Question

Supply and demand are powerful forces in a free market.

In four to five sentences, explain some of the factors that cause shifts in supply and demand and what the effects of these shifts are.

Answer 1

Shifts in demand occur when factors other than price change, such as consumer incomes, tastes and expectations, the prices of substitutes or complements, and the size or composition of the population. Supply shifts when input costs, technology, the number of sellers, taxes or subsidies, or events like weather or strikes change producers’ willingness or ability to sell at each price. An increase in demand raises equilibrium price and quantity, while a decrease in demand lowers both; an increase in supply lowers price and raises quantity, while a decrease in supply raises price and lowers quantity. When supply and demand shift at the same time, the resulting change in price and quantity depends on the direction and relative magnitude of each shift.