Change In Equilibrium Price Due To Shift In Demand

The concept of equilibrium price is a fundamental aspect of economics. It represents the price at which the quantity of goods supplied equals the quantity demanded. When there is a shift in demand, the equilibrium price is directly affected, leading to significant changes in the market. This article explores how shifts in demand can alter the equilibrium price, providing a comprehensive understanding of the underlying economic principles.

Understanding Demand and Equilibrium Price

• Demand : The quantity of a good or service that consumers can purchase at various prices.
• Supply : The quantity of a good or service that producers can offer for sale at various prices.
• Equilibrium Price : The price at which the quantity demanded by consumers equals the quantity supplied by producers.

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Factors of Change In Equilibrium Price

1. Changes in Consumer Preferences : If consumers develop a preference for a particular good, the demand will increase, shifting the demand curve to the right.
2. Income Levels : An increase in consumer income typically leads to higher demand for goods and services, while a decrease in income reduces demand.
3. Price of Related Goods : The demand for a good can be influenced by the price of related goods, such as substitutes and complements. For instance, an increase in the price of a substitute good can increase the demand for the original good.
4. Expectations of Future Prices : If consumers expect prices to rise, they will likely increase their current demand, shifting the demand curve to the right.
5. Population Changes : An increase in population size can lead to higher demand for goods and services, while a decrease in population can reduce demand.

What is Demand and Demand Curve?

Impact of an Increase in Demand on Equilibrium Price

1. Higher Equilibrium Price : With the demand curve shifting to the right, the quantity demanded at the original equilibrium price exceeds the quantity supplied. This excess demand drives the price, leading to a new, higher equilibrium price.
2. Increased Quantity Supplied : As the price increases, producers are incentivised to supply more of the good, increasing the quantity supplied.
3. New Market Equilibrium : The market reaches a new equilibrium at the intersection of the new demand curve and the original supply curve, resulting in a higher equilibrium price and quantity.

Impact of a Decrease in Demand on Equilibrium Price

1. Lower Equilibrium Price : With the demand curve shifting to the left, the quantity demanded at the original equilibrium price falls below the quantity supplied. This excess supply decreases prices, leading to a new, lower equilibrium price.
2. Decreased Quantity Supplied : As the price decreases, producers are less willing to supply the good, decreasing the quantity supplied.
3. New Market Equilibrium : The market reaches a new equilibrium at the intersection of the new demand curve and the original supply curve, resulting in a lower equilibrium price and quantity.

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Real-World Examples

• Technology Products : The demand for smartphones increases with new features and advancements. When a popular brand releases a new model, the demand for that model shifts to the right, leading to a higher equilibrium price.
• Seasonal Goods : The demand for winter clothing increases during the colder months, shifting the demand curve to the right and raising the equilibrium price. Conversely, the demand for these goods decreases during warmer months, leading to a lower equilibrium price.
• Health Crises : During a health crisis, such as the COVID-19 pandemic, the demand for medical supplies and personal protective equipment surged, shifting the demand curve to the right and resulting in higher equilibrium prices.

Factors that affect the demand and the demand curve

• Price of the Product : The most significant factor affecting demand is the product's price. As price changes, the quantity demanded changes, resulting in movements along the demand curve.
• Consumer Income : Higher incomes generally increase demand for normal goods, while lower incomes may increase demand for inferior goods.
• Consumer Preferences and Tastes : Consumer preferences and tastes changes can drastically affect demand for certain products, regardless of price.
• Prices of Related Goods : The demand for a product can be influenced by the prices of substitute goods (goods that can be used in place of each other) and complementary goods (goods used together).
• Consumer Expectations : Anticipations about future prices, incomes, or economic conditions can influence current demand.
• Population and Demographics : Changes in population size, age distribution, and demographic factors can impact demand for various goods and services.

Change in Demand vs Change in Quantity Demanded

Shift in Demand Curve

Supply Curve

Equilibrium Price

1. Outline the initial market model with supply and demand curves.
2. Identify whether an economic event affects supply or demand.
3. Illustrate the shift of the relevant curve (supply or demand).
4. Determine the new equilibrium price and quantity, comparing it to the original equilibrium.

• Contraction: When the quantity demanded decreases due to a price increase.
• Expansion or Extension: When the quantity demanded increases due to a price decrease.

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