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Help me with demand-supply :(

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costargh:
Ok, Im really sad. I dont understand why I don't understand what I should understand :(
And like it just seems so stupid to be through the whole year and not get this.
Heres my thing. Why isn't business confidence a supply side factor.

Here is my email and the reply to Mr Wood. Even with his reply I don't get it. I'm pretty sure it has to do with there being a difference between a shift in the demand or supply curve and just the movement along the curve/line.


--- Quote ---Hi Brian Wood,

I had a question and I was wondering if you could answer it for me.
Why is business confidence not a supply side factor?

I just started my course revision and your lately article coincided with the area of study I was up to. The way I thought about it was that when business confidence is high, businesses will demand and invest more in resources (eg. capital and labour resources to increase production) which increase AD. But I thought that the high business confidence which has resulted in more goods and services being produced, would in turn increase AS. Why is this not the case?
(I am presuming this is not the case because it is not mentioned in my notes/ text book or your article)

Thanks

Costa
--- End quote ---


--- Quote ---Hi,
 
There is a big difference between an increase in the quantity supplied (as indicated by the equilibrium point moving to the right) and an increase in supply (as indicated by the actual curve moving to the right).  Your question seems to be confusing the two, and so I think that might be where you are going wrong.
 
Mr Wood
--- End quote ---

:( I'm so sad.

Collin Li:
"But I thought that the high business confidence which has resulted in more goods and services being produced, would in turn increase AS. Why is this not the case?"

What you say is almost right, but it is not an upward shift in the AS (increase in supply). It is a movement along the AS curve (increase in quantity and prices).

If you draw your typical demand-supply curve, and then shift the demand up, then you will notice the new equilibrium is to the top-right of the original equilibrium. This represents an increase in the quantity traded of goods and services, due to a movement along the supply curve as a result of the shift in the demand curve. This makes sense because an increase in the demand curve means people are willing to pay more for their goods and services, so suppliers (on the same unchanged supply schedule) will increase output.

Here, I am trying to explain that an increase in the quantity traded does not necessarily imply an increase in supply. The supply-side has not changed, but there is now additional demand, so the suppliers can afford to produce more (not an increase in the supply - which would represent things like reduced costs of production).

costargh:
OHHHH fuck I think I understand it!!!

But besides the fact that businesses requiring more inputs when business confidence is high, why would demand increase?
(once this is answered I think I understand it all and I will say how I interpret what you said and ask if its correct :S )

Collin Li:
There is an increase in the demand curve because businesses are suddenly demanding more labour, capital, inputs, etc., as a result of their increased confidence. Nothing has made these things cheaper or more accessible, so it is not a supply-side effect. It is simply a demand-side effect - these confident firms are prepared to pay more to buy more.

costargh:
Ok... so here I go:

Business confidence is high. Wesfarmers decides that they want to expand operations (and for the sake of simplicity) they only require more labour resources. There will be an increase in the demand of labour as a result of this higher business confidence (say for example, other businesses are also demanding more labour resources). This causes the demand curve to shift to the right, moving the equilibrium price higher (to the top right). At this new equilibrium price, the workforce is now more prepared to work for Wesfarmers because of the increases in their wages.

So what has happened is that there has been a SHIFT of the demand curve, but a MOVEMENT along the supply curve?

If this is correct, is it safe to say that every condition of demand and supply will have this similar 2 way effect?
ie. shift on one curve, and movement on the other (as price and quantity supplied changes?)

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