In this video we’ll examine the effect of changes in supply and demand on equilibrium
price and quantity.
You should already be familiar with the causes for the shifts, so I won’t go into too much
detail about the reasoning behind the shift.
What I’ll focus on is the resulting change and the impact on price and quantity.
Let’s get started with first looking at demand.
We will demonstrate an increase and decrease in demand followed by the same for supply.
With a little practice it starts getting much easier.
You should always begin with this basic graph using this exact annotation.
This is the standard AS economics graph for equilibrium and should always be your starting
point in demand and supply analysis.
Now let’s look specifically at what happens when demand increases and more importantly,
how to graph it.
Suppose an effective advertising campaign is launched for a product and its demand increases.
The demand curve shifts to the right.
We draw this by shifting the demand curve, using an arrow to indicate the change.
This is done to draw the attention of your teacher or the examiner to the change in the
demand curve.
You can probably get credit by not doing this, but I’d urge you to do so to avoid confusing
yourself when using this diagram as part of a larger essay.
The arrow demonstrates that D is the starting point and the new demand curve is D1.
As demand shifts to the right and increases, equilibrium price rises from P* to P1 and
equilibrium quantity increases from Q* to Q1.
We see an increase in demand and an extension of supply and more quantity is supplied to
the market to meet the rising demand.
Supply remains the same but quantity supplied increases.
Be sure to understand this distinction, it is a common error for many students.
We’ll now do the same for a decrease in demand.
Suppose the government publishes a report about the dangers of consuming soft drinks.
If the initial demand for soft drinks was D, it will now decrease to D1.
We use the same annotation for the change in demand, as well as the reduction in equilibrium
price and equilibrium quantity.
As fewer people want to buy the product, sellers reduce quantity supplied and lower the price.
Remember, supply stays the same but there is a reduction in quantity supplied.
Let’s now flip to the producer side of the equation and look at an increase in supply.
Suppose we are looking at the market for wheat.
If there is great weather that season and farmers have an abundant harvest, this will
increase the supply of wheat in the market.
As supply increases, we shift it rightward with an arrow indicating the change.
With the additional wheat on the market, sellers need to compete for business and therefore
reduce prices while equilibrium quantity increases.
In this situation, demand stays the same but quantity demanded increases.
If there is poor weather that season and farmers face a poor harvest, this will decrease the
supply of wheat in the market.
As supply decreases, we shift it leftward with an arrow indicating the change.
With the reduction of wheat on the market, there is a decrease in equilibrium quantity
and an increase equilibrium price.
In this situation, demand stays the same but quantity demanded decreases.
The main takeaways from this video should be the way to draw shifts in demand and supply
and understanding the resulting impact on equilibrium price and quantity.
If you’re not sure about why the curves shift the way they do, go back and watch the
videos that talk about the influences on supply and demand in the Unit 2 playlist.
As always, feel free to leave me a comment below or email me directly at enhancetuition@gmail.com.
Happy studying!