So the change of a relevant exogenous factor (i.e.
Parameter A stands for everything else in the world. That is when A (and, perhaps, B) comes into play, and this play is crucial. If you treat your local market as a part of outer system, you may include the influence of the other factors (markets etc.) that are not included in you model explicitly. (In a sense they are also exogenous but the model prohibits them to change: they are parameters – not variables.) In that abstract model you can never know WHY prices have changed because you have no information about anything outside the primitive system. Function itself is just given and unchanged. So, when you study a demand function in isolation (in other words, local closed model) you may only consider price, p, as exogenous variable and its change causes change in quantity, q. Of course, with axes confusingly exchanged their default mathematical seats. Moving along the curve is just a math artefact to explain that we deal with function: From wherever P and Q started (P=12 in the example), we now end at point P=7,Q=2, and the curve remains unmoved along the entire line P=2Q+3.įirst, note that in the real world nearly everything moves the curve. The curve remains steady, but we slide along it to get to the new P=7, Q=2 position. If P=2Q+3 is the supply, then consider that if you set the price (by law) to be 7, then Q is now 2. Let us say the government wants to set the price of a product. This is easiest to see with a linear, mathematical example. Note how the price levels are lower at every level of Q.Ĭhanges in supply and demand that are not "shifts" are called "slides along the curve". For example, if the supply curve was P=2Q+3, and there was a decrease in the cost of inputs, the demand curve could shift to P=2Q+2. If you come up with something that didn't fit into these categories, but is not P or Q, the result is still a shift! You probably just need your imagination to squeeze it into one of these 7 formal categories. If anything else changes other than P or Q that is relevant to the curve, the curve shifts.įor supply, these shifters generally fall into three categories: Supply and demand curves are a function of price and quantity.
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