If you are wondering why the supply curve moves horizontally and not vertically, thinking about it this way may help. In a perfect competition, the long run supply is said to be perfectly elastic. Then imagine that there is a supply shock such that it increases or decreases the supply at a given price level. Then in the long run, the market will just return to the previous equilibrium, and we don't see any changes in the supply. So why don't we see any changes even though there was a supply shock? Because graphically, the long run supply curve is horizontal, and the supply shock moved the supply curve horizontally. Since you asked about the Keynesian aggregate supply: when we have a supply curve that is not perfectly elastic, a horizontal shift would result in a corresponding vertical movement in the equilibrium. But when there is a negative supply shock, such as imposing taxes, the producers require higher prices to offset their increase in costs. This is equivalent to saying that they can produce less quantity given the same price level as before (curve shifts left), or that they can only produce the same amount given a price increase that is equivalent to the tax (curve shifts up). So in such a situation, a leftward movement (or equivalently, an upward movement) indicates the same thing: that there is a negative supply shock. Hope this helped.
Learning Objectives
It’s hard to overstate the importance of understanding the difference between shifts in curves and movements along curves. Remember, when we talk about changes in demand or supply, we do not mean the same thing as changes in quantity demanded or quantity supplied. A change in demand refers to a shift in the entire demand curve, which is caused by a variety of factors (preferences, income, prices of substitutes and complements, expectations, population, etc.). In this case, the entire demand curve moves left or right.  Figure 1. Change in Demand. A change in demand means that the entire demand curve shifts either left or right. The initial demand curve D0 shifts to become either D1 or D2. This could be caused by a shift in tastes, changes in population, changes in income, prices of substitute or complement goods, or changes future expectations. A change in quantity demanded refers to a movement along the demand curve, which is caused only by a change in price. In this case, the demand curve doesn’t move; rather, we move along the existing demand curve. Figure 2. Change in Quantity Demanded. A change in the quantity demanded refers to movement along the existing demand curve, D0. This is a change in price, which is caused by a shift in the supply curve. Similarly, a change in supply refers to a shift in the entire supply curve, which is caused by shifters such as taxes, production costs, and technology. Just like with demand, this means that the entire supply curve moves left or right. Figure 3. Change in Supply. A change in supply means that the entire supply curve shifts either left or right. The initial supply curve S0 shifts to become either S1 or S2. This is caused by production conditions, changes in input prices, advances in technology, or changes in taxes or regulations. A change in quantity supplied refers to a movement along the supply curve, which is caused only by a change in price. Similar to demand, a change in quantity supplied means that we’re moving along the existing supply curve. Figure 4. Change in Quantity Supplied. A change in the quantity supplied refers to movement along the existing supply curve, S0. This is a change in price, caused by a shift in the demand curve. Here’s one way to remember: a movement along a demand curve, resulting in a change in quantity demanded, is always caused by a shift in the supply curve. Similarly, a movement along a supply curve, resulting in a change in quantity supplied, is always caused by a shift in the demand curve.
Watch this video for another demonstration of the important distinction between these terms.
Try graphing each of these situations to determine if they cause a shift in demand, quantity demanded, supply, or quantity supplied.
demand: the relationship between the price and the quantity demanded of a certain good or service quantity demanded: the total number of units of a good or service consumers are willing to purchase at a given price quantity supplied: the total number of units of a good or service producers are willing to sell at a given price shift in demand: when a change in some economic factor (other than price) causes a different quantity to be demanded at every price shift in supply: when a change in some economic factor (other than price) causes a different quantity to be supplied at every price supply: the relationship between price and the quantity supplied of a certain good or service Contribute!Did you have an idea for improving this content? We’d love your input. Improve this pageLearn More
Change in supply refers to a shift, either to the left or right, in the entire price-quantity relationship that defines a supply curve.
A change in supply is an economic term that describes when the suppliers of a given good or service alter production or output. A change in supply can occur as a result of new technologies, such as more efficient or less expensive production processes, or a change in the number of competitors in the market. A change in supply leads to a shift in the supply curve, which causes an imbalance in the market that is corrected by changing prices and demand. An increase in the change in supply shifts the supply curve to the right, while a decrease in the change in supply shifts the supply curve left. Essentially, there is an increase or decrease in the quantity supplied that is paired with a higher or lower supply price.
A change in supply shouldn't be confused with a change in the quantity supplied. The former causes a shift in the entire supply curve, while the latter results in movement along the existing supply curve. The general consensus amongst economists is that these are the primary factors that cause a change in supply, which necessitates the shifting of the supply curve:
For example, if a new technology reduces the cost of gaming console production for manufacturers, according to the law of supply the output of consoles will increase. With more output in the market, the price of consoles is likely to fall, creating greater demand in the marketplace and higher overall sales of consoles. This technological advancement has caused a change in supply. The effects of changing supply and demand are found by plotting the two variables on a graph. The horizontal X-axis represents quantity and the vertical Y-axis represents price. The supply and demand curves intersect to form an "X" in the middle of the graph; the supply curve points upward and to the right, while the demand curve points downward and to the right. Where the two curves intersect is the price and quantity, based on current levels of supply and demand. A positive change in supply when demand is constant shifts the supply curve to the right, which results in an intersection that yields lower prices and higher quantity. A negative change in supply, on the other hand, shifts the curve to the left, causing prices to rise and the quantity to decrease. During the early 2010s, the development of hydraulic fracturing, or "fracking", as a method to extract oil from shale rock formations in North America caused a positive change in supply in the oil market. Non-OPEC oil production rose by over one million barrels per day, with most of the oil coming from fracking activity in North America. Because of the increase in the supply of oil, the per-barrel price of oil, which had reached an all-time high of $147 in 2008, plunged as low as $27 in Feb. 2016. Economists predicted that lower prices would create greater demand for oil, although this demand was tempered by deteriorating economic conditions in many parts of the world. |
What causes the demand and supply curves to shift left or right?
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