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One of the most important uses of the supply and demand model is to make simple predictions.

Suppose, for example, the market for eggs can be represented by supply and demand curves. What will happen in this market if a new variety of chicken is developed which can produce more eggs?

To answer this question, we must decide who is directly affected. Who cares more about how many eggs a chicken lays—the buyers of eggs or the producers of eggs? Buyers are rarely concerned with the methods of production, but sellers always are. It becomes more profitable to produce eggs at the old price, so the behavior of the sellers will change. The old supply curve, which showed how the sellers acted before the new chicken variety was developed, becomes invalid, and a new supply curve further to the right now illustrates their behavior. Economists show this change by shifting the supply curve to the right.

Buyers are ultimately affected, but only indirectly, because the price of eggs changes. As the supply curve moves right, the price falls, and buyers respond by moving down the demand curve.

In the jargon of economics, we have had an increase in supply and an increase in quantity demanded.


Copyright Robert Schenk