Handout 2: Effect of changes in demand and supply
Effect of changes in demand and supply.
The supply and demand of a good (or service) may change for various reasons (more buyers or more sellers entering the market).
In the figure below D is the original demand curve and S represents the supply curve. N is the level of equilibrium that has been reached on that market.
The price will be OR and the quantity changing hands will be RN.
Suppose there is an increase in demand. This is represented by a shift to the right (or upwards) of the original demand curve. D1 is now the new demand curve. The point at C now becomes the point of intersection with the supply curve and this means that OR1 is the price and R1C the quantity sold. One can see that an increase in demand results in an increase in price as well as the quantity bought and sold.
D2 represents a decrease in demand (one needs to know what cause less buyers to be in a market). Now the intersection is L. The new price is OR2 and the quantity sold drops from RN to R2L. A decrease in demand results in both a fall in price and in quantity.
FIGURE 2
Changes in supply and demand can also happen simultaneously. In this case changes can either be counteracted by opposite changes or amplified, depending of the relative shifts that take place in supply and demand.
Charl Heydenrych - January 2011
* Charts/graphs taken from Van den Bogearde.
FIGURE 1
Two things can be said relating to the above analysis – The immediate effect of an increase in demand if there were not total and immediate knowledge present would be that the price would remain at R and there would be an excess of demand (shortage) of NM which is a position of disequilibrium. Likewise a fall leads to an oversupply of KN which is also a position of disequilibrium.
The second point is that changes in supply can be analysed in a similar fashion and from such an analysis it could be shown that an increase in supply causes a fall in price and an increase in the volumes traded. This is graphically represented in figure 2 in the shift by S to S1 with the equilibrium now being found at C (and the opposite, the fall in supply by S to S2 with a new equilibrium at L).