Effects of Change in Demand

A shift in demand means an increase in demand or a decrease in demand. It occurs due to changes in determinants other than the own price of the commodity. For example, with an increase in income (other factors being constant), consumers will be able to buy more units of a product at the same price. This will cause a shift in demand, which will be indicated by a rightward shift in the demand curve. Similarly, with the decrease in income (other factors being constant), consumers will buy fewer units of any product at the same price. This will cause a shift in demand, which will be indicated by a leftward shift in the demand curve.

Case I – Increase in Demand
 

1. Here, the X-axis represents Quantity Demanded and Supplied, and the Y-axis represents Price. DD is the initial demand curve, SS is the supply curve and E is the initial equilibrium point on which P is the equilibrium price and Q is the equilibrium quantity.

2. Due to an increase in demand, the demand curve shifts from DD to D₁D₁, causing excess demand in the market, at the existing price.

3. Due to the pressure of demand, the price of the commodity tends to be higher than the equilibrium price. Thus, the price shifts from P to P₁.

4. Due to the rise in price from P to P₁, the quantity demanded tends to contract and the quantity supplied tends to expand. The expansion of supply and contraction of demand is continuous till excess demand is fully tackled.

5. E₁ is the point of new equilibrium where supply is once again equal to demand. Corresponding to the new equilibrium, the quantity demanded/supplied is OQ₁ and the equilibrium price is OP₁.

6. The net effect of an increase in demand is: (a) an increase in equilibrium price from OP to OP₁, and (b) an increase in equilibrium quantity from OQ to OQ₁.

Case II – Decrease in Demand

1. Here, the X-axis represents Quantity Demanded and Supplied, and the Y-axis represents Price. DD is the initial demand curve, SS is the supply curve and E is the initial equilibrium point on which P is the equilibrium price and Q is the equilibrium quantity.

2. Due to a decrease in demand, the demand curve shifts from DD to D₂D₂, causing a lack of demand in the market, at the existing price.

3. Due to the excess supply, the price of the commodity tends to be lower than the equilibrium price. Thus, the price shifts from P to P₂.

4. Due to a decline in price, the quantity demanded tends to expand and the quantity supplied tends to contract. The expansion of demand and contraction of supply is continuous till excess supply is fully tackled.

5. E₂ is the point of new equilibrium where supply is once again equal to demand. Corresponding to the new equilibrium, the quantity demanded/supplied is OQ₂ and the equilibrium price is OP₂.

6. The net effect of a decrease in demand is: (a) a decrease in equilibrium price from OP to OP₂, and (b) a decrease in equilibrium quantity from OQ to OQ₂.

Equilibrium Price and Equilibrium Quantity of a commodity is determined when the quantity demand is equal to the quantity of the commodity supplied. Therefore, if there is any change in the quantity demanded and/or quantity supplied of the commodity, there will be a shift in either the demand curve or supply curve or both, further resulting in a change in equilibrium price and equilibrium quantity. There are many factors that affect equilibrium price and equilibrium quantity. Factors other than the price of the product affect demand and supply in the form of movements in the curves. These movements cause a rightward or a leftward shift in demand and supply curves affecting equilibrium price and equilibrium quantity.

Some of the reasons responsible for a shift in the demand curve include Change in Population, Change in Price of Complementary Goods, Change in Price of Substitute Goods, Change in Income (Normal and Inferior Goods), Change in Taste and Preference, and Expectation of Change in the Price in Future. However, the reasons responsible for a shift in the supply curve include Change in Price of Factors of Production, Change in Price of other Goods, Change in the State of Technology, Change in the Taxation Policy, Expectations of Change in Price in Future, Change in the Goals of Firms, and Change in the Number of Firms.