Demand and Supply curves

A movement along a demand curve is a change in the quantity demanded caused only by a change in the good's own price, ceteris paribus. If the price of a good falls, there is an extension of demand (more is demanded) as we move down the existing curve; if the price rises, there is a contraction (less is demanded). For example, if the price of coffee falls, consumers buy more coffee — a movement down the same demand curve.

A shift of the demand curve is a change in demand itself — the quantity demanded changes at every price — caused by a change in a non-price determinant. A rightward shift is an increase in demand, a leftward shift a decrease. For example, if average incomes rise and coffee is a normal good, demand for coffee increases at every price, so the whole curve shifts to the right; or if a substitute such as tea becomes cheaper, demand for coffee falls and the curve shifts left.

The key difference is the cause: the good's own price produces a movement along the curve, whereas any other factor (income, tastes, prices of related goods, population, advertising, expectations) produces a shift of the whole curve. Keeping the terminology precise — extension/contraction for movements, increase/decrease for shifts — is essential, because it determines which diagram correctly represents an event.

Both events affect the coffee market, one through supply and one through demand.

The heatwave damaging the harvest reduces the quantity of coffee that can be produced and raises costs, so supply falls: the supply curve shifts to the left (S₁ → S₂). On its own, this raises the equilibrium price and lowers the equilibrium quantity.

The health study improves consumers' tastes/preferences for coffee, so demand rises: the demand curve shifts to the right (D₁ → D₂). On its own, this raises both the equilibrium price and quantity.

Combining the two: both shifts push the equilibrium price upwards, so the price of coffee will definitely rise. The effect on quantity is ambiguous, however, because the leftward supply shift reduces quantity while the rightward demand shift increases it. The net change in quantity depends on the relative sizes of the two shifts: if the demand increase outweighs the supply fall, quantity rises; if the supply fall is larger, quantity falls.

So the diagram shows a clear rise in price but an indeterminate change in quantity.

An increase in demand for electric cars means the demand curve shifts to the right — more are demanded at every price — and is caused by non-price determinants.

Income. Electric cars are a normal good, so rising real incomes raise demand. Where incomes are growing, more consumers can afford them. However, they are expensive, so income effects matter most for higher-income groups.

Prices of related goods. A rise in the price of petrol/diesel cars or fuel (substitutes/complements to conventional motoring) makes electric cars relatively more attractive, raising their demand. Conversely, if charging is costly or inconvenient, demand may be held back.

Tastes and preferences. Growing environmental awareness shifts tastes towards low-emission vehicles, increasing demand. Advertising and social trends reinforce this.

Government policy and expectations. Subsidies, tax breaks or expectations of future bans on petrol cars all raise current demand. Expectations of falling prices, by contrast, could delay purchases.

Judgement. Several factors can increase the demand for electric cars, but they are not equally important and they interact. The most powerful drivers are likely to be government incentives and the relative cost of running electric versus conventional cars, because these directly change affordability and the cost comparison that most consumers make. Rising incomes and changing tastes support demand but work more slowly. Crucially, demand will only increase substantially if complementary conditions — adequate charging infrastructure and falling battery costs — are also met; without them, favourable income or tastes may not translate into actual purchases. The most defensible conclusion is therefore that demand rises most when affordability, running-cost advantages and supporting infrastructure move together, rather than from any single factor alone.

A fall in production costs (e.g. cheaper inputs or new technology) increases supply, shifting the supply curve to the right. At the original price there is excess supply, so the equilibrium price falls and quantity rises.

The case that consumers benefit. A lower price means consumers pay less and can buy more, raising their consumer surplus and real living standards. Higher output may also mean more choice and, where the cost fall comes from better technology, possibly better quality. In competitive markets, firms are forced to pass cost savings on to consumers to remain competitive, so the benefit is likely to reach buyers.

The case against / qualifications. The size of the consumer benefit depends on price elasticity of demand: if demand is inelastic, the price fall is large but the quantity rise small, whereas with elastic demand quantity responds strongly. More importantly, whether savings are passed on depends on market structure. In a monopoly or highly concentrated market, the firm may keep the lower costs as higher profit rather than cutting price, so consumers gain little. The cost fall might also come from cutting corners (lower quality or worse working conditions), which could harm consumers or workers. Finally, the benefit may be temporary if the cost change reverses.

Judgement. A fall in production costs tends to benefit consumers because it usually lowers price and raises output, but it does not always do so. The extent of the benefit depends critically on the degree of competition (whether savings are passed on) and on the elasticity of demand (how much quantity responds). Consumers benefit most in competitive markets with responsive demand; they benefit least where firms have market power and retain the savings as profit. The most defensible conclusion is therefore that lower costs are generally good for consumers, but the claim that they always benefit is too strong.