Comparative statics for demand and supply

This article discusses the comparative statics for demand curves and supply curves with particular interest on the effect of the movement of these curves on the equilibrium quantity traded and the market price.

For simplicity, we assume that all demand curves are downward-sloping, i.e., that the law of demand holds. However, for the supply curves, we consider both upward-sloping and downward-sloping supply curves. While short-run supply curves are almost always upward-sloping, long-run supply curves may be upward-sloping, flat, or downward-sloping, depending on whether the industry is an increasing cost industry, constant cost industry, or decreasing cost industry.

Upward-sloping supply curve

This is the typical case, particularly for a short-run analysis. This is because the short-run supply curve is almost always upward-sloping.

Comparative change	Possible causes	Effect on equilibrium price	Effect on equilibrium quantity traded
expansion of demand curve, i.e., the demand curve moves upward/rightward	increase in market size, increase in income, increase in price of substitute goods, decrease in price of complementary goods, change in tastes and preferences, change in climate conditions, change in expectations of future prices	increases	increases
contraction of demand curve, i.e., the demand curve moves downward/leftward	decrease in market size, decrease in income, decrease in price of substitute goods, increase in price of complementary goods, change in tastes and preferences, change in climate conditions, change in expectations of future prices	decreases	decreases
expansion of supply curve, i.e., the supply curve moves downward/rightward	increase in number of suppliers, reduction in cost of production due to reduction in prices of factors of production	decreases	increases
contraction of supply curve, i.e., the supply curve moves upward/leftward	decrease in number of suppliers, increase in cost of production due to increase in prices of factors of production	increases	decreases

Downward-sloping supply curve

This case is important for the analysis of long-run supply curve, i.e., for long run price trends, in a decreasing cost industry.

When both the demand curve and the supply curve are downward-sloping, it is possible for them to have more than one point of intersection. The relevant market price and equilibrium quantity traded occur at a point beyond which the supply curve becomes farther right of the demand curve.

Thus, for simplicity, we assume a situation where the supply curve is downward-sloping but is flatter (more horizontal) than the demand curve. In this case, there is a unique point of intersection of the curves and this gives the market price and equilibrium quantity traded.

Comparative change	Possible causes	Effect on equilibrium price	Effect on equilibrium quantity traded
expansion of demand curve, i.e., the demand curve moves upward/rightward	increase in market size, increase in income, increase in price of substitute goods, decrease in price of complementary goods, change in tastes and preferences, change in climate conditions, change in expectations of future prices	decreases	increases
contraction of demand curve, i.e., the demand curve moves downward/leftward	decrease in market size, decrease in income, decrease in price of substitute goods, increase in price of complementary goods, change in tastes and preferences, change in climate conditions, change in expectations of future prices	increases	decreases
expansion of supply curve, i.e., the supply curve moves upward/rightward	increase in number of suppliers, reduction in cost of production due to reduction in prices of factors of production	increases	decreases
contraction of supply curve, i.e., the supply curve moves downward/leftward	decrease in number of suppliers, increase in cost of production due to increase in prices of factors of production	decreases	increases

Note that an "expansion" of the supply curve here is a bad thing because what it really means is that the marginal costs are going up. This needs to be clarified, it is confusing and somewhat paradoxical.