The Effects of Shifts in Demand and Supply on Market Equilibrium

When demand and supply curves intersect, they create market equilibrium. Equilibrium price occurs at the point of intersection between demand and supply curves. Thus, when demand and/or supply curves shift, they alter market prices and by changing the equilibrium position as illustrated in the sections below:

Shift in Demand: Increase in Demand

Shift in demand and equilibrium price

Figure 2.16: Increase in Demand

Consider Figure 2.16 which illustrates the effect of an increase on demand on market equilibrium. An increase in demand is represented by a shift of the demand curve from D1D1 to D2D2. The immediate effect will be shortage and this will force prices to rise leading to increase in quantity supplied until equilibrium is re-established at PE.

Shift in Demand: Decreasing Demand

Decrease in demand and equilibrium price

Fall in demand Consider Figure 2.17 which illustrates the effect of a fall in demand on the market equilibrium. A fall in demand is represented by a shift of demand curve to the left from D1D1 to D2D2. The immediate effect will be a surplus and this will force the producers to lower the price in an attempt to get rid of excess stock. This fall in price will led to decline in quantity supplied until a new equilibrium is established at Pe1; Qe1.

Shift in supply

Increase in supply Consider Figure 2.18 which illustrates the effect of an increase of supply on the market equilibrium. An increase in supply is represented by a shift of supply curve to the right from S1S1 to S2S2. The immediate effect will be surplus and this will force the producer to lower their prices in order to get rid of excess stock. This fall will lead to an increase in quantity demanded from QE to Q1 where a new equilibrium is established at PE1.

Increase in supply and equlibrium

A fall in supply Consider the Figure 2.19 which illustrates the effect of a fall in supply on the market equilibrium. A fall in supply is represented by a shift of supply curve to the left from S1S1 to S2S2. The immediate effect will be shortage and thus will force the prices to go up, leading to a fall in quantity demanded until a new equilibrium is established at Pe1, Qe2.

Decrease in supply and equilibrium price

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