Demand and Supply Curves, and Price Elasticity

The question is not which line moved

Two things can happen to a demand curve, and telling them apart is the most heavily examined skill in this part of the course. It is also the one candidates get wrong most reliably. Either you move ALONG the curve, or the whole curve SHIFTS to a new position. ⚠️⚠️ THE REASON PEOPLE GET IT WRONG IS THAT THEY TREAT IT AS A QUESTION ABOUT THE DIAGRAM. WHICH LINE MOVED? WHICH WAY DID IT GO? UP, DOWN, LEFT, RIGHT? ⚠️ ASKED THAT WAY IT IS GUESSWORK, BECAUSE BOTH OF THEM LOOK LIKE MOVEMENT ON A PAGE. ⭐⭐ IT IS NOT A QUESTION ABOUT THE DIAGRAM AT ALL. IT IS A QUESTION ABOUT CAUSE, AND THERE IS EXACTLY ONE RULE. ⭐⭐ IF THE PRICE CHANGED FIRST, YOU MOVE ALONG THE CURVE. IF ANYTHING ELSE CHANGED FIRST, THE WHOLE CURVE SHIFTS. That is the entire distinction, and it never has an exception. ⭐ AND THE REASON IT WORKS IS WORTH KNOWING, BECAUSE IT MAKES THE RULE IMPOSSIBLE TO FORGET. The curve is drawn with price on one axis and quantity on the other. So anything the price does is already on the line: every price the curve could take is sitting there, with a quantity beside it. A change in price cannot need a new line, because the old line already answered that question. ⚠️ BUT SOMETHING THAT IS NOT ON EITHER AXIS CANNOT BE SHOWN BY SLIDING ALONG. If people's incomes change, or tastes change, or the cost of making the thing changes, none of those is on the diagram anywhere. ⭐ SO THE ONLY WAY TO SHOW THEM IS TO REDRAW THE LINE IN A NEW PLACE. The same rule governs supply, in exactly the same way and for exactly the same reason, which is why the two are taught together. ⭐⭐ AND IT SETS UP THE SECOND HALF OF THIS TOPIC WITHOUT ANY NEW MACHINERY. ONCE YOU KNOW THAT A PRICE CHANGE MOVES YOU ALONG, THE OBVIOUS NEXT QUESTION IS HOW FAR ALONG YOU GET. A lot, for some things: a small price rise and buyers largely disappear. Very little, for others: the price rises and people carry on much as before. ⭐ THAT IS ALL PRICE ELASTICITY IS, AND ON THIS COURSE IT IS ASKED ABOUT THROUGH THE SHAPE OF THE LINE RATHER THAN THROUGH ANY CALCULATION. Carry one question through everything that follows: what changed first, the price or something else?

One rule, three uses

The same question asked of demand, of supply, and of how far the response goes. Notice the first two columns are the same rule twice.

Tap the two that shift the curve

Tap the TWO changes that would SHIFT a demand curve rather than move you along it.

• Buyers' incomes rise across the whole market
• The thing becomes fashionable and more people want one
• The price of the thing itself is reduced by the seller
• The price of the thing itself rises sharply

The sentence that gives it away

A student writes that demand fell because the price rose. Why does that sentence cost marks even though it sounds reasonable?

• Because a price change moves you along the curve, so the quantity demanded fell while demand itself was unchanged, and the sentence uses the word for a shift to describe a movement
• Because a price rise does not affect how much people buy
• Because a price rise shifts the demand curve to the left
• Because the sentence should have been about supply rather than demand

The terms this topic turns on

Five terms, each defined by what it is. The third and fourth are the pair the whole module exists to separate.

Match each change to what the curve does

Two that follow from the rule

Select the TWO statements that follow from shifts and movements being a question about cause.

• A shift means a different quantity at every price, not merely at the price things happen to be at now
• The same rule decides the question for supply as for demand, which is why the two are set together
• Whether a curve shifts can be judged from which way the line appears to move on the page
• Deciding between them requires calculating the price elasticity first

Answering a curve question in order

A routine that works on any question in this topic, and it is deliberately mechanical, because the marks here go to precision rather than to insight. ⭐⭐ FIRST, FIND WHAT CHANGED FIRST. NOT WHAT HAPPENED NEXT, AND NOT WHAT THE QUESTION IS ASKING YOU TO PREDICT. THE THING THAT STARTED IT. THEN ASK WHETHER THAT THING IS THE PRICE OF THIS GOOD. ⭐ IF IT IS, YOU MOVE ALONG. IF IT IS ANYTHING ELSE, THE CURVE SHIFTS. THERE IS NO THIRD CASE. THEN ASK WHICH SIDE IT LANDED ON. A change to buyers or their circumstances belongs to demand. A change to producers or their costs belongs to supply. ⚠️ AND WATCH ONE WORD: A COST IS WHAT THE PRODUCER PAYS AND A PRICE IS WHAT THE BUYER PAYS. QUESTIONS USE THAT DIFFERENCE DELIBERATELY. ⭐ THEN SAY WHICH WAY, AND SAY IT IN TERMS OF QUANTITY AT EVERY PRICE. More at every price, or less at every price, is a far clearer statement than left or right, and it is much harder to get backwards. AND IF THE QUESTION MENTIONS HOW MUCH, IT HAS MOVED TO ELASTICITY, which is about the steepness of the line rather than about which line moved. ⚠️ THREE HABITS THAT COST MARKS HERE. ⚠️ THE FIRST IS WRITING DEMAND WHEN YOU MEAN QUANTITY DEMANDED. ⭐ THIS IS THE SINGLE MOST EXPENSIVE WORDING ERROR IN THE TOPIC, BECAUSE THE MARKER CANNOT TELL A SLIP FROM A MISUNDERSTANDING AND HAS TO ASSUME THE SECOND. ⚠️ THE SECOND IS DECIDING FROM THE PICTURE. A diagram shows you what happened; it does not tell you why, and the why is what the question is asking about. ⚠️ AND THE THIRD IS REACHING FOR A CALCULATION. ⭐ THIS COURSE ASKS ABOUT ELASTICITY THROUGH THE SHAPE OF THE CURVE AND THROUGH WHAT IT MEANS FOR BUYERS AND PRODUCERS. A FORMULA IS NOT REQUIRED AND WILL NOT RESCUE AN ANSWER THAT HAS NOT SAID WHAT CHANGED FIRST. One last thing. If you are unsure, say what changed first out loud before you say anything else. The rest of the answer usually assembles itself once that sentence exists.

One stall, and four different weeks

A stallholder sells strawberries. Nothing here describes a real stall and no money amounts are given, because the argument does not need any. In the first week, they put a sign up: everything reduced. More people buy. Nothing else about the week is unusual. ⭐ ASK WHAT STARTED IT, AND THE ANSWER IS THE SIGN. THE STALLHOLDER CHANGED WHAT THEY WERE CHARGING, AND BUYERS REACTED TO THAT. Everybody who walked past was the same person they would have been anyway, with the same money in their pocket and the same fondness for strawberries. ⚠️ NOTHING ABOUT THE BUYERS CHANGED. THE ONLY THING THAT CHANGED WAS WHAT THEY WERE BEING ASKED TO PAY. In the second week, the sign comes down and the old figure returns. But a magazine has run a piece about how good strawberries are for you, and the stall is busier than ever at the old figure. ⭐⭐ NOW SOMETHING ABOUT THE BUYERS THEMSELVES HAS CHANGED. They want strawberries more than they did, and they would want more of them at the reduced figure too, and at a raised one. The whole relationship between what strawberries cost and how many people take home has moved. In the third week, a poor harvest means the stallholder is paying far more for each tray from the wholesaler. They would now rather sell fewer and keep the rest of their money for other stock. ⚠️ NOTE CAREFULLY WHAT DID NOT CHANGE HERE: WHAT THE CUSTOMER IS ASKED TO PAY IS NOT THE SAME THING AS WHAT THE STALLHOLDER PAID. ⭐ THIS IS THE CHANGE THAT CATCHES PEOPLE OUT, BECAUSE THERE IS MONEY IN IT AND SO IT FEELS LIKE THE FIRST WEEK. IT IS NOT. IT IS THE THIRD WEEK BECAUSE IT HAPPENED ON THE SELLER'S SIDE. And in the fourth week, everything is as normal except that the stall next door has slashed what it charges for raspberries. Strawberry sales drop although nothing about strawberries has altered at all. ⭐⭐ FOUR WEEKS, AND ONLY THE FIRST ONE STARTED WITH WHAT STRAWBERRIES COST. ⭐ ASK OF EACH WEEK: WHAT MOVED FIRST? THE ANSWER SORTS THEM WITHOUT ANY DIAGRAM AT ALL, AND THE DIAGRAM THEN DRAWS ITSELF.

Order the way to answer

Put these six steps into the order that turns a described change into a correct answer.

• Identify what changed first, rather than what happened next
• Ask whether that thing was the price of this good itself
• If it was, you move along the curve; if it was anything else, the curve shifts
• Decide which side it landed on: a change to buyers, or a change to producers
• Say which way, in terms of more or less at every price
• Check the wording, so that quantity demanded is not written as demand

Assemble the sentence that says why

This is the sentence that gets the marks in this topic. Assemble it.

Reading elasticity off the shape

A producer is told the demand curve for their product is very steep. What does that tell them about raising the price?

• That the quantity bought would fall only a little, because a steep curve means the response to a price change is small
• That the quantity bought would collapse, because steep curves show large responses
• That the curve would shift to the left
• Nothing, until the elasticity has been calculated from a formula

The curves run

Five questions on what changed first. Three lives.

Complete the curve facts

The amount buyers are willing and able to buy at each possible price is _____. The amount producers are willing and able to offer at each possible price is _____. A move of the whole curve to a new position, caused by something other than the price of the good itself, is a _____. How much the quantity responds when the price changes, shown by how steep or shallow the curve is, is _____.

Three answers to tighten

Three students answer questions on demand and supply. The economics behind each is broadly sound; the answers are what need work.

• A student writes that a fall in price caused an increase in demand. What needs changing?
• Asked what happens when the cost of raw materials rises, a student says the demand curve shifts left because everything is more expensive. Where did it go wrong?
• A student is asked how far quantity would fall if a producer raised the price, and spends the answer trying to remember an elasticity formula. What should they have done?

Explain what changed, and what the curve does

A shop selling umbrellas has an unusual month: first it runs a sale, and then a long spell of wet weather makes umbrellas far more popular. Explain what happens to demand in each case, using the correct terms throughout.

• State the rule that decides between a movement along and a shift
• Explain what happened first in the sale, and say whether that moves along or shifts
• Use the phrase quantity demanded rather than demand where that is what you mean
• Explain what happened first in the wet spell, and say why that is a different case
• Say which way the curve moves, in terms of more or less at every price
• Explain why a change in the price of the umbrellas themselves can never shift their own curve
• Finish by saying what a steep curve would mean for the shop if it raised its prices, without using any formula