pcecon.com Class Notes
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Equilibrium can change when demand or supply change because of the factors mentioned earlier:
You may remember that demand can increase (moving the demand curve to the right) if

• incomes of buyers are increased (normally, although this is not true for "inferior goods")
• substitutes become more expensive or less available
• complements become less expensive or more available
• number of consumers increases (due to population, demographics)
• fads, fashions, tastes and attitudes (emotion) make the good more popular
• information about the good (including advertising) increases desire for the good
• changes in the buyers' environment (weather, time of year, laws) makes the good more desirable to buyers
• buyers have an expectation of higher FUTURE price for the good
  

The original equilibrium (with the green supply and red demand) occurs at the price of P1 and quantity (bought and sold) of Q1. As the demand curve moves (to the purple curve), the equilibrium price increases to P2 and the quantity (bought and sold) increases to Q2. Buyers buy more of the good, but must pay a higher price to get it.

Demand can decrease (moving the demand curve to the left) if

• incomes of buyers are decreased (normally, although this is not true for "inferior goods")
• substitutes become less expensive or more available
• complements become more expensive or less available
• number of consumers decreases (due to population, demographics)
• fads, fashions, tastes and attitudes (emotion) make the good less popular
• information about the good (including advertising) decreases desire for the good
• changes in the buyers' environment (weather, time of year, laws) makes the good less desirable to buyers
• buyers have an expectation of lower FUTURE price for the good

The original equilibrium (with the green supply and red demand) occurs at the price of P1 and quantity (bought and sold) of Q1. As the demand curve moves (to the purple curve), the equilibrium price decreases to P2 and the quantity (bought and sold) decreases to Q2. Buyers buy less of the good, and pay a lower price to get it.

You may remember that supply can increase (moving the supply curve to the right) if

• COSTS ARE LOWER due to
• lower resource prices
• new technology for producing is used
• larger number of sellers
• favorable environment for producing or selling
• lower taxes
  

When supply increases for one of these reasons, it will move the equilibrium, and thus decrease the price and increase the quantity traded of the good:

The original equilibrium (with the green supply and red demand) occurs at the price of P1 and quantity (bought and sold) of Q1. As the supply curve moves (to the purple curve), the equilibrium price decreases to P2 and the quantity (bought and sold) increases to Q2. Sellers sell more of the good, but get paid a lower price to sell it.

Supply can decrease (moving the supply curve to the left) if

• COSTS ARE HIGHER due to
• higher resource prices
• smaller number of sellers
• unfavorable environment for producing or selling
• higher taxes
  

When supply decreases for one of these reasons, it will move the equilibrium, and thus increase the price and decrease the quantity traded of the good:

The original equilibrium (with the green supply and red demand) occurs at the price of P1 and quantity (bought and sold) of Q1. As the supply curve moves (to the purple curve), the equilibrium price increases to P2 and the quantity (bought and sold) decreases to Q2. Sellers sell less of the good, but get paid a higher price to sell it.

A Summary...

Event	Effect on Price	Effect on Quantity bought and sold
Demand Increases	Price Increases	Quantity Increases
Demand Decreases	Price Decreases	Quantity Decreases
Supply Increases	Price Decreases	Quantity Increases
Supply Decreases	Price Increases	Quantity Decreases

What if more than one thing is changing?

If demand and supply are both changing, the total effect is the addition of the effects of each change. For example, if demand is increasing at the same time as supply is increasing, the result will be an increase in quantity, but we can't be sure about the overall effect on price:

Event	Effect on Price	Effect on Quantity bought and sold
Demand Increases	Price Increases	Quantity Increases
Supply Increases	Price Decreases	Quantity Increases
Demand Increases while Supply Increases	Price Decreases or Price Increases or Price stays the same (depends on which changes the most)	Quantity Increases

To see this graphically:

The original equilibrium (with the green supply and red demand) occurs at the price of P1 and quantity (bought and sold) of Q1. If the supply curve moves to the right more than the demand curve moves to the right, the equilibrium price decreases to P2 and the quantity (bought and sold) increases to Q2.

The original equilibrium (with the green supply and red demand) occurs at the price of P1 and quantity (bought and sold) of Q1. If the supply curve moves to the right less than the demand curve moves to the right, the equilibrium price increases to P2 and the quantity (bought and sold) increases to Q2.

The original equilibrium (with the green supply and red demand) occurs at the price of P1 and quantity (bought and sold) of Q1. If the supply curve moves to the right by as much as the demand curve moves to the right, the equilibrium price remains at P1 and the quantity (bought and sold) increases to Q2.