Written by The equilibrium price and quantity of a good or service are determined by the intersection of the supply and demand curves in a market.
The supply curve shows the relationship between the price and the quantity supplied by producers, while the demand curve shows the relationship between the price and the quantity demanded by consumers.
There are two types of changes in demand that can affect the equilibrium point: an increase in demand and a decrease in demand.
An increase in demand means that consumers are willing and able to buy more of the good or service at any given price, causing the demand curve to shift to the right.
A decrease in demand means that consumers are willing and able to buy less of the good or service at any given price, causing the demand curve to shift to the left.
There are also two types of changes in supply that can affect the equilibrium point: an increase in supply and a decrease in supply.
An increase in supply means that producers are willing and able to offer more of the good or service at any given price, causing the supply curve to shift to the right.
A decrease in supply means that producers are willing and able to offer less of the good or service at any given price, causing the supply curve to shift to the left.
When either the supply or the demand curve shifts, the equilibrium price and quantity will also change.
Let’s now look at the effect of changes in demand and/or changes in supply on equilibrium price and quantity.
1. Increase in demand while supply remains constant
An increase in demand shifts the demand curve from D1 to D2, resulting in a higher equilibrium price (P2) and a higher equilibrium quantity (12).
The reason is that an increase in demand will cause the quantity demanded to exceed the quantity supplied, which will result in a shortage.
The shortage will cause prices to increase, as buyers will compete for the limited supply.
Therefore, an increase in demand will result in a higher equilibrium price and a higher equilibrium quantity.
2. Decrease in demand while supply remains constant
A decrease in demand, while supply remains constant, will cause the quantity supplied to exceed the quantity demanded so that there is a surplus.
The surplus will cause prices to fall, as sellers will compete to clear their excess inventory.
Therefore, a decrease in demand will result in a lower equilibrium price(P1) and a lower equilibrium quantity (8).
An example of this is when there is a decrease in consumer income. This will result in a decrease in demand while supply is unaffected.
3. Increase in supply while demand remains constant
An increase in supply shifts the supply curve from S1 to S2, resulting in a lower equilibrium price (P2) and a higher equilibrium quantity (12).
For example, when there is a sudden increase in the supply of apples due to a bumper harvest.
The demand for apples will remain constant, as it does not change much with the season.
So, this will cause the price of apples to fall, as there is a surplus of supply.
4. Decrease in supply while demand remains constant
A decrease in supply shifts the supply curve from S1 to S2, resulting in a higher equilibrium price (P5) and a lower equilibrium quantity (8).
The reason is that a decrease in supply while demand remains constant will cause the quantity demanded to exceed the quantity supplied so there is a shortage.
The shortage will cause prices to increase, as buyers will compete for the limited supply.
Therefore, a decrease in supply will result in a higher equilibrium price and a lower equilibrium quantity.
5. Demand rises and supply falls by an equal amount
If the increase in demand equals the decrease in supply, the equilibrium price will increase while the equilibrium quantity stays the same.
The reason is not farfetched. An equal shift in both demand and supply curves will cause both curves to move along the same horizontal line at the original equilibrium quantity (Q1).
The new intersection point will be at a higher vertical line than the original one, indicating a higher equilibrium price (P2).
6. Demand falls, and supply rises by an equal amount
If a decrease in demand equals an increase in supply, the equilibrium price will decrease while the equilibrium quantity stays the same.
7. Demand rises by a greater amount than supply falls
A larger shift in the demand curve than the fall in the supply curve will cause the demand curve to move further to the right than the supply curve moves to the left.
The new intersection point will be at a higher horizontal line and a higher vertical line than the original one, indicating a higher equilibrium price (P2) and a higher equilibrium quantity (12).
So, when demand increases by a larger amount than supply decreases, both equilibrium price and quantity rise.
8. Demand rises by a smaller amount than supply falls
When demand rises by a lesser amount than supply falls, the equilibrium price rises while the equilibrium quantity falls.
The reason for this is simple. When demand rises by a smaller amount than supply falls, it will result in a smaller shift in the demand curve than the supply curve.
The result is that the demand curve will move less to the right than the supply curve moves to the left.
The new intersection point will be at a higher vertical line but a lower horizontal line than the original one, indicating a higher equilibrium price (P2) and a lower equilibrium quantity (7).
Conclusion
To summarize,
- An increase in demand while supply remains constant will result in a higher equilibrium price and a higher equilibrium quantity, as buyers will compete for the limited supply.
- A decrease in demand, while supply remains constant, will result in a lower equilibrium price and a lower equilibrium quantity, as sellers will compete to clear their excess inventory.
- An increase in supply, while demand remains constant, will result in a lower equilibrium price and a higher equilibrium quantity, as sellers will compete to clear their excess inventory.
- A decrease in supply while demand remains constant will result in a higher equilibrium price and a lower equilibrium quantity, as buyers will compete for the limited supply.
- When demand rises and supply falls by an equal amount, the equilibrium price will increase while the equilibrium quantity stays the same.
- When demand falls and supply rises by an equal amount, the equilibrium price will increase while the equilibrium quantity stays the same.
- When demand increases by a larger amount than supply decreases, both equilibrium price and quantity rise.
- When demand rises by a lesser amount than supply falls, the equilibrium price rises while the equilibrium quantity falls.
