Effect of Shifts in Demand and Supply on Equilibrium

In a competitive market the equilibrium price and equilibrium quantity are settled where the demand curve DD and the supply curve SS intersect. A change in any factor other than the price of the good itself shifts one of these curves and moves the equilibrium to a new point. It is important to distinguish a shift of a curve (the whole curve moves, caused by a change in a non-price determinant) from a movement along a curve (caused only by a change in the good's own price).

A. Change in demand (supply unchanged).

• An increase in demand (rightward shift of DD — e.g. a rise in income, or the good becoming fashionable) raises both equilibrium price and equilibrium quantity.
• A decrease in demand (leftward shift) lowers both equilibrium price and quantity.

B. Change in supply (demand unchanged).

• An increase in supply (rightward shift of SS — e.g. a good harvest or lower input cost) lowers price but raises quantity.
• A decrease in supply (leftward shift) raises price but lowers quantity.

C. Simultaneous shifts in demand and supply. When both curves move together, the direction of one of the two — price or quantity — is definite while the other depends on the relative size of the two shifts.