Principles of Microeconomics / Unit 2 MIC 0142 review, 2 to 3 minutes
The Drought Chain: Which Curve Moves, Which Does Not
The idea
One chain of events, worked step by step, settles the distinction the whole model rests on. A drought strikes the pea crop. Step one: the drought is a natural condition, a supply shifter, so the supply curve shifts left; at every price, growers now bring fewer peas. Step two: at the old price there is a shortage, so the price rises. Step three: the higher price moves buyers up along the demand curve; quantity demanded falls, and the demand curve has not moved, because nothing about buyers' willingness at each price has changed. Step four: the higher price also moves along the new supply curve; growers who can still produce bring a little more than they would have at the old price, but on the shifted curve. The new equilibrium has a higher price and a lower quantity. Now the errors. The first is to say that with fewer peas available, demand falls too, and to shift demand left; that predicts a lower price, which cannot be right for a crop that has halved. The second is to say that the higher price now shifts supply right, because sellers are attracted by it; that confuses the movement along the new curve with a shift of it. The third is to shift supply left again because the higher price has cut sales, which runs the causation backward. In every case the test is the same: did the event change what one side would do at each and every price? Only such an event shifts a curve. A change in this good's own price moves along.
In practice
Worked example: before the drought, peas clear at two dollars a pound and one hundred thousand pounds a week. The drought halves what growers offer at every price, so at two dollars only fifty thousand pounds arrive and buyers want their usual hundred thousand: a shortage of fifty thousand. The price climbs to three dollars. At three dollars buyers take seventy thousand pounds, moving along their unchanged curve, and growers on their reduced curve manage seventy thousand. The market clears at three dollars and seventy thousand pounds. Quantity demanded fell by thirty thousand, and the demand curve is exactly where it was.
Where people slip
Three cautions. Sales fell, and demand did not; those are different sentences, and the second is the one the exam grades. Only one curve shifted, and the other adjusted along its length. And the four-step process works because it asks about each curve separately; skip step two and the price change will look like a reason to shift something else. Every market question in this course, in every market it visits, is a version of this chain.
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