Effect of Changes in Demand and Supply on Equilibrium Price and Quantity
a. Increase in Demand
An increase in demand leads to an outward or rightward shift in the demand curve. When this happens supply remains constant, there will be an excess of demand oversupply. The equilibrium price and quantity will increase. See diagram below
From the diagram above, an increase in demand from D0D0 made the equilibrium price to increase from P0 to P2 while the equilibrium quantity increase from q0 to q2
b. Decrease in Demand
A decrease in demand occurs when the demand curve shifts inwardly or into the left. When this happens demand for a commodity decrease while supply remains constant. There will be an excess of supply over demand which will result in the equilibrium price and quantity decreasing or falling.
From the graph above, the original equilibrium price is P2 while the original equilibrium quantity is qo. A decrease in demand from D0D0 lead to a fall in equilibrium from price from P2 to Po while the equilibrium quantity fell from q0 to q1.
The two cases above can be put in a single diagram
(c) Increase in Supply
When supply increases, the whole curve shifts outward to the right. As a result of this, if supply increases, then demand remains constant. There will be an excess of supply, the equilibrium price decreases while the equilibrium quantity increases.
From the diagram, equilibrium price falls from P2 to Po while the equilibrium quantity increases from q1 to qo as a result of increase in supply. The new equilibrum position is Po and quantity is Qo
(d) Decrease in Supply
A decrease in supply results in an inward or leftward shift in the supply curve. A fall in supply without any change in demand will lead to an excess of demand over supply and this makes the equilibrium price increase while the equilibrium quantity reduces. The diagram below explains it.
From the diagram above, the equilibrium prices increase from PE0 to PE1 while the equilibrium quantity reduces from qE0 to qE1 due to decrease in supply. The two cases of increase and decrease in supply can be represented in a single diagram thus.
The law of demand states that at higher prices, lower quantities are demanded and at lower prices, higher quantities are demanded. But the law does not show the extent of changes in demand.