Source: Besanko & Braeutigam, Microeconomics 5th ed., Ch. 2
Tags: supply and demand, demand shift, supply shift, equilibrium, substitutes, complements, input costs, microeconomics, intermediate micro
Difficulty: Introductory to Intermediate Prerequisites: Basic understanding of what supply and demand curves represent. If you are not yet comfortable plotting a simple S and D diagram, review your Chapter 1 notes first.
Chapter 2 is the engine room of microeconomics. Every pricing, tax, and welfare question you will meet later rests on understanding how supply and demand curves shift and how those shifts produce a new equilibrium price and quantity. This set of notes focuses on the mechanics of curve shifts: which curve moves, which direction, and why. If you can nail the logic here, comparative statics problems in later chapters become straightforward applications of the same toolkit. You should already know the difference between a movement along a curve and a shift of the entire curve.
When something other than the good's own price changes, the demand curve or the supply curve shifts. Demand shifts come from changes in the price of related goods, consumer preferences, or income. Supply shifts come from changes in input costs, technology, or natural events. The new equilibrium is where the shifted curve crosses the curve that stayed put.
Demand curve shift (shift in demand)
A movement of the entire demand curve to the left or right, caused by a change in something other than the good's own price. A rightward shift means consumers want more at every price; a leftward shift means they want less.
In simple terms, the whole curve picks up and moves. A change in price just slides you along the existing curve.
Supply curve shift (shift in supply)
A movement of the entire supply curve to the left or right, caused by a change in something other than the good's own price. A leftward (upward) shift means producers supply less at every price; a rightward (downward) shift means they supply more.
Think of it as the entire cost structure of the industry changing, so the old price-quantity pairs no longer hold.
Substitute goods
Two goods are substitutes if an increase in the price of one raises demand for the other. Tea and coffee are classic substitutes: when tea gets expensive, some consumers switch to coffee.
In simple terms, substitutes are your Plan B. If one gets pricier, you buy more of the other.
Complement goods
Two goods are complements if an increase in the price of one reduces demand for the other. Coffee and Styrofoam cups are complements: you tend to buy them together.
Think of it as a pair that travels together. If one gets expensive, you buy less of both.
Demand shifters
Factors other than the good's own price that cause the demand curve to shift. The main ones are: prices of substitutes, prices of complements, consumer income, consumer tastes and preferences, population, and expectations about future prices.
Supply shifters
Factors other than the good's own price that cause the supply curve to shift. The main ones are: input prices (wages, raw materials), technology, weather and natural events, number of sellers, taxes or subsidies, and expectations.
Equilibrium
The price-quantity pair where quantity demanded equals quantity supplied. Graphically, it is the intersection of the supply and demand curves. After a shift, the market moves to a new equilibrium.
In simple terms, it is the point where the market clears: no shortage, no surplus.
A demand curve shifts when a non-price determinant of demand changes. The curve itself moves; the supply curve stays put. You then read the new equilibrium off the new intersection.
Price of a substitute rises: demand shifts right
Example (Besanko Q1a): The price of tea doubles. Tea is a substitute for coffee.
Because tea is now more expensive, some tea drinkers switch to coffee.
The demand curve for coffee shifts rightward (D to D₂).
Result: equilibrium price of coffee rises (P to P₂) and equilibrium quantity rises (Q to Q₂).
Key logic: substitute gets expensive, demand for your good increases.
Negative health information: demand shifts left
Example (Besanko Q1b): A study links caffeine to cancer.
Consumers reduce their willingness to buy coffee at every price.
The demand curve for coffee shifts leftward (D to D₂).
Result: equilibrium price falls (P to P₂) and equilibrium quantity falls (Q to Q₂).
Key logic: bad news about a product reduces demand, shifting the curve left.
A supply curve shifts when a non-price determinant of supply changes. The demand curve stays put.
Destruction of a key input: supply shifts left
Example (Besanko Q1c): A frost kills half of the Colombian coffee bean crop.
With fewer beans available, producers can supply less coffee at every price.
The supply curve shifts leftward (S to S₂).
Result: equilibrium price rises (P to P₂) and equilibrium quantity falls (Q₂ < Q).
Key logic: when a natural disaster destroys inputs, supply contracts and price rises.
Input price rises: supply shifts left
Example (Besanko Q1d): The price of Styrofoam coffee cups triples (up 300%).
Styrofoam cups are an input (or complement in production) for selling coffee.
Higher input costs mean producers are willing to supply less at every price.
The supply curve shifts leftward (S to S₂).
Result: equilibrium price rises (P to P₂) and equilibrium quantity falls (Q₂ < Q).
Key logic: higher input costs shift supply left, raising price and lowering quantity.
Event | Which curve shifts? | Direction | Price effect | Quantity effect |
|---|---|---|---|---|
Price of substitute rises | Demand | Right | Rises | Rises |
Negative health study | Demand | Left | Falls | Falls |
Frost destroys crop | Supply | Left | Rises | Falls |
Input price rises (cups) | Supply | Left | Rises | Falls |
There are no algebraic formulas in the curve-shifting problems (Q1), but the graphical logic is critical.
How to read a shift diagram:
Identify which curve shifts and which stays fixed.
The original equilibrium is the intersection of the original S and D.
The new equilibrium is the intersection of the shifted curve with the curve that did not move.
Read off the new P and Q from the axes.
Checklist for drawing shift diagrams on an exam:
Draw and label the original S and D curves with the original equilibrium (P, Q).
Identify the event and decide: does it affect demand or supply?
Shift only the affected curve in the correct direction.
Label the shifted curve (D₂ or S₂).
Mark the new equilibrium (P₂, Q₂) with dashed lines to the axes.
State in words what happened to price and quantity.
Substitute-driven demand shifts happen constantly. When the price of petrol spikes, demand for electric vehicles rises. When streaming services raise subscription prices, demand for rival platforms increases. The logic is identical to the tea-coffee example.
Supply shocks from weather are a recurring feature of agricultural markets. The 2014 Brazilian drought, for instance, pushed coffee futures to multi-year highs through the same leftward supply shift shown in Q1c.
Students often confuse a shift of the curve with a movement along the curve. A change in the good's own price causes movement along the curve. Everything else shifts it.
Students sometimes shift both curves at once when the question only describes one event. Read the scenario carefully: one event typically shifts one curve.
A leftward shift of supply is sometimes called an "upward" shift. This is the same thing. The supply curve moves up and to the left, meaning higher cost at every quantity.
Students occasionally get the direction of a complement effect backwards. If the price of a complement rises, demand for your good falls (leftward shift), not rises.
⚠️ The most commonly tested skill in this section is identifying which curve shifts and in which direction. Get this right and the rest follows.
⚠️ Exams frequently give you a scenario and ask you to state what happens to equilibrium price and quantity. You must be able to do this quickly for demand shifts (right or left) and supply shifts (right or left).
⚠️ Be precise with language. "Demand increases" means the demand curve shifts right. "Quantity demanded increases" means movement along the curve to a higher quantity, usually because price fell. Professors mark this distinction.
True or False: If the price of coffee rises, the demand curve for coffee shifts left.
False. A change in the good's own price causes movement along the demand curve, not a shift.
Fill in the blank: Tea and coffee are ______ goods, so a rise in the price of tea shifts coffee demand to the ______.
Substitute; right.
True or False: A frost that destroys coffee crops shifts the demand curve left.
False. It shifts the supply curve left.
Fill in the blank: When the price of a complement rises, demand for the paired good shifts ______.
Left (decreases).
True or False: A leftward shift of supply raises equilibrium price and lowers equilibrium quantity.
True.
Q: A new government report finds that drinking orange juice improves heart health. What happens to the equilibrium price and quantity of orange juice? Explain using a supply and demand diagram.
A: The positive health finding increases consumer willingness to buy orange juice at every price. The demand curve shifts rightward. Supply stays put. The new equilibrium has a higher price and a higher quantity.
Q: Suppose a drought destroys a large portion of the wheat harvest. What happens in the market for bread?
A: Wheat is a key input for bread. The drought raises wheat prices, which increases production costs for bread makers. The supply curve for bread shifts leftward. Equilibrium price of bread rises, and equilibrium quantity falls.
Q: Are coffee and doughnuts more likely to be substitutes or complements? If the price of coffee rises, what happens to equilibrium price and quantity of doughnuts?
A: Coffee and doughnuts are complements (people tend to consume them together). If the price of coffee rises, fewer people buy coffee, and therefore fewer people buy doughnuts. The demand curve for doughnuts shifts left. Equilibrium price and quantity of doughnuts both fall.
Q: Distinguish between "an increase in demand" and "an increase in quantity demanded."
A: An increase in demand refers to a rightward shift of the entire demand curve, caused by a non-price factor (income, preferences, price of a related good). An increase in quantity demanded refers to movement along a fixed demand curve in response to a decrease in the good's own price. The first shifts the curve; the second is a slide along it.
This material connects directly to elasticity (also in Ch. 2), which measures how sensitive quantity demanded or supplied is to a price change. Once you understand shifts, elasticity tells you how large the resulting changes in price and quantity will be.
It also connects to consumer and producer surplus (Ch. 9 and beyond). The welfare effects of taxes, price floors, and price ceilings all depend on where equilibrium lands after a shift, and the magnitudes depend on elasticities.
In later chapters on market structure (perfect competition, monopoly, oligopoly), you will still use the same S and D framework as a baseline, so fluency here pays off throughout the course.
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