Equilibrium occurs when the intentions of demanders and suppliers exactly match. Once a market reaches equilibrium, that price and quantity prevail until something happens to demand or supply. A change in any determinant of demand or supply usually changes equilibrium price and quantity in a predictable way, as you’ll see.
Shifts of the Demand Curve
In Exhibit 6, demand curve D and supply curve S intersect at point c to yield the initial equilibrium price of $9 and the initial equilibrium quantity of 20 million 12-inch regular pizzas per week. Now suppose that one of the determinants of demand changes in a way that increases demand, shifting the demand curve to the right from D to D9. Any of the following could shift the demand for pizza rightward: (1) an increase in the money income of consumers (because pizza is a normal good); (2) an increase in the price of a substitute, such as tacos, or a decrease in the price of a complement, such as Pepsi (3) a change in consumer expectations that causes people to demand more pizzas now; (4) a growth in the number of pizza consumers; or (5) a change in consumer tastes based, for example, on a discovery that the tomato sauce on pizza has antioxidant properties that improve overall health. After the demand curve shifts rightward to D′ in Exhibit 6, the amount demanded at the initial price of $9 is 30 million pizzas, which exceeds the amount supplied of 2
Shifts of the Demand Curve
In Exhibit 6, demand curve D and supply curve S intersect at point c to yield the initial equilibrium price of $9 and the initial equilibrium quantity of 20 million 12-inch regular pizzas per week. Now suppose that one of the determinants of demand changes in a way that increases demand, shifting the demand curve to the right from D to D9. Any of the following could shift the demand for pizza rightward: (1) an increase in the money income of consumers (because pizza is a normal good); (2) an increase in the price of a substitute, such as tacos, or a decrease in the price of a complement, such as Pepsi (3) a change in consumer expectations that causes people to demand more pizzas now; (4) a growth in the number of pizza consumers; or (5) a change in consumer tastes based, for example, on a discovery that the tomato sauce on pizza has antioxidant properties that improve overall health. After the demand curve shifts rightward to D′ in Exhibit 6, the amount demanded at the initial price of $9 is 30 million pizzas, which exceeds the amount supplied of 2
million by 10 million pizzas. Competition among consumers for the limited quantity supplied puts upward pressure on the price. As the price increases, the quantity demanded decreases along the new demand curve D′, and the quantity supplied increases along the existing supply curve S until the two quantities are equal once again at equilibrium point g. The new equilibrium price is $12, and the new equilibrium quantity is 24 million pizzas per week. Thus, given an upward-sloping supply curve, an increase in demand increases both equilibrium price and quantity. A decrease in demand would initially create a surplus. Competition among producers to sell pizzas would lower both equilibrium price and quantity. These results can be summarized as follows: Given an upward-sloping supply curve, a rightward shift of the demand curve increases both equilibrium price and quantity and a leftward shift decreases both equilibrium price and quantity
S hifts of the Supply Curve
Let’s now consider shifts of the supply curve. In Exhibit 7, as before, we begin with demand curve D and supply curve S intersecting at point c to yield an equilibrium price of $9 and an equilibrium quantity of 20 million pizzas per week. Suppose one of the determinants of supply changes, increasing supply from S to S9. Changes that could
S hifts of the Supply Curve
Let’s now consider shifts of the supply curve. In Exhibit 7, as before, we begin with demand curve D and supply curve S intersecting at point c to yield an equilibrium price of $9 and an equilibrium quantity of 20 million pizzas per week. Suppose one of the determinants of supply changes, increasing supply from S to S9. Changes that could
shift the supply curve rightward include (1) a technological breakthrough in pizza ovens; (2) a reduction in the price of a resource such as mozzarella cheese; (3) a decline in the price of another good such as Italian bread; (4) a change in expectations that encourages pizza makers to expand production now; or (5) an increase in the number of pizzerias. After the supply curve shifts rightward in Exhibit 7, the amount supplied at the initial price of $9 increases from 20 million to 30 million, so producers now supply 10 million more pizzas than consumers demand. Pizza makers compete to sell the surplus by lowering the price. As the price falls, the quantity supplied declines along the new supply curve and the quantity demanded increases along the existing demand curve until a new equilibrium point d is established. The new equilibrium price is $6, and the new equilibrium quantity is 26 million pizzas per week. In short, an increase in supply reduces the price and increases the quantity. On the other hand, a decrease in supply increases the price but decreases the quantity. Thus, given a downward-sloping demand curve, a rightward shift of the supply curve decreases price but increases quantity, and a leftward shift increases price but decreases quantity.
simultaneous Shifts of Demand and Supply Curves
As long as only one curve shifts, we can say for sure how equilibrium price and quantity will change. If both curves shift, however, the outcome is less obvious. For example, suppose both demand and supply increase, or shift rightward, as in Exhibit 8. Note that in panel (a), demand shifts more than supply, and in panel (b), supply shifts more than demand. In both panels, equilibrium quantity increases. The change in equilibrium price, however, depends on which curve shifts more. If demand shifts more, as in panel (a), equilibrium price increases. For example, between 1995 and 2005, the demand for housing increased more than the supply, so both price and quantity increased. But if supply shifts more, as in panel (b), equilibrium price decreases. For example, in the last decade, the supply of personal computers has increased more than the demand, so price has decreased and quantity increased.
simultaneous Shifts of Demand and Supply Curves
As long as only one curve shifts, we can say for sure how equilibrium price and quantity will change. If both curves shift, however, the outcome is less obvious. For example, suppose both demand and supply increase, or shift rightward, as in Exhibit 8. Note that in panel (a), demand shifts more than supply, and in panel (b), supply shifts more than demand. In both panels, equilibrium quantity increases. The change in equilibrium price, however, depends on which curve shifts more. If demand shifts more, as in panel (a), equilibrium price increases. For example, between 1995 and 2005, the demand for housing increased more than the supply, so both price and quantity increased. But if supply shifts more, as in panel (b), equilibrium price decreases. For example, in the last decade, the supply of personal computers has increased more than the demand, so price has decreased and quantity increased.
Conversely, if both demand and supply decrease, or shift leftward, equilibrium quantity decreases. But, again, we cannot say what will happen to equilibrium price unless we examine relative shifts. (You can use Exhibit 8 to consider decreases in demand and supply by viewing D9 and S9 as the initial curves.) If demand shifts more, the price will fall. If supply shifts more, the price will rise.
If demand and supply shift in opposite directions, we can say what will happen to equilibrium price. Equilibrium price will increase if demand increases and supply decreases. Equilibrium price will decrease if demand decreases and supply increases. Without reference to particular shifts, however, we cannot say what will happen to equilibrium quantity. These results are no doubt confusing, but Exhibit 9 summarizes the four possible combinations of changes. Using Exhibit 9 as a reference, please take the time right now to work through some changes in demand and supply to develop a feel for the results. An online case study at www.cengagebrain.com evaluates changes in the market for professional basketball.
If demand and supply shift in opposite directions, we can say what will happen to equilibrium price. Equilibrium price will increase if demand increases and supply decreases. Equilibrium price will decrease if demand decreases and supply increases. Without reference to particular shifts, however, we cannot say what will happen to equilibrium quantity. These results are no doubt confusing, but Exhibit 9 summarizes the four possible combinations of changes. Using Exhibit 9 as a reference, please take the time right now to work through some changes in demand and supply to develop a feel for the results. An online case study at www.cengagebrain.com evaluates changes in the market for professional basketball.
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