Market Equilibrium and Shifts in Supply and Demand
Understand how buyers and sellers interact to determine market equilibrium, and how demand and supply changes affect equilibrium price and quantity.
and
and describe plans across a range of prices, with other things held constant. A curve usually slopes downward: when a good’s own price falls, buyers typically more, and when it rises, they less. A curve usually slopes upward because a higher price typically encourages sellers to offer more.
A curve represents the entire relationship between price and quantity. By contrast, and refer to particular quantities at a given price.
Finding
occurs where the amount buyers plan to purchase equals the amount sellers plan to sell. On a graph, it is the intersection of the curve, labeled , and the curve, labeled . The intersection’s vertical coordinate is the , and its horizontal coordinate is the .
To read the graph, locate the intersection , trace horizontally to the price axis to identify , and trace vertically to the quantity axis to identify . For example, if the curves intersect at a price of and a quantity of , those are the market’s and quantity in the units shown on the axes.
At a price above equilibrium, exceeds , creating a . At a price below equilibrium, exceeds , creating a .
Movements and shifts
A happens when the good’s own price changes, changing or while the curve stays in place. A happens when a non-price factor changes the quantity buyers or sellers plan at every given price.
A change in or shifts the affected curve; it does not by itself shift the other curve. Instead, the shift changes equilibrium and causes movement along the curve that did not shift.
Common causes and directions of shifts include:
increases when popularity rises, there are more buyers, income rises for a normal good, or the price of a substitute rises. then shifts right.
decreases when popularity falls, there are fewer buyers, income falls for a normal good, or the price of a substitute falls. then shifts left.
increases when input costs fall, technology improves, or production conditions become more favorable. then shifts right.
decreases when input costs rise or production conditions become less favorable, such as during a drought. then shifts left.
Effects of a single shift
Under the usual assumptions of downward-sloping and upward-sloping , the direction of both equilibrium outcomes is predictable when one curve shifts:
If shifts right, and quantity rise.
If shifts left, and quantity fall.
If shifts right, falls and quantity rises.
If shifts left, rises and quantity falls.
For example, if steel becomes more expensive to produce cars, car shifts left. The new intersection with has a higher and a lower . If consumer interest in cars increases instead, shifts right, producing a higher and quantity.
A method for analyzing a market change
Identify the event and decide whether it affects buyers, sellers, or both.
Determine whether each affected curve shifts left, indicating a decrease, or right, indicating an increase. A change in the good’s own price is not a curve shift.
Draw or imagine the new curve and find its intersection with the curve that did not shift, or with both new curves if both shift.
Compare the new equilibrium with the original and state how price and quantity change.
Simultaneous shifts and uncertain outcomes
When and shift at the same time, consider the effect on price and quantity separately. If the shifts push an outcome in opposite directions, shift directions alone are not enough to determine the result; it depends on the relative sizes of the shifts.
and both shift right: increases, while the price change is ambiguous.
and both shift left: decreases, while the price change is ambiguous.
shifts right while shifts left: increases, while the quantity change is ambiguous.
shifts left while shifts right: decreases, while the quantity change is ambiguous.
For example, when and both increase, greater tends to raise price while greater tends to lower it. Without knowing which shift is larger, the net price change is uncertain, although both shifts increase . When rises while falls, both changes push price upward, but they have opposing effects on quantity, so the net quantity change is uncertain. A diagram can show the result by displaying both shifts, marking the new intersection, and comparing its coordinates with the original equilibrium.