. As a result, the quantity demanded falls from 100 apples to 50 apples. The price is constant at $3, but the health report causes the shift in demand curve, thus causing quantity demanded to fall.