Changes in Equilibrium

• Market equilibrium price and quantity are not fixed forever.
• They change when the demand curve or the supply curve (or both) shifts due to changes in underlying conditions.

Causes of shift in demand

• Demand increases when income rises (for normal goods), tastes improve, price of substitute rises, price of complement falls, etc.
• Demand decreases when income falls (for normal goods), tastes worsen, price of substitute falls, price of complement rises, etc.

Direction of shift

• Increase in demand ⇒ demand curve shifts to the right (upward).
• Decrease in demand ⇒ demand curve shifts to the left (downward).

Graph explanation

• On the X-axis: quantity; on the Y-axis: price.
• DD is the original demand curve and SS is the supply curve. They intersect at point E, giving equilibrium price OP and equilibrium quantity OX.
• When demand increases, the new demand curve is D₁D₁. It lies to the right of DD and cuts the same supply curve SS at a new point E₁.
  i. The new equilibrium price rises from OP to OP₁.
  ii. The new equilibrium quantity rises from OX to OX₁.
• When demand decreases, the demand curve shifts to D₂D₂ (left of DD) and intersects SS at E₂.
  i. The new equilibrium price falls from OP to OP₂.
  ii. The new equilibrium quantity falls from OX to OX₂.

Conclusion for demand shift

If supply remains unchanged, there is a direct relationship between demand and price:
Demand ↑ ⇒ Equilibrium price ↑ and equilibrium quantity ↑.
Demand ↓ ⇒ Equilibrium price ↓ and equilibrium quantity ↓.

Causes of shift in supply

• Supply increases when input costs fall, technology improves, there is favourable weather for agricultural goods, indirect taxes are lower, etc.
• Supply decreases when input costs rise, poor technology, bad weather, higher taxes, etc.

Direction of shift

• Increase in supply ⇒ supply curve shifts to the right (downward).
• Decrease in supply ⇒ supply curve shifts to the left (upward).

Graph explanation

• Demand curve DD and supply curve SS initially intersect at point E. Equilibrium price is OP, and equilibrium quantity is OX.
• When supply increases, the supply curve shifts to S₁S₁ (right of SS). New equilibrium is at E₁.
  i. Equilibrium quantity rises from OX to OX₁.
  ii. Equilibrium price falls from OP to OP₁.
• When supply decreases, the supply curve shifts to S₂S₂ (left of SS). New equilibrium is at E₂.
  i. Equilibrium quantity falls from OX to OX₂.
  ii. Equilibrium price rises from OP to OP₂.

Conclusion for supply shift

If demand remains unchanged, there is an inverse relationship between supply and price:
Supply ↑ ⇒ Equilibrium price ↓, equilibrium quantity ↑.
Supply ↓ ⇒ Equilibrium price ↑, equilibrium quantity ↓.

• Increase in demand:
  During festivals, demand for sweets and clothes rises even if supply is the same. Shops often raise prices and still sell more units; both price and quantity sold increase.
• Increase in supply:
  After a bumper harvest of wheat, supply in the market increases. Even if people’s demand is the same, wheat prices usually fall and more wheat is sold overall.

• Equilibrium price and quantity change whenever demand or supply curves shift.
• A rightward shift of demand or supply shows an increase; a leftward shift shows a decrease.
• With supply fixed, demand and price move in the same direction (direct relation).
• With demand fixed, supply and price move in the opposite direction (inverse relation).
• Diagrams must show original curves (DD, SS), new curves (D₁D₁, D₂D₂, S₁S₁, S₂S₂), and old/new equilibrium points (E, E₁, E₂) with corresponding prices and quantities.​