The lesson about the law of supply and demand, Study notes of Economics

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THE EFFECTS OF CHANGES

IN DEMAND AND SUPPLY

ON EQUILIBRIUM PRICE

AND QUANTITY

A. CHANGE IN DEMAND A decrease in demand (shifting) will cause a reduction in the equilibrium price and quantity of a good.

An increase in demand (shifting) A. CHANGE IN DEMAND will cause an increase in the equilibrium price and quantity of a good.

• The increase in demand causes excess demand to develop at the initial price.
• Excess demand will cause the price to rise, and as price rises producers are willing to sell more, thereby increasing quantity.

An increase in supply(shifting) B. CHANGE IN SUPPLY will cause a reduction in the equilibrium price and an increase in the equilibrium quantity of a good.

• The increase in supply creates an excess supply at the initial price.
• Excess supply causes the price to fall and quantity demanded to increase.

• The decrease in supply creates an excess demand at the initial price.
• Excess demand causes the price to rise and quantity demanded to decrease.

A change in supply will cause

equilibrium quantity to change in

same directions but will cause

equilibrium price to change in

opposite directions.

EFFECT OF CHANGES IN SUPPLY

For any quantity, consumers now place a

lower value on the good, and producers are

willing to accept a lower price; therefore,

price will fall. The effect on output will

depend on the relative size of the two

changes.

An increase in demand and a decrease in supply(shifting) C. CHANGES IN DEMAND AND SUPPLY will cause an increase in equilibrium price, but the effect on equilibrium quantity cannot be determined.

If demand and supply change in opposite directions, then the change in the equilibrium price can be determined, but the change in the equilibrium quantity cannot. EFFECT OF OPPOSITE CHANGES IN SUPPLY AND DEMAND

If both demand and supply increase(shifting) C. CHANGES IN DEMAND AND SUPPLY If both demand and supply increase, there will be an increase in the equilibrium quantity, but the effect on price cannot be determined.

If both demand and supply decrease(shifting) C. CHANGES IN DEMAND AND SUPPLY there will be a decrease in the equilibrium quantity, but the effect on price cannot be determined.

If both demand and supply decrease,

consumers wish to buy less and firms wish to

supply less, so output will fall. However, since

consumers place a lower value on each unit,

but producers are willing to supply each unit

only at higher prices, the effect on price will

depend on the relative size of the two changes.