What will happen to the demand curve for chicken if the price of chicken increases?

After you have worked through this section of the learning unit, you should be able to:

• illustrate and explain the adjustment process in a market if demand decreases

Let us use the same approach to look at a second scenario. Let’s assume that fried chicken pieces and chicken burgers are substitutes. There is a decrease in the cost of production of chicken burgers, which led to a decrease in the price of chicken burgers.

How will this event affect the market for fried chicken pieces?

Are we dealing with a demand or a supply factor?

This is a demand factor since the price of a substitute is an important determinant of demand.

What would happen to the demand for fried chicken pieces if the price of fried chicken burgers were to decrease?

The demand for fried chicken pieces would decrease since households would rather buy chicken burgers than fried chicken pieces.

Would this decrease in the demand for fried chicken pieces cause a rightward shift or leftward shift of the demand curve for fried chicken pieces?

Market for fried chicken

It is a leftward shift to indicate that at each price the quantity demanded is lower.

The next diagram indicates the end result of a decrease in the demand for fried chicken pieces. What happened to the equilibrium price and the equilibrium quantity?

A decrease in demand

It is a leftward shift to indicate that at each price the quantity demanded is lower.

Using a comparative static analysis, a comparison of the initial equilibrium, E, with the new equilibrium, E1, indicates that both the equilibrium price and the equilibrium quantity decreased.

Let us now turn our attention to the dynamics, which describe the adjustment process in the event of a decrease in demand.

THE ADJUSTMENT PROCESS OF A DECREASE IN DEMAND

Before we analyse the adjustment process that occurs in the market, let us look again at the end result.

A decrease in demand

A decrease in demand causes a leftward shift of the demand curve from D to D1, and a new equilibrium position is reached. By comparing the new equilibrium position with the previous equilibrium position, you can see that the equilibrium price decreases from R4 to R3 and the equilibrium quantity decreases from 3 000 to 2 400.

What happens in the market is that the decrease in demand leads to a lower equilibrium price and a lower equilibrium quantity demanded and supplied.

A decrease in demand creates an excess supply

A decrease in demand creates an excess supply

A decrease in demand creates an excess supply

A decrease in demand creates an excess supply

A decrease in demand creates an excess supply

The market is now in disequilibrium because suppliers cannot sell the quantity they planned to sell at R4. As you know, excess supply forces suppliers to cut the price of the good or service. As the price declines, the quantity supplied will decrease and the quantity demanded will increase. The surplus thus declines.

An excess supply decreases the price

An excess supply decreases the price

An excess supply decreases the price

An excess supply decreases the price

An excess supply decreases the price

Assume the price decreases to R3,50. When the price decreases to R3,50, two things happen in the market: the quantity demanded increases from 1 800 to 2 000, while the quantity supplied decreases from 3 000 to 2 600 pieces and the excess supply decreases to 600. The decrease in price is encouraging buyers to increase the quantity bought and the supplier to decrease the quantity supplied. The combined effect of this is that the excess supply or surplus decreases.

An excess supply decreases the price

An excess supply decreases the price

This trend will continue until a new equilibrium position is reached where the quantity demanded is equal to the quantity supplied – this new equilibrium position is where the equilibrium price is R3 and the equilibrium quantity is 2 400.

Note that the supply curve does not shift – a movement occurs along the supply curve.

In terms of a chain of events, the impact of a decrease in demand on the equilibrium price and quantity can be described as follows:

↓Demand → Excess supply (Qd < Qs) → → ↑Pe ↑Qe

Watch the following video clip on the adjustment process is demand decreases.

Activity

Do the following activity to see if you understand the impact of change in demand on the market:

Use the following diagram, which illustrates the market for ice cream, to explain what happens to the equilibrium price and quantity if the number of potential consumers decreases:

Correct.  The number of consumers (households) are a demand factor.

Think again.  The number of consumers (households) are a demand factor.

Correct.  A decrease in the number of potential buyers (consumers) decreases the demand.

Think again.  There are less consumers now.

Think again.  It is a demand factor that has changed.

Think again.  It is a demand factor that has changed.

Correct.  It is a demand factor and therefore the demand curve shfits.

Think again.  It is a demand factor

Think again.  Less consumers meand less demand.

Correct.
A decrease in potential consumers decreases demand and the demand curve shifts to the left.

Think again.  At the existing market price the quantity demanded is less than the quantity supplied.

Correct.  Since the quantity demand is now less than the quantity supplied and excess supply is created.

Think again.  Less consumers meand less demand.

Correct.
A decrease in potential consumers decreases demand and the demand curve shifts to the left.

Think again.  An excess supply exists in the market.  If and excess demand existed the price would have increased.

Correct.  The excess supply leads to a decrease in the price.

f. The process continues until a new equilibrium is reached where the price is (higher; lower) and the quantity is (higher; lower).

Think again.  A decrease in demand leads to a lower price.

Correct.  A decrease in demand lowers the equilibrium price.

Think again. A decrease in demand leads to a lower quantity.

Correct. A decrease in demand lowers the equilibrium quantity.