Economics / Unit 4: Supply and Market Equilibrium
4.5 Shifts in Equilibrium
Notes
When demand or supply shifts, the market moves to a new equilibrium. Imagine the curves on a graph and follow where they now cross.
| Change | Equilibrium price | Equilibrium quantity |
|---|---|---|
| Demand increases (shifts right) | rises | rises |
| Demand decreases (shifts left) | falls | falls |
| Supply increases (shifts right) | falls | rises |
| Supply decreases (shifts left) | rises | falls |
- Steps: (1) decide whether the event affects demand or supply; (2) decide the direction of the shift; (3) read off the effect on price and quantity.
- Worked example: a frost destroys orange trees. Supply of oranges shifts left. At the old price there is now a shortage, so the price rises and the quantity sold falls.
- If both curves shift, one result is certain and the other depends on which shift is larger. Example: if demand rises and supply rises, quantity rises for sure, but the price could go up, down or stay the same.
Practice
A study finds that blueberries improve memory. What happens to the equilibrium price and quantity of blueberries?
Tastes change, demand shifts right, and the new intersection has a higher price and quantity.
New technology makes solar panels much cheaper to produce. In the solar panel market:
Lower costs increase supply, so the curve shifts right and crosses demand at a lower price and higher quantity.
In the market for coffee, demand increases while a poor harvest decreases supply. Which result is certain?
Both shifts push price up. Their effects on quantity work in opposite directions, so quantity is uncertain.
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