A subtle point on supply/demand shifts

According to my microeconomics professor (and, I think, most reputable economics textbooks), five things can cause a change in demand:

  1. A change in income
  2. A change in tastes
  3. A change in the population (number of demanding people)
  4. A change in the price of substitutes/complements
  5. A change in expectations about future prices and income

Likewise, five things can cause a change in supply:

  1. A change in technology
  2. A change in factor prices
  3. A change in the number of suppliers
  4. A change in political stability/weather/other “acts of God”
  5. A change in expectation about future prices and income

These make sense to me. Note that these are causes of shifts in demand and supply curves—not shifts in quantity demanded or quantity supplied.

But I want to point out one thing in both categories that is fundamentally different than the others. The number 3s—a change in population (demand) and a change in the number of suppliers (supply)—are relevant only for entire populations’ demand/supply curves, while the other four in each category are relevant for both entire populations and individuals.

To understand why, it’s important to fully understand the things themselves. Regarding demand, a change in the size of population shifts the demand curve for a very simple reason: More people are demanding a good, which shifts quantity demanded to the right. It’s that simple. Regarding supply, a change in the number of suppliers means more firms are supplying a good, which shifts quantity supplied to the right. It’s that simple.

It should be clear now why these things—changes in the number of demanders/suppliers—cannot shift demand/supply curves for individuals, but only for a group of individuals. The other four causes in each category can apply to one individual’s supply/demand curves. A change in income, tastes, related goods’ prices, and inflationary expectations can affect how you or I demand goods. But a simple increase in the population, ceteris paribus, cannot. Likewise, a change in technology, factor prices, political stability/weather, and inflationary expectations can affect how an individual supplier supplies goods. A mere increase in the number of sellers, ceteris paribus, cannot.

In the end, my professor should have said these causes of shifts in demand/supply curves are relevant to a society’s demand/supply curves only, and not demand/supply curves in general. If we want to examine only individuals’ demand/supply curves, we should leave out number 3 in both categories.

Leave a Reply

Your email address will not be published. Required fields are marked *