Effect of Shift in Demand and Supply on The Equilibrium Price:  

       The market is said to be in equilibrium when the price of a good or service becomes constant. At this point the price of the good or service is called equilibrium price and the quantity supplied by the suppliers is equilibrium quantity.

     Equilibrium price is the price at which the quantity demanded by consumers is equal to the quantity supplied by the suppliers. 

    At equilibrium, the market is stable, means when a market is at its equilibrium price and quantity, then it has no reason to move away from that point, because it is balancing the quantity supplied and the quantity demanded. However, if a market is not at equilibrium, then economic pressure arise to move the market towards the equilibrium price and equilibrium quantity.

       Changing market forces may disturb the equilibrium, either by shifting demand, shifting supply or shifting both demand and supply. Any factors that causes a change in demand, shifts the demand curve towards left or right and initial equilibrium point changes its position.

    Similarly, any increase or decrease in supply also brings changes to the equilibrium points. Thus, there is a strong relationship between demand, supply and their effect on market equilibrium.

  

Effect of Change in Demand Only: 

Case 1 : When Market Demand Increases with Market Supply being Constant:

     When supply remain constant, a change in demand i.e., shift in demand curve will result in change in equilibrium price and quantity.

       An increase in income of the buyers and an increase in population shift the demand curve to the right representing an increase in demand.

    In such a situation, there will be a rise in price and quantity at the new equilibrium point.

   

Effect of Rightward Shift of Demand Curve on Equilibrium Price and Quantity

  In the given figure, D0D0 and SS are the initial demand and supply curve, E0 is the initial equilibrium point and OP0 is the initial equilibrium price and OQ0 is initial equilibrium quantity. 

     When there is an increase in demand, the demand curve shifts rightward from D0D0 to D1D1, quantity demanded at initial price OP0 will  become OQ3 while the quantity supplied is still OQ0.

     Thus, there is an excess demand, this will cause the price to rise, until it reaches OP1 where the quantity demanded and quantity supplied will be equal to each other.

    Therefore, a new equilibrium point arises at which there is no more tendency for price or the quantity to change.

   So it is concluded that when there is an increase in demand assuming supply remains constant the price and quantity both increase.

 The Four Steps, in case of increase in demand:

     1. Demand curve D0D0 shifts to the right at D1D1.

     2. At initial price OP0 , quantity demanded becomes OQ3 , there is an excess demand.

     3. Competition among consumers and producers causes the price to rise at OP1.

     4. At higher price the quantity supplied rises and the quantity demanded decreases until the two becomes equal. There is no further change in price and quantity at E1. 

Case 2 : When Market demand decreases with market supply being constant: 

     When there is a decrease in income of consumers, any inverse effect of taste and preferences, fall in the size of population and due to natural causes then there may be a reduction in the demand for a commodity.

    The decrease in demand result in a leftward shift in demand curve.

   In this situation, the equilibrium price of the commodity as well as equilibrium quantity will decrease at a new equilibrium point.

    

    In the given figure, E0 is the initial equilibrium as an interaction of initial demand and supply curve D0D0  and SS respectively.

    The initial equilibrium price OP0 and quantity OQ0.

   When there is decrease in demand for the product represented by leftward shift in the demand curve from D0D0 to D2D2 the new equilibrium point E2 establishes at the new equilibrium price OP2 and equilibrium quantity OQ2. 

   Thus, it is concluded that the decrease in demand while supply remains constant will reduce both equilibrium price as well as equilibrium quantity in the market.

   The Four Steps in case of Decrease in Demand:

   1. Demand curve D0D0 shifts to left at D2D2.

   2. At initial price the quantity demanded is lowered while quantity supplied remains the same, there occurs an excess supply.

   3. Competition among consumers and sellers causes the price to fall to OP2. 

   4. As price falls, the quantity supplied decreases and the quantity demanded increased until the two become equal. There is no further change in price and quantity at point E2.

Effect of Change in Supply on Equilibrium Price and Equilibrium Quantity :

   Question : How is the equilibrium Price of a commodity affected by change in its supply ?

Case 3 : When Market Supply Increases with Market Demand being Constant: 

           If there is an increase in the number of suppliers, a decrease in the price of the related goods, a decrease in the price of factor inputs, a decrease in government taxation and an increase in production subsidies, the supply will increase.

     This brings a rightward shift in the supply curve.

     In this situation, there will be a fall in price and a rise in quantity at a new equilibrium point.

Effect of Increase in Supply on Market Equilibrium with demand being constant 

   In the given figure, E0 is the initial equilibrium obtained by the interaction between DD and S0S0 ; demand and supply curves. While OP0 is initial price and OQ0 is initial equilibrium quantity.

    When supply is increased S0S0 curve shifts rightward to form S1S1.

     At initial price OP0, quantity supplied becomes OQ3 while quantity demanded is still OQ0. Thus there is an excess supply which is 

 excess supply = OQ3 – OQ0 

      = Q0Q3 

    This excess supply leads to the fall in price, as the sellers tend to clear surplus stock.

    Therefore the price falls to reach at OP1 where the quantity supplied is reduced and quantity demanded is increased until they both become equal. Thus equilibrium price will fall and equilibrium quantity will increase when the supply is increased.

Case 4 :   When Market Supply is Decreased with Market demand  being Constant 

   Question : Show with the help of diagrams, the effects on equilibrium price and quantity when:

    1. There is a fall in price of substitute goods 

    2. There is a rise in the prices of factor input.

Answer:  

         1. Effect on Equilibrium Price and Quantity when there is fall in Price of Substitute Goods :

     Since the price of substitute good is proportional to the demand of the commodity. The fall in the price of substitute good will lead to decrease in demand of the commodity.

Effect of decrease in Demand while Supply being constant 

             In the given diagram the decrease in demand will shift the demand curve towards the left i.e., from D0D0 to D1D1.

    At initial price OP0 the quantity demanded will become OQ2 while the quantity supplied is still OQ0. Thus there is an excess supply.

   Due to the competition among the consumers and sellers, excess supply leads to rise equilibrium price and thus the equilibrium quantity will decreased to become OQ1.

   2. Effect on equilibrium Price and Quantity when there is a rise in the prices of input :

    When there is rise in the prices of input, the cost of production also rise. So at initial price the supply is decreased. 

Effect of decrease in Supply while Demand being constant

   In the given diagram, DD and S0S0 are demand curve and initial supply curve. E0 is initial equilibrium point at OP0 is equilibrium price and OQ0 equilibrium quantity.

     When supply is decreased, supply curve S0S0 shifts leftward to form a new supply curve S1S1.

    At initial price OP0, quantity supplied becomes OQ2 thus there is ab excess demand at quantity demanded is decreased is still OQ0.

    The excess demand leads to rise in price to OP1, at which quantity demanded and quantity supplied becomes equal. So the equilibrium price rises and equilibrium quantity falls when there is decrease in supply.

       Effect of Simultaneous Change (Shift) in Demand and Supply :

   1. When Equilibrium Price Remains the Same :

     

     Effect of Change in Demand and Supply both in equal magnitude 

     When demand and supply both increases in equal magnitude, or in same proportion, equilibrium price remains the same but equilibrium quantity increases.

    In the given diagram, DD and SS are the initial demand and supply curves. E is initial equilibrium point, while OP is equilibrium price and OQ is quantity.

    An increase in demand causes shift of DD curve to D1D1 curve and supply shifts from SS to S1S1. The equilibrium point shifts to E1 which is the point of intersection  of D1D1 and S1S1.

      Since the shift of demand and supply curve is in equal proportion equilibrium quantity increases from OQ to OQ1, but price remains unchanged at OP.

2. When Equilibrium Price Rises:

3. When Equilibrium Price Falls:

Read more:

  # Equilibrium Price and Quantity in Competitive Market 

 # Some Special Cases of Equilibrium

  # Importance of Time Element

  #Maximum Price Legislation Vs. Minimum Price Legislation