The very foundation of economics involves the demand and supply of a product and how these two get affected because of price and non-price related triggers. Now, this change in the demand and supply is visualised in the form of a curve. When the curve is affected due to the price change, we see a movement along the curve. However, when the curve is affected due to any change other than any change in the price of a given product, we see the shift of the curve itself. This movement along a curve or shift of the curve results in the increase or decrease of the demand and supply.
National Income and Movement of Curves
What if tomorrow India's income changes and there is no fixed income?
The result of this change in macroeconomics is indicated by the movement of two types of curves. The movement along the curve and the shift of the curve.
Movement along a Curve
Marginal Propensity to consume explains the relation between consumption and income, which explains that as income increases, consumption increases. It is given by the formula,
C = f(Y)
The consumption function will slope upwards if the income consumption relation is positive. The greater the income, the greater the amount you can spend to consume goods. Take a look at your savings, as the income increases, you get more income which you can save for future use. Thus, if there is more income that means there will be more savings. This defines a positive relationship between income and savings due to a positive marginal propensity to save (MPS). Saving function is given by-
S = f(Y)
Thus, the savings function slopes upward as well. If there is a discussion of income, consumption, and savings how can one forget about investment, right? The investment is determined autonomously or externally and is viewed as a given value. Therefore, as your income increases, your investment will continue to remain the same. The horizontal investment curve shows that it is given and constant.
Movement of the Demand Curve
The movement of the demand curve shows the change in quantity demand because of a change in its price, there is a movement of the quantity demanded along the same curve.
Factors like the consumer’s income along with the prices of other goods, etc. remain constant and the only thing that changes is the price.
In such a scenario, the price change affects the demand, but the demand follows the same curve as before the price change. This is the Movement of the Demand Curve. The movement can go up and down along the demand curve. We know that rising prices of commodities reduce demand if all other factors remain constant, and if the other factors remain constant then the rising prices of commodities reduce demand.
A Shift in the Demand Curve
The shift in the demand curve occurs when the price of a good is the same, but other factors that are expected to be constant, such as consumer income and preferences, and the price of other goods, change.
In situations where there is a change in price and change in some other factors, this overall affects the quantity demand. Therefore, Demand follows a different curve each time price changes.
This is known as the Shift of the Demand Curve. It shifts either to the left or the right, depending on the factors affecting it.
The demand curve for ice creams is likely to shift towards the right during summer because the demand for ice cream increases in summer. But the fact that ice cream might be injurious to health can adversely affect proclivities for ice cream. This is likely to result in a leftward demand curve shift for ice cream.
The Movement in Demand Curve
The movement along the Demand Curve visually shows how the demand for a product is affected by the change in its price. In this visualisation, all the other determinants of demand are considered constant.
Explanation of the Movement along the Demand Curve
The relationship between the price of a product and its demand is depicted in the form of a curve. This curve is called the Demand Curve.
Let us explain this with an example. Suppose an egg seller sells eggs at Rs.5/egg. In this scenario, each of the consumers buys an average of 15 eggs per month. So the quantity demanded is 15 eggs/consumer. Now if we visualise this scenario and draw a Demand Curve, it will look like this -
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The Y-axis shows the different price points and the X-axis shows the Quantity of the product Demanded in response to a particular price. (Other determinants of the demand is assumed to remain constant).
Now if the price of the egg is increased to Rs.8 per piece, we see the demand drops to 10 eggs/consumer per month. If we visualise this data, it will look like this -
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Since 8 is greater than 5 the meeting point of price and the Demand Curve move upward. At the same time, we see that the Quantity Demanded decreases. So when there is an upward movement along the Demand Curve, we see a decrease in demand because of the price increase.
The opposite happens when the price of the eggs is reduced to Rs3/egg. In this case, we see that the meeting point of price and demand shifts downward - because 3 is lower than 5. We also see an increase in Quantity Demanded.
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The Shift in the Demand Curve
Sometimes the Demand Curve itself shifts. This shift along the Demand Curve happens when the price of the product remains fixed but the other determinants of the demand change.
Let’s take the example of the same egg seller. Imagine that the egg seller keeps on selling the egg at Rs.5, but the income of the people increases. In that case, we will see a rise in the demand for eggs. This rise in the income of people - a thing not related to the product price - will push the Demand Curve to the right to accommodate more quantities of eggs or better quality of eggs. The opposite will happen if the income of the people decreases - the Demand Curve will shift leftwards.
Note: Usually the shift results in the change in the demand of the people - not the quantity demanded.
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Movement along the Supply Curve
Now that you know all about movement and Shift in Demand Curve, let’s talk about the movement along the Supply Curve.
When the supply of a product either increases or decreases due to an increase or decrease in its price (all the other factors remain constant), that change in the quantity of the product supplied is depicted as the movement in Supply Curve.
Taking the same example used above, if the price of the egg increases to Rs.8, we will see an increase in the quantity of the product supplied. Because we see an increase in supply, we call it an Extension of the supply. This Movement in Supply Curve is an upward movement.
Now, if the price is reduced to Rs.3, we will also see a decrease in the quantity of the product supplied. Because we see a decrease in supply, we call it the Contraction of the supply. This Movement along the Supply Curve is a downward movement.
The Shift of the Supply Curve
When the supply of a product increases or decreases because of any factor other than its price, we will see a shift in the Supply Curve itself.
So for example, if due to technological advancements, a manufacturer produces more of the product at the same cost, it will be able to supply that product in greater quantities while keeping the price the same. In this case we will see a rightward shift of the Supply Curve.
Again, if, say, the raw materials needed to make the product decreases in quantity, we will see a decrease in the supply of the product too. In this case, the movement and shift in Supply Curve happen leftwards.
Did You know?
It was Alfred Marshall who first developed the idea of a supply and Demand Curve back in 1890.