Change in Demand Supply and Market Equilibrium

We have already discussed the price determination of a commodity whose demand and supply curves are given, but generally demand and supply keeps on changing, resulting in shift in demand (factors like income, tastes and preferences etc.) and supply( change in technologies, input prices etc.) curves.

Let us now see the effect of change in demand and supply, on the equilibrium price and quantity.

Change in demand and Market Equilibrium

Change in demand has two aspects:

1) Increase in demand- demand curve shift to the right

2) Decrease in demand- demand curve shift to the left

Increase in demand:

demand supply

In the above diagram, DD and SS are the initial demand and supply curves. Equilibrium is struck at E, P and Q is the initial equilibrium price and quantity.

In case of increase in demand:

a) Demand Curve shift to the right. D₁D₁ is the new demand curve, supply curve remains the same.

b) Quantity demanded will be OQ₁ but the supply will remain at OQ. An excess demand (shortage) occurs at the initial price.

c) Competition among consumers and producers causes the price to rise to OP₁.

d) As price rises, the quantity supplied rises (law of supply, extension of supply) from E towards E₁. Quantity demanded falls (law of demand, contraction of demand) from point A towards E₁.

e) The process of contraction of demand and extension of supply continue until two becomes equal, after that there is no more tendency for either price or quantity to change.

Thus, an increase in demand for a commodity causes an increase in both equilibrium price and equilibrium quantity bought and sold.

Market Equilibrium

In the above diagram, DD and SS are the initial demand and supply curves. Equilibrium is struck at E, P and Q is the initial equilibrium price and quantity.

In case of decrease in demand:

a) Demand Curve shift to the left. D₁D₁ is the new demand curve, supply curve remains the same.

b) Quantity demanded will fall to OQ₂ but the supply will remain at OQ. An excess supply (surplus) occurs at the initial price.

c) Competition among consumers and producers causes the price to fall to OP₁.

d) As price falls, the quantity supplied falls (law of supply, contraction of supply) from E towards E₁. Quantity demanded rises (law of demand, extension of demand) from point A towards E₁.

e) The process of extension of demand and contraction of supply continue until two becomes equal, after that there is no more tendency for either price or quantity to change.

Thus, decrease in demand for a commodity causes a decrease in both equilibrium price and equilibrium quantity bought and sold.

Change in Supply and Market Equilibrium

Change in supply has two aspects:

1) Increase in supply - demand curve shift to the right

2) Decrease in supply - demand curve shift to the left

Increase in supply:

Market Equilibrium

In the above diagram, DD and SS are the initial demand and supply curves. Equilibrium is struck at E, P and Q is the initial equilibrium price and quantity.

In case of increase in supply:

a) Supply Curve shift to the right. S₁S₁ is the new supply curve, demand curve remains the same.

b) Quantity supplied will be OQ₁ but the demand will remain at OQ. An excess supply (surplus) occurs at the initial price.

c) Competition among consumers and producers causes the price to fall to OP₁.

d) As price falls, the quantity supplied falls (law of supply, contraction of supply) from A towards E₁. Quantity demanded rises (law of demand, extension of demand) from point E towards E₁.

e) The process of extension of demand and contraction of supply continue until two becomes equal, after that there is no more tendency for either price or quantity to change.

Thus, an increase in supply for a commodity causes a decrease in equilibrium price and increase in equilibrium quantity bought and sold.

Decrease in supply:

Market Equilibrium

In the above diagram, DD and SS are the initial demand and supply curves. Equilibrium is struck at E, P and Q is the initial equilibrium price and quantity.

In case of decrease in supply:

a) Supply Curve shift to the left. S₁S₁is the new supply curve, demand curve remains the same.

b) Quantity supplied falls to OQ₁ but the demand will remain at OQ. An excess demand (shortage) occurs at the initial price.

c) Competition among consumers and producers causes the price to rise to OP₁.

d) As price rises, the quantity supplied rises (law of supply, extension of supply) from A towards E₁. Quantity demanded falls (law of demand, contraction of demand) from point E towards E₁.

e) The process of extension of demand and contraction of supply continue until two becomes equal, after that there is no more tendency for either price or quantity to change.

Thus, decrease in supply for a commodity causes an increase in equilibrium price and decrease in equilibrium quantity bought and sold.