In financial markets, for example, the law of one price essentially states that identical or equivalent financial assets should trade at the same price, regardless of where they are traded. This is driven by the idea that if a discrepancy exists, arbitrageurs will exploit it, buying the asset where it’s cheaper and selling it where it’s more expensive, thus driving the price toward equality. If a company’s stock is traded on multiple exchanges, the law of one price suggests that its price should be the same across those exchanges (accounting for currency exchange rates, if applicable).

The equilibrium price is not static. It constantly adjusts based on shifts in supply and demand. If demand increases, the equilibrium price will likely rise, and vice versa. This post looks at factors that increase or decrease economic and financial curves.

Alfred Marshall, pictured below, made a valuable contribution to our understanding of supply and demand with his visible representation of the equillibrium price. Consequently, this framework provides a valuable graphical and mathematical foundation for understanding economic and financial market dynamics.

There are basic causes of a price change to be noted – shifts in demand (increase or decrease), supply (increase or decrease), or both

Although it’s important to distinguish between a “movement along” the demand curve (caused by a change in price), “shifts” of the demand curve can be caused by many other factors.

Demand shifts to the right – An increase in demand shifts the demand curve to the right. This raises the price and output.
Demand shifts to the left – A decrease in demand shifts the demand curve to the left. This reduces price and output.
Supply shifts to the right – An increase in supply shifts the supply curve to the right. This reduces price and increases output.
Supply shifts to the left – A decrease in supply shifts the supply curve to the left. This raises price but reduces output.

Factors That Shift the Demand Curve

– Income
For normal goods, an increase in income leads to an increase in demand (a rightward shift). For normal goods, a decrease in income leads to a decrease in demand (a leftward shift). For inferior goods (like generic brands), an increase in income leads to a decrease in demand, and vice versa.
 
– Prices of Related Goods
If the price of a substitute good increases, the demand for the original good increases (a rightward shift). If the price of a complementary good increases, the demand for the original good decreases (a leftward shift).  

– Tastes and Preferences
Changes in consumer tastes and preferences, often influenced by advertising, trends, or cultural shifts, can significantly impact demand. Increased preference leads to increased demand (a rightward shift). Decreased preference leads to decreased demand (a leftward shift).

– Expectations
Consumer expectations about future prices, income, or availability can influence current demand. If consumers expect prices to rise in the future, current demand increases (a rightward shift). If consumers expect prices to fall in the future, current demand decreases (a leftward shift).
 
– Number of Buyers
An increase in the number of buyers in a market increases overall demand (a rightward shift). A decrease in the number of buyers decreases overall demand (a leftward shift).  

– Demographic Changes
Changes in the size and composition of the population. For example a increase in the elderly population increases the demand for healthcare.  

Accordingly, any factor that changes consumers’ willingness or ability to purchase a good or service at a given price will cause the demand curve to shift.

In market graphs, the supply curve illustrates the relationship between the price of a good or service and the quantity that producers are willing to supply. Once again, it’s important to differentiate between a “movement along” the supply curve (caused by a change in price) and a “shift” of the supply curve (caused by other factors).

Factors That Shift the Supply Curve

– Costs of Production
Changes in the prices of inputs, such as labor, raw materials, and energy, directly affect the cost of production. Increased costs shift the supply curve to the left (a decrease in supply). Decreased costs shift the supply curve to the right (an increase in supply).  

– Technology
Technological advancements can improve production efficiency, reducing costs and increasing output. New technology generally shifts the supply curve to the right.  

– Government Policies
Taxes on production increase costs, shifting the supply curve to the left. Subsidies reduce production costs, shifting the supply curve to the right. Regulations can increase or decrease production costs, depending on their nature, and therefore shift the supply curve accordingly.  

– Number of Sellers
An increase in the number of sellers in a market increases the overall supply, shifting the curve to the right.  
A decrease in the number of sellers decreases supply, shifting the curve to the left.  

– Expectations of Future Prices
If producers expect prices to rise in the future, they may reduce current supply to sell more later, shifting the curve to the left.  
If they expect prices to fall, they may increase current supply, shifting the curve to the right.

– Prices of Related Goods
If the price of a related good that producers could also produce increases, they may shift production towards that good, decreasing the supply of the original good (shifting the supply curve to the left).  

– Natural Disasters
Natural disasters can heavily effect the amount of goods that can be produced. Therefore these events can cause massive shifts in the supply curve.  

Basically, any factor that changes the producers’ ability or willingness to supply a good or service at a given price will cause the supply curve to shift.

What Factors Change Demand and Supply Curves in Financial Markets?

In financial markets, like any other market, the interplay of supply and demand determines prices. However, the factors that shift these curves have some unique characteristics.  

Factors Affecting Demand in Financial Markets

– Interest Rates
When interest rates fall, borrowing becomes cheaper, increasing the demand for loans and other debt instruments. Conversely, higher interest rates reduce borrowing and can increase the demand for interest-bearing assets like bonds.

– Investor Sentiment
Optimism about the economy or a particular asset can increase demand. Fear and uncertainty can lead to a decrease in demand, as investors seek safer havens.  

– Economic Data
Strong economic indicators, like GDP growth or low unemployment, can increase demand for stocks and other risk assets. Weak economic data can have the opposite effect.  

– Inflation Expectations
Rising inflation expectations can decrease demand for bonds, as their real return erodes.  
Conversely, it can increase demand for assets that are expected to outpace inflation, like commodities or certain stocks.

– Government Policies
Fiscal policies, like tax cuts or increased government spending, can stimulate demand. Monetary policies, like changes in the money supply, can also influence demand.  

– Changes in Risk Aversion
When investors risk aversion is low, they are more willing to purchase riskier assets, increasing demand. When risk aversion is high, demand shifts to safer assets.  

Factors Affecting Supply in Financial Markets

– Central Bank Policies
Central banks influence the supply of money through open market operations, reserve requirements, and the discount rate. These actions directly impact the supply of credit and other financial instruments.  

– Corporate Issuances
Companies issue stocks and bonds to raise capital, increasing the supply of these instruments.  
The number of corporate issuances depends on factors like economic conditions and interest rates.  

– Government Issuances
Governments issue bonds to finance their spending, adding to the supply of debt instruments.  

– Investor Expectations
If investors expect the price of an asset to fall, they may increase their supply of that asset in order to sell before the price drops.

– Profitability Expectations
If a company is expecting high profitability, they may issue more stock, increasing supply.

Key Differences from Traditional Goods Markets

In reality, frictions in financial markets like transaction costs, taxes, and information asymmetries can prevent the law of one price from holding perfectly. Also, the degree to which the law of one price holds depends on the efficiency of the market. In highly efficient markets, price discrepancies are quickly eliminated. Lastly, some financial instruments are highly complex, making it difficult to determine whether they are truly identical.

In financial markets, expectations play a much larger role than in markets for physical goods. Information flows very rapidly, leading to quick adjustments in supply and demand. Psychological factors, like fear and greed, also have a significant impact on market dynamics.

Citation APA (7th Edition)

Pennings, A.J. (2025, March 10) Moving Economic and Financial Curves. apennings.com https://apennings.com/dystopian-economies/moving-the-curves-to-achieve-equillbrium-prices/

© ALL RIGHTS RESERVED

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Anthony J. Pennings, PhD is a professor at the Department of Technology and Society, State University of New York, Korea and holds a joint position as a Research Professor for Stony Brook University. He teaches policy and ICT for sustainable development. From 2002-2012 he taught digital economics and information systems management at New York University. He also taught in the Digital Media MBA at St. Edwards University in Austin, Texas, where he lives when not in the Republic of Korea.

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Category: dystopian economies, political economy of media

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