Determinants of Supply and Demand

We’re going to follow the “little ushanka that could. You know ushankas...those super-warm Russian hats with the ear flaps? Yeah. The journey of this little ushanka will show us all the ways demand curves and supply curves can shift, and how those shifts can affect the market.

So there’s this little ushanka that was made in a factory in Siberia, waiting to find its forever-head to don. But the Russian currency, the ruble, took a tumble, and the economy with it. When the ruble and the economy took a tumble, so did people’s incomes.

Because so many Russians had a change in income, they were buying fewer hats. This change in income made the demand for ushankas go down, which shifted the demand curve for ushankas inward. What happened when the demand curve for ushankas shifted inward? Well, ushankas are produced (the supply) and sold (the demand) at the price and quantity where the two lines cross.

When the demand curve gets shifted inward, it decreases both the price and the quantity for ushanka-market-equilibrium, which is bad for ushankas trying to find their forever-heads.

If you think that’s bad...things would get even more hopeless for the little ushanka. These other hats...foreign hats called “beanies...” dropped in price in the Russian market when the economy went down. Since the price of a substitute hat for ushankas went down, the demand curve for ushankas shifted even further inward. Eventually, the economy bounced back. And with it, Russia was so overjoyed that they had a baby boom. This change in number of buyers, thanks to an increase in population, shifted the demand curve for ushankas...up.

But not as much as our little ushanka would have expected. Why? Well, young Russians had gotten used to the beanies. Young Russians had a preference for beanies over ushankas. And then another unfortunate event occured: climate change. Climate change made the Russian winters less cold, which made ushankas less useful. This change in usefulness of ushankas made the demand curve for ushankas shift even further inward.

Down, down, down the demand for ushankas went. Our poor little ushanka...would it ever be sold? Our story wouldn’t be complete without looking at what happened to the supply curve. There used to be a tariff on ushankas sold outside of Siberia, on the ones sold to the non-Siberian parts of Russia. The Kremlin saw the demand curve for the iconic ushankas shift inward, and decided to remove the ushanka tariff. Thanks to this change in government policy, the supply curve for ushankas shifted outward.

Better yet, the ushanka factory started making ushankas with faux fur rather than real fur to appeal to the preferences of vegans, which reduced overall production costs. And fur was in shorter supply anyway, because of global warming, making fur more expensive. This change in production costs shifted the supply curve for ushankas even further upward.

While that was good for all of the little ushanka’s friends, it wasn’t necessarily good for it, personally, being a fur ushanka. Still, it gave the little ushanka hope...hope that was much needed after all of those drops in the demand curve. To try to compete with beanies, the ushanka factory invested in new technology, which further shifted the ushanka supply curve outward. Basically, more hat-making robots and fewer hat-making people, like what happened with car production.

One winter, there was a horrible winter storm in Russia. The storm tore off many roofs, including the ushanka factory roof. Our little ushanka almost blew away. This geographic influence caused the ushanka supply curve to shift inward. Once the storm passed, people who didn’t have ushankas regretted that they didn’t have one, resulting in an increase in demand for ushankas...a symbol of Russian solidarity against the bitter cold.

At last, our little ushanka was sold, and found its forever-head. The little ushanka’s forever-head belonged to a young, cheery Siberian boy. Even though the hat was too big, the boy’s father said that if he kept his ushanka in good condition, he could use it until his head was big enough, and for decades afterwards.

Too bad a Siberian monkey stole it off the boy’s head just a minute later.

Anyway...just to sum up, five things that can cause a shift in a demand curve are:

- Changes in income
- Price of substitutes
- Number of buyers (population)
- Tastes & preferences
- Usefulness

And four things that can shift the supply curve are:

- Changes in production costs
- New technology
- Geographic influences
- Changes in government policies

Remember: when the supply and demand curves shift, it changes the price and quantity where the two lines intersect, changing the equilibrium. And also remember to, uh...watch out for Siberian monkeys. And spies.