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I am reading "Principles of Economics" by N. Gregory Mankiw.

Why doesn't the supply curve shift to the left in the following situation?
Why do producers respond to the surplus by cutting their prices?

Suppose first that the market price is above the equilibrium price, as in panel (a) of Figure 9. At a price of $5 per cone, the quantity of the good supplied (10 cones) exceeds the quantity demanded (4 cones). There is a surplus of the good: Producers are unable to sell all they want at the going price. A surplus is sometimes called a situation of excess supply. When there is a surplus in the ice-cream market, sellers of ice cream find their freezers increasingly full of ice cream they would like to sell but cannot. They respond to the surplus by cutting their prices. Falling prices, in turn, increase the quantity demanded and decrease the quantity supplied. These changes represent movements along the supply and demand curves, not shifts in the curves. Prices continue to fall until the market reaches the equilibrium.

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Why doesn't the supply curve shift to the left in the following situation?

Because in order for a demand curve to shift demand has to change at any price. For example, let us suppose that the demand function is given by:

$$D_1 = 100 -P$$

If a firm changes price it chargers it does change quantity demanded $D_1$ but does not shift the whole demand function $D = 100 -P$. If quantity demanded changes just because price varies, we call this movement along demand curve.

However, suppose now that there is some change in preferences of people so that demand function $D_1$ shifts and we will have new demand function $D_2$:

$$D_2 = 50 -P$$

Can you see the difference? Now at any price demand will be smaller compared to $D_1$. If price is $5$ the demand in $D_1$ will be $95$ but in $D_2$ only $45$, if price is $10$ then $D_1 = 90$ and $D_2 = 40$ and so on. This is what we would call shift in demand (in fact if you would plot $D_2$ an $D_1$ you would see that $D_2$ is just $D_1$ shifted to the left.

Why do producers respond to the surplus by cutting their prices?

Because, within the bounds of a simple supply-demand model, if there is a surplus of goods producers have two options:

A) throw the goods away and get nothing.

B) sell them at lower price.

selling them at lower price if you can is more rational then just throwing the goods away (at least it would be in a simple models, there might be some complex strategic interactions where it might be other way around, but you won't encounter such more nuanced and complex models in econ 101 textbook).

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  • $\begingroup$ 1muflon1, Thank you very much for your answer. I think producers can wait untill goods are sold without cutting their prices. $\endgroup$ – tchappy ha May 22 at 13:54
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    $\begingroup$ @tchappyha 1. Actually storing goods is expensive, that is why in real life stores often just actually have to throw things out (because IRL there might be strategic reasons or insufficient demand even at lower prices) or why you often see sales after seasons (e.g. post Easter sales on Easter chocolate - even though chocolate can be stored for a year). 2. In the model above there is no possibility for storing goods - to do that you would have to go beyond simple static model to some multiperiod dynamic one - but even in such setting you would often see it would be more rational to lower P $\endgroup$ – 1muflon1 May 22 at 13:58
  • $\begingroup$ 1muflon1, Thank you very much! $\endgroup$ – tchappy ha May 22 at 14:00

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