Changes in demand and supply

The equilibrium price remains constant only if all other things influencing demand and supply remain constant. But, if there is a change in these factors, the effect of these changes would increase, decrease or leave the equilibrium price unaffected. The effect of these changes can be studied in the following 3 categories:
• Changes in demand
• Increase in demand
• Decrease in demand
• Changes in supply
• Increase in supply
• Decrease in supply
Simultaneous changes in demand and supply

Changes in demand

Changes in demand take place due to changes in price of related goods, income, consumers’ tastes and preferences, etc. To study the changes in demand, we assume that the supply curve remains constant and only the demand increases or decreases.

Increase in demand

This is when the demand curve increases (shifts to the right), supply curve remaining constant. If there is a rise in the price of a substitute good, the demand curve will shift to the right. Thus, the demand curve shifts from D to D’ with the supply curve remaining constant. We notice that the equilibrium price also increases from P to P’.

This is because, when the demand increases, the supply is short of the demand and hence, the price will go up to OP’. With the rise in price, supply will also go up and the new equilibrium would be reached at point E’. At this point, OP’ is the price and OQ’ is the quantity demanded and supplied.

Thus, as the demand curve shifts to the right i.e. demand increases, supply being constant, the equilibrium price and quantity also increases.

Note the distinction between changes in quantity demanded and change in demand. Changes in quantity demanded occur only when there is a change in the price. Thus, the change in the price-quantity schedule brings movements on the demand curve, whereas the changes in the other determinants (namely income, tastes, prices of substitutes, etc.) shift the demand curve as a whole.

Decrease in demand

This is a case when the demand curve decreases (shifts to the left), supply curve remaining constant. If there is a fall in the price of a substitute good, the demand curve will shift to the left. Thus, the demand curve shifts from D to D” with the supply curve remaining constant. We notice that the equilibrium price decreases to P” from P.

This is because, as the demand decreases, the supply is greater than demand and hence, the price falls from OP to OP”. With the fall in price, supply will also fall from OQ to OQ” and the new equilibrium would be reached at point E”. At this point, OP” is the price and OQ” is the quantity demanded and supplied.

Thus, as the demand curve shifts to the left i.e. demand decreases, supply being constant, the equilibrium price and quantity also decrease.

Changes in supply

Changes in supply take place due to changes in cost of production, technique of production, etc. To study the changes in supply, we assume that the supply curve increases or decreases while the demand curve remains constant.

Increase in supply

This is when the supply curve increases (shifts to the right), demand curve remaining constant. If there is a fall in the price of a related good, the supply curve will shift to the right i.e., there will be an increase in supply. Thus, the supply curve shifts from S to S’ with the demand curve remaining constant. We notice that the equilibrium price decreases from P to P’.

This is because, when the supply increases, the supply is greater than demand and hence, the price falls from OP to OP’. With the fall in price, demand will increase from Q to Q’ and the new equilibrium would be reached at point E’. At this point, OP’ is the price and OQ’ is the quantity demanded and supplied.

Thus, as the supply curve shifts to the right i.e. supply increases, demand being constant, the equilibrium price decreases but the quantity increases.

Decrease in supply

This is when the supply curve decreases (shifts to the left), demand curve remaining constant. If there is a rise in the price of a related good, the supply curve will shift to the left i.e., there will be a decrease in supply. Thus, the supply curve shifts from S to S” with the demand curve remaining constant. We notice that the equilibrium price increases from P to P”.

This is because, when the supply decreases, the supply is short of the demand and hence, the price rises from OP to OP”. With the rise in price, demand will decrease from Q to Q” and the new equilibrium would be reached at point E”. At this point, OP” is the price and OQ” is the quantity demanded and supplied.

Thus, as the supply curve shifts to the left or decreases, demand being constant, the equilibrium price increases but the quantity decreases.  