Laws of demand and supply, determinants and curve shifters
As price rises, quantity demanded falls and quantity supplied rises, other things equal. Any other factor shifts the whole curve.
The two laws
Exceptions to the law of demand: Giffen goods (very poor households and a basic staple), Veblen or prestige goods, and buying more when further price rises are expected.
Demand shifters (determinants other than price)
| Determinant | Effect on demand | Sri Lankan example |
|---|---|---|
| Income | Normal goods: income ↑ → demand ↑. Inferior goods: income ↑ → demand ↓ | Higher incomes raise demand for restaurant meals and cars |
| Price of a substitute | Substitute's price ↑ → demand ↑ | Coffee becomes dearer → more tea demanded |
| Price of a complement | Complement's price ↑ → demand ↓ | Petrol becomes dearer → fewer motorcycles demanded |
| Tastes and fashion | Favourable change → demand ↑ | Health campaigns raise demand for brown rice |
| Expectations | Expected price rise → demand ↑ now | Buyers stock up on rice before an expected price rise |
| Number of buyers, season | More buyers → demand ↑ | Demand for clothes rises before the Sinhala and Tamil New Year |
Supply shifters (determinants other than price)
| Determinant | Effect on supply | Sri Lankan example |
|---|---|---|
| Input costs | Costs ↑ → supply ↓ (shifts left) | Higher fertiliser or fuel costs cut vegetable supply |
| Technology | Better technology → supply ↑ | New machinery raises garment output per worker |
| Weather and nature | Good weather → supply ↑ | A dry spell cuts green tea leaf supply |
| Prices of other goods | A rival product becomes more profitable → supply of this good ↓ | Farmers switch land from paddy to more profitable crops |
| Taxes and subsidies | Tax ↑ → supply ↓; subsidy → supply ↑ | A fertiliser subsidy raises paddy supply |
| Number of sellers | More firms → supply ↑ | More bakeries open in a town |
Worked example: building market demand from individual demand
Two buyers, A and B, demand mangoes as follows. At Rs. 100: A 6, B 4. At Rs. 150: A 4, B 3. At Rs. 200: A 2, B 2. Find the market demand schedule.
- Market demand is the horizontal sum: add the quantities of all buyers at each price.
- At Rs. 100: 6 + 4 = 10 mangoes.
- At Rs. 150: 4 + 3 = 7 mangoes.
- At Rs. 200: 2 + 2 = 4 mangoes.
- Quantity falls as price rises (10 → 7 → 4), so the market demand curve slopes downwards.
Market demand: Rs. 100 → 10; Rs. 150 → 7; Rs. 200 → 4. It obeys the law of demand.
Movement along versus shift of the curve
The same rule applies to supply: own price moves you along the supply curve; costs, technology, weather and taxes shift it.
Ceylon tea shows supply shifters at work: a dry spell in the hill country cuts green leaf output and shifts supply left, while good weather shifts it right. Demand for Sri Lankan apparel shifts with incomes and fashion in buyer countries, not only with price.
Short answer: “Distinguish a change in demand from a change in quantity demanded.” A change in quantity demanded is a movement along the curve caused by the good's own price; a change in demand is a shift of the whole curve caused by other factors.
Structured question: “Explain four determinants of supply with examples.” Input costs, technology, weather, taxes and subsidies, number of sellers: state the direction of the shift and give a Sri Lankan example for each.
Essay: “State the laws of demand and supply and explain the factors that shift the demand and supply curves.” State both laws with reasons and diagrams, list demand shifters and supply shifters with direction and examples, and separate movements from shifts.
Own price moves, others shift. Demand shifters: I-R-T-E-N (Income, Related goods' prices, Tastes, Expectations, Number of buyers).