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M04.L04 — Comparative Statics: Analysing Shifts in Supply and Demand

Module: Module 04 — Supply and Market Equilibrium Lesson: L04 of 06 Duration: ~30 minutes Level: Introductory Provenance: OpenStax Principles of Microeconomics 3e | Khan Academy Microeconomics

Learning Objective

Predict price and quantity changes from shifts in supply or demand

Four Fundamental Shifts

  1. Demand increases: Higher price, higher quantity (COVID toilet paper demand)
  2. Demand decreases: Lower price, lower quantity (Declining newspaper demand)
  3. Supply increases: Lower price, higher quantity (Australian iron ore expansion)
  4. Supply decreases: Higher price, lower quantity (Drought-reduced crop yields)

During COVID-19, Australian food markets experienced simultaneous: - Demand increase (panic buying) - Supply decrease (logistics disruptions) Result: Sharp price spikes with ambiguous quantity effects

Worked Example

Iron Ore Boom 2021

  1. Baseline: P1 = $100/tonne, Q1 = 1 million tonnes
  2. Chinese demand increases → demand curve shifts right
  3. Australian supply decreases (weather disruptions) → supply shifts left
  4. Result: P2 = $180/tonne (price definitely rises) Q2 ambiguous (depends on relative shift magnitudes)

Common Misconception

"When both curves shift, price and quantity always move in predictable directions"

With simultaneous shifts, one variable's change may be ambiguous depending on relative shift magnitudes.

Key Takeaways

  • Single shifts have clear price-quantity effects
  • Double shifts require analyzing relative magnitudes
  • Australian examples demonstrate complex real-world scenarios
  • Iron ore and agriculture show export market dynamics

Practice

  1. How did COVID border closures affect Australia's fruit markets?
  2. What happens to price when demand increases and supply increases more?
  3. Why might wheat prices fall despite a poor harvest?

Further Resources

Provenance: OpenStax Principles of Microeconomics 3e | Khan Academy Microeconomics