So now that we know how the market will act when it’s undisturbed, let’s start mixing things up a bit and find out what happens when things start to change. For example, what if something causes demand to change? Or supply to change? Or both? This is where graphical analysis really becomes useful.
[break]
Changes in Demand (Increase)
Suppose we’re at market equilibrium, when there’s a sudden increase in demand while supply stays constant.

Let’s walk through this step by step.

Increase in Demand

1) Demand increases. At this point, nothing else has changed yet so that increase in demand will create a shortage.

2) The shortage will cause consumers to bid up the market price, which will cause the quantity demanded to fall and the quantity supplied to rise. This will continue to happen until we hit our new equilibrium point.

3) The end result is that we now have a higher equilibrium price and a higher equilibrium quantity.
[break]
Changes in Demand (Decrease)
The exact opposite happens if there is a decrease in demand if supply remains constant.

Decrease in Demand

1) Demand decreases. This creates a surplus in the market.

2) Producers notice the surplus building up in their inventories and begin cutting their prices. As the market price falls, the quantity supplied falls with it while the quantity demand rises. This will continue to happen until we hit our new equilibrium point.

3) The end result is that we now have a lower equilibrium price and a lower equilibrium quantity.
[break]
Changes in Supply (Increase)
Suppose we’re at market equilibrium when there’s a sudden increase in supply while demand stays constant.

Again, we’ll go through this step by step.

Increase in Supply

1) Supply increases. At this point, nothing else has changed yet so the sudden increase in supply creates a surplus.

2) This will prompt producers to start lowering their prices so they can get rid of the surplus. As the market price goes down, the quantity supplied will decrease while the quantity demanded will increase. This will happen until we hit our new equilibrium.

3) The end result is that we now have a lower equilibrium price, but a higher equilibrium quantity.
[break]
Changes in Supply (Decrease)
The opposite end result will occur if supply decreased instead while demand stays constant.

Decrease in Supply

1) Supply decreases, creating a shortage.

2) Consumers respond to the shortage by bidding up the market price. As the market price goes up, the quantity demanded falls while the quantity supplied rises. This will continue to happen until we hit our new equilibrium point.

3) The end result is that we now have a higher equilibrium price and a lower equilibrium quantity.
[break]
Recap (tl;dr)
There were a lot of words and graphs up there. Here’s what you needed to get out of it.

-If demand increases while supply stays constant, the equilibrium price and quantity will go up.

-If demand decreases while supply stays constant, the equilibrium price and quantity will go down.

-If supply increases while demand stays constant, the equilibrium price will go down while the equilibrium quantity will go up.

-If supply decreases while demand stays constant, the equilibrium price will go up while the equilibrium quantity will go down.
[break]
Reference
McConnell, Campbell R., Stanley L. Brue, and Sean Masaki. Flynn. Macroeconomics: Principles, Problems, and Policies. Boston: McGraw-Hill Irwin, 2009. Print.
[break]
Next economics post: Market Equilibrium: Complex Cases
Previous economics post: Market Equilibrium: Putting Demand and Supply Together

Disclaimer

All works here are my own and are considered works in progress and may be subject to change at any time. The opinions expressed here are mine only unless otherwise noted. I am not being paid by a third party to endorse a product of any sort. These writings are written for my own references. I do not claim to be a professional of any kind so follow any information you find here at your own risk. The facts that I post on here are things that I believe to be true, but may not necessarily be so. This is the internet; do your own fact checking and take everything with a grain of salt.

Comments are closed.