What happens to equilibrium price and quantity when demand increases example?

How is equilibrium price determined?

Updated 7/8/2018 Jacob Reed
Below is a review of how markets reach equilibrium. If you would like to get some practice with these concepts, head over to the Shifting Markets Review Game.

What is equilibrium?

Equilibrium is the price that clears the market. In other words it is the price where quantity supplied equals quantity demanded. Market forces push prices toward equilibrium. 

How does the market move toward equilibrium?

If the market price is above equilibrium, quantity supplied will be greater than quantity demanded; creating a surplus. When that occurs, market forces push the price downward toward equilibrium (increasing Qd and decreasing Qs) until the surplus is eliminated.

​If the market price is below equilibrium, quantity supplied will be less than quantity demanded; creating a shortage. When that occurs, market forces pull the price upward toward equilibrium (decreasing Qd and increasing Qs) until the shortage is eliminated.

How do shifts in supply and demand change equilibrium?

Shifts in supply or demand curves move the equilibrium price and quantity. If demand increases, equilibrium price and quantity both increase. If demand decreases, equilibrium price and quantity both decrease. If supply increases, equilibrium price decreases, and quantity increases. If supply decreases, equilibrium price increases and equilibrium quantity decreases. 
Note: If you don’t recall what shifts supply and demand, go review your demand and supply shifters.

How do double shifts impact price and quantity?

When supply and demand both shift, either price or quantity will be indeterminate. When supply and demand move in the same direction, price is indeterminate. That is because an increase in supply decrease price while an increase in demand will increase price. Since the price axis moves in both directions, the net effect is based on which shift is stronger. Since that cannot be known, the price will be indeterminate. Since both shifts increase equilibrium quantity, the quantity will definitely increase. 

Similarly, when supply and demand move in opposite directions, quantity is indeterminate because one shift will increase quantity and the other will decrease quantity. 

The key to figuring out the impact of double shifts is to graph out both shifts and see what happens to the equilibrium price and quantity with each shift. If the shifts conflict, that axis is indeterminate.

Supply and demand curves express relationships between price and quantity. Equilibrium exists when supply equals demand. The shape of these curves and the equilibrium price affect small and large businesses because revenues are a factor of price and quantity. Although a single business cannot affect the shape of these curves, the combined actions of businesses and consumers affect the supply and demand curves for different industries.

Tip

When the curve shifts up, the equilibrium price may increase. Although a single business cannot affect the shape of these curves, the combined actions of businesses and consumers affect the supply and demand curves for different industries.

Supply and Demand: Basics

The supply and demand curves are plots of price on the vertical y-axis and quantity on the horizontal x-axis. The demand curve is a downward-sloping curve showing an inverse relationship between price and quantity because demand rises when prices fall and falls when prices rise. The supply curve is an upward-sloping curve showing a direct relationship between price and quantity because supply rises and falls with price.

Shifts in the Curves

The supply and demand curves assume that all other things are constant. If not, there is an upward or downward shift, meaning the whole curve moves up or down. Reasons for a demand curve shift include the availability of alternative products and changes in consumer preferences, unemployment levels and interest rates. Reasons for a supply curve shift include changes in consumer expectations and new technologies. Upward shifts in the supply and demand curves indicate decreasing supply and increasing demand, respectively, while the opposite is true for downward shifts.

The Equilibrium Price

The equilibrium price is the intersection of the supply and demand curves. Markets reach equilibrium because prices that are above and below an equilibrium price lead to surpluses and shortages, respectively. A surplus usually means that vendors will lower prices to clear out inventory, while a shortage means they will raise prices to take advantage of the higher demand. In both cases, the price will converge toward an equilibrium price, which may be higher or lower than the original equilibrium price.

Effects of Shifts in Supply and Demand

Upward shifts in the supply and demand curves affect the equilibrium price and quantity. If the supply curve shifts upward, meaning supply decreases but demand holds steady, the equilibrium price increases but the quantity falls. For example, if gasoline supplies fall, pump prices are likely to rise. If the supply curve shifts downward, meaning supply increases, the equilibrium price falls and the quantity increases. If refineries supply more gasoline, pump prices are likely to fall if there is no corresponding increase in demand.

If the demand curve shifts upward, meaning demand increases but supply holds steady, the equilibrium price and quantity both increase. For example, pump prices often rise during the summer as people drive to their summer homes for the weekend. If the demand curve shifts downward, meaning demand decreases but supply holds steady, the equilibrium price and quantity both decrease.

What happens to equilibrium price and quantity when demand increases?

What is the equilibrium price and quantity examples?

What is an example of change in quantity demanded?

Why does equilibrium price increase when demand increases?