IMPACT OF CHANGES IN DEMAND ON SUPPLY ON THE EQUILIBRIUM PRICE AND QUANTITY
IMPACT OF CHANGES IN DEMAND
INCREASE IN DEMAND
P
(per pound)
S₀
$1.40
$1.00
D₁
D₀
5
7
Q of coffee (billion pounds)
●
●
●
●
●
Increase in the price of a substitute product (increase in the price of tea, or price of caffeinated soft drinks).
Decrease in the price of a complement (decrease in the price of donuts, or decrease in the price of coffee makers).
Drinking coffee become more “fashionable”.
People’s income increases.
Increase in the number of households.
Demand shifts to the right. There is a change in demand. The change in demand causes a change in quantity supplied (a movement along the supply curve).
The new equilibrium price and equilibrium quantity are both greater than the previous equilibrium price and quantity.
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DECREASE IN DEMAND
P
(per pound)
S₀
$1.00
$0.76
D₁
3.8 5
●
●
●
●
D₀
Q of coffee (billion pounds)
Decrease in the price of a substitute product (increase in the price of tea, or price of caffeinated soft drinks)
Increase in the price of a complement (decrease in the price of donuts, or decrease in the price of coffee makers)
It is announced that drinking coffee has adverse health effects.
People’s income decreases. There is less visit to cafes serving “designer” coffee
The equilibrium price and quantity of coffee both decrease.
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IMPACT OF CHANGES IN SUPPLY
INCREASE IN SUPPLY
P
(per pound)
S₀
S₁
E₀
$1.00
E₁
$0.60
D₀
5
7
Q of coffee (billion pounds)
●
●
●
●
Decrease in the price of inputs (lower wages for coffee harvesters; lower fuel prices to operate farm machinery; lower price of fertilizers ...)
New coffee planting and harvesting technology.
Decrease in the price of a good which is a substitute in production (decrease in the price of cocoa).
Increase in the number of coffee producing countries.
The equilibrium price of coffee decreases, but equilibrium quantity increases.
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DECREASE IN SUPPLY
S₁
P
(per pound)
S₀
E₁
$1.30
E₀
$1.00
D₀
3.5
5
Q of coffee (billion pounds)
●
●
●
Increase in the price of inputs (lower wages for coffee harvesters; lower fuel prices to operate farm machinery; lower price of fertilizers ...)
Adverse weather conditions or natural disasters affecting coffee output.
Increase in the price of a good which is a substitute in production (increase in the price of cocoa).
The equilibrium price of coffee increases, but equilibrium quantity decreases.
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SIMULTANEOUS SHIFTS OF SUPPLY AND DEMAND CURVES
(A) DEMAND AND SUPPLY SHIFT THE IN SAME DIRECTION
(1) DEMAND AND SUPPLY BOTH INCREASE (SHIFT TO THE RIGHT). Equilibrium quantity increases.
Supply shifts more than demand
Equilibrium price decreases
Demand shifts more than supply
Equilibrium price increases
P
P
S₀
S₁
$1.20
$1.00
E₀
$1.00
$0.80
S₀
E₁
E₁
E₀
D₁
D₁
D₀
5
8
S₁
D₀
Q
5
8
Q
 Increase in supply: Coffee growing technology improves; price of inputs used in growing coffee decreases; more countries join
coffee production.
 Increase in demand: Drinking coffee becomes more fashionable; price of coffee substitutes increase ...
The equilibrium quantity will definitely or unambiguously increase. The direction of change in the equilibrium price is, however,
ambiguous. If supply shift more than demand, the equilibrium price will decrease. If demand shifts more than supply, equilibrium price
will increase.
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(2)
DEMAND AND SUPPLY BOTH DECREASE (SHIFT TO THE LEFT). Equilibrium quantity decreases.
Supply shifts more than demand
Equilibrium price increases
Demand shifts more than supply
Equilibrium price decreases
P
PP
S₁S₁
$1.20
$1.20
$1.00
$1.00
S₀S₀
S₁
S₀
E₁E₁
E₀E₀
$1.00
$0.80
D₁D₁
22
55
E₀
E₁
D₀
D₀
D₁
QQ
2
5
D₀
Q
 Decrease in supply: A natural disaster affects coffee output in Brazil and Columbia; price of inputs used in growing coffee
increases...
 Decrease in demand: People drink less coffee after the announcement that coffee is “bad for you”; price of coffee substitutes
decrease...
The equilibrium quantity will definitely or unambiguously decrease. The direction of change in the equilibrium price is, however,
ambiguous. If supply shift more than demand, the equilibrium price will increase. If demand shifts more than supply, equilibrium price
will decrease.
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(B)
DEMAND AND SUPPLY SHIFT IN THE OPPOSITE DIRECTIONS
(1) DEMAND INCREASES (SHIFTS RIGHT); SUPPLY DECREASES (SHIFTS LEFT). Equilibrium price increases.
Supply shifts more than demand
Equilibrium quantity decreases
Demand shifts more than supply
Equilibrium quantity increases
P
P
S₁
S₁
S₀
S₀
E₁
E₁
$1.60
$1.60
E₀
E₀
$1.00
$1.00
D₁
D₁
D₀
4
5
D₀
Q
5
6
Q
 Decrease in supply: A natural disaster affects coffee output in Brazil and Columbia; price of inputs used in growing coffee
increases...
 Increase in demand: Drinking coffee becomes more “fashionable”; price of coffee substitutes increase...
The equilibrium price will definitely or unambiguously decrease. The direction of change in the equilibrium quantity is, however,
ambiguous. If supply shift more than demand, the equilibrium quantity will decrease. If demand shifts more than supply, equilibrium
quantity will increase.
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DEMAND DECREASES (SHIFTS LEFT); SUPPLY INCREASES (SHIFTS RIGHT). Equilibrium price decreases.
(2)
Supply shifts more than demand
Equilibrium quantity increases
Demand shifts more than supply
Equilibrium quantity decreases
P
P
S₀
S₀
S₁
S₁
E₀
E₀
$1.00
$1.00
E₁
E₁
$0.40
$0.40
D₁
5
6
D₀
D₁
Q
4
5
D₀
Q
 Increase in supply: Coffee growing technology improves; price of inputs used in growing coffee decreases; more countries join
coffee production.
 Decrease in demand: People drink less coffee after the announcement that coffee is “bad for you”; price of coffee substitutes
decrease...
The equilibrium price will definitely or unambiguously decrease. The direction of change in the equilibrium quantity is, however,
ambiguous. If supply shift more than demand, the equilibrium quantity will decrease. If demand shifts more than supply, equilibrium
quantity will increase.
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