Why does supply (and demand) shift left and right as opposed to up and down?

Question

I've wondered about this for a long time. In the past I rationalized it by saying that up and left were the same (or at least have the same overall effect), and that thinking in terms of left and right works for increase/decrease in both supply and demand curves. But things like taxes raise prices which is most intuitively viewed as an upward movement (although saying left and right are useful regardless). Then when I encountered Keynesian aggregate supply (which makes it obvious that left and up are not interchangable), I was astounded when I learned that decrease in supply, including supposedly taxes, actually moved the curve left, not up. Shouldn't taxes exist which increase price levels of all firms in order to pay for them, moving (Keynesian) aggregate supply up because whatever quantity of goods firms produce they have to set prices higher to pay for the cost of taxes?

Answer 1

Both ways of thinking are correct. They are two equivalent and complementary ways of thinking about the same thing:

1. Shift left (right): At each price, the quantity that producers are willing and able to supply has gone down (up).
2. Shift up (down): To get producers to supply each quantity, the required price has gone up (down).

Example where the supply curve shifts left or (equivalently) up:

Answer 2

The supply curve is defined by a function $Q_{S} = a + bP$.

When plotting on a price-quantity graph, we have to invert the function: $P = -\frac{a}{b} + \frac{Q_{S}}{b}$. We set $Q_{S}=0$ to get the y-intercept ($-\frac{a}{b}$), and $P=0$ to get the x-intercept ($a$). (Note that $a\leq0$, so that suppliers produce nothing when the price is zero.)

To shift the supply curve, we change $a$. Here I set $b=2$ and switch $a$ from $0$ to $-4$.

Thinking in terms of the x-intercept, we've shifted the supply curve left, from $a=0$ to $-4$. (Since we require quantity to be positive, I show only the first quadrant.)

But if we think in terms of the y-intercept, the curve has shifted up, from $-\frac{a}{b} = 0$ to $2$.

Both interpretations make sense. If you ever need to persuade yourself, think of the function generating the graph.

Answer 3

If you are wondering why the supply curve moves horizontally and not vertically, thinking about it this way may help.

In a perfect competition, the long run supply is said to be perfectly elastic. Then imagine that there is a supply shock such that it increases or decreases the supply at a given price level. Then in the long run, the market will just return to the previous equilibrium, and we don't see any changes in the supply. So why don't we see any changes even though there was a supply shock? Because graphically, the long run supply curve is horizontal, and the supply shock moved the supply curve horizontally.

Since you asked about the Keynesian aggregate supply: when we have a supply curve that is not perfectly elastic, a horizontal shift would result in a corresponding vertical movement in the equilibrium. But when there is a negative supply shock, such as imposing taxes, the producers require higher prices to offset their increase in costs. This is equivalent to saying that they can produce less quantity given the same price level as before (curve shifts left), or that they can only produce the same amount given a price increase that is equivalent to the tax (curve shifts up). So in such a situation, a leftward movement (or equivalently, an upward movement) indicates the same thing: that there is a negative supply shock.

Hope this helped.