[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

USING DEMAND AND SUPPLY CURVES
The concepts of demand and supply curves—and market equilibrium as the intersection
of demand and supply curves—constitute the economist’s basic model of
demand and supply. This model has proved to be extremely useful. It helps explain
why the price of a given commodity is high, and that of some other commodity is
low. It also helps predict the consequences of certain changes. Its predictions can
then be tested against what actually happens. One of the reasons that the model is
so useful is that it gives reasonably accurate predictions.
Figure 3.14 repeats the demand and supply curve for candy bars. But assume
now that sugar becomes more expensive. As a result, at each price the amount of
candy firms are willing to supply is reduced. The supply curve shifts to the left, as
in panel A. There will be a new equilibrium, at a higher price and a lower quantity
of candy consumed.
Alternatively, assume that Americans become more health conscious, and as a
result, at each price fewer candy bars are consumed: the demand curve shifts to the
left, as shown in panel B. Again, there will be a new equilibrium, at a lower price and
a lower quantity of candy consumed.
This illustrates how changes in observed prices can be related either to shifts
in the demand curve or to shifts in the supply curve. To take a different example,
when the war in Kuwait interrupted the supply of oil from the Middle East in 1990,
the supply curve shifted. The model predicted the result: an increase in the price
of oil. This increase was the natural outcome of the law of supply and demand.
A
B
PRICE OF SUGAR (p)
p 1
Supply
curve
E 1
p 1
p 2 E 0
Demand
curve
QUANTITY OF CANDY BARS (Q )
PRICE OF SUGAR (p)
E 0
E 1
p 2
Q 2 Q 1
QUANTITY OF CANDY BARS (Q )
Supply
curve
Demand
curve
Figure 3.14
USING SUPPLY AND DEMAND
CURVES TO PREDICT PRICE
CHANGES
Initially the market for candy bars is in equilibrium at E 0 . An increase in the cost of
sugar shifts the supply curve to the left, as shown in panel A. At the new equilibrium,
E 1 , the price is higher and the quantity consumed is lower. A shift in taste away from
candy results in a leftward shift in the demand curve as shown in panel B. At the new
equilibrium, E 1 , the price and the quantity consumed are lower.
LAW OF SUPPLY AND DEMAND ∂ 69