A Little Econ Lesson

Let’s have a little lesson in microeconomics, shall we? The graph above is an illustration of the basic supply and demand curves shown in every Econ 101 text. These graphs illustrate that as the price of something increases people tend to buy less of it, suppliers make more of it, and there’s an “equilibrium price” where the lines cross, i.e. supply and demand are equal. Simple enough.

This graph has a little difference. It adds an additional demand curve to illustrate the effect of an increase in demand on prices, supply, and the equilibrium price. As you probably have already predicted, with a demand shift that increases demand the supply and equilibrium price both increase.

There’s one more little difference. The blue vertical bar indicates a fixed supply. As you could probably guess when supply is fixed and there is a shift that increases demand, it will increase the equilibrium price.

One last little observation. What happens if the increase in the equilibrium price in response to a demand shift and a fixed supply itself results in another demand shift that increases demand? Then you have a positive feedback loop which will continue stopped by some exogenous factor.

4 comments… add one
  • This isn’t the sort of thing usually covered in Econ 101. More like Econ 301.

  • CuriousOnlooker Link

    I guess I had a great high school economics teacher.

    We were taught about positive feedback loops (hoarding) and the idea of (in)elasticity in the supply/demand curve.

  • Drew Link

    Uh, er. Well, 101 at least at Chicago. And you might want to consider the real sequence of events.

    Quantity demanded down and quantity supplied up as price increases are theoretical considerations. There is no reason that, a priori, the two curves intersect at price x. The demand shift you describe is what actually happens in the real world, and that curve is always moving. The same could be said of supply. When things settle down momentarily you have a price, and a blue line for quantity.

    To complete the argument, if the demand shifted (say, to the right) for a product or service generally the supply curve would also adjust to the right) and price would fall…….all at a higher quantity.

    To bring it to today’s issues. With the supply chain disrupted we have a supply shock – the supply curve moves to the left. Depending on elasticity either price will increase, or quantity demanded will fall over time, or more likely, both. Eventually the supply curve will move to the right. The real issue to contemplate is how much of the price increases we are currently experiencing is supply shock vs how much is demand pull from pouring money into the economy, vs how much is monetary inflation.

    We won’t know for awhile. From a political angle its hard to imagine it will be resolved before the 2022 election cycle.

  • My actual point here is that the federal government’s increasing the amount of money it’s paying for health care will increase willingness to pay, i.e. shift the demand curve to the right. In the absence of an increase in the supply of healthcare or price controls that will inevitably increase the price.

    Price controls would carry a different but related set of problems.

Leave a Comment