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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?

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    $\begingroup$ "But things like taxes raise prices which is most intuitively viewed as an upward movement (although saying left and right are useful regardless)." I cannot make sense of this. Can you please explicitly state 1. The coordinate system you are using. 2. The curve you are talking about. 3. The exact thing that shifts the curve. $\endgroup$ – Giskard Feb 4 at 20:07
  • $\begingroup$ @Giskard yeah I was unsure if that bit would be explained well enough. I was trying to talk about in microeconomics the effect of a specific tax on a generic supply curve. I don't know how to put images here, so economicsonline.co.uk/Competitive_markets/Shifts_in_supply.html (this was the first thing that came up when I googled shifting supply). You can look up law of supply, etc, there are other questions on the site. The horizontal axis is quantity of a good, the vertical is price per unit quantity of that good (in Cartesian coordinates, of course :) ). $\endgroup$ – Benjamin Thoburn Feb 4 at 21:00
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    $\begingroup$ Economists draw their graphs with peculiar axis choices, in particular quantity is usually the $x$-axis, more quantity is a movement to the right and less quantity is a movement to the left. Similarly prices are usually the $y$-axis so a change in price is up or down $\endgroup$ – Henry Feb 5 at 0:32
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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:

enter image description here

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  • $\begingroup$ How does this explain the Keynesian AS curve moving left (I've been told it doesn't always move up or down)? $\endgroup$ – Benjamin Thoburn Feb 6 at 14:58
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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.

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  • $\begingroup$ Consider an economy in stage 1 of Keynesian AS where it's flat and suppose every good in the economy gets a specific tax of 5%. This would still raise the price levels of goods in the flat part, right? Meanwhile, the factors of production may all stay the same; the capacity of labor, price of resources, etc, don't change. So ceteris paribus, the curve would not move left. Specific taxes are common but I have not seen a graph of K.AS move vertically. My econ teacher said this is not the case but he too struggled to explain why it couldn't move vertically. $\endgroup$ – Benjamin Thoburn Feb 5 at 16:38
  • $\begingroup$ It's been a while since I learned this so correct me if I'm wrong, but I believe that in your case the short run aggregate demand would shift left. In the long run, the short run aggregate supply will shift left until the aggregate demand meets the LRAS. Since you assumed the LRAS to be flat, you will see a leftward horizontal shift in the equilibrium. $\endgroup$ – Moon Feb 6 at 0:55

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