Supply and Demand

Shifts of Equilibrium

Market equilibrium can change if there is a shift in supply, a shift in demand, or both.

The equilibrium point (where quantity demanded meets quantity supplied) may shift if there is a shift in demand, a shift in supply, or both. Economists compare the initial equilibrium to the new one to see the effect on the market price and quantity. This helps predict consumer trends and impacts the efficiency potential for factories (so they can create the supply needed to match the demand without excess).

In the case of fur coats, the demand curve for fur coats may increase (shift to the right) because of a celebrity endorsement. This shifts the demand curve to the right, resulting in a new equilibrium point with higher prices and higher quantity supplied, and increasing the overall quantity of fur coats in the market. A warmer climate or an upsurge in animal rights activism may shift the demand curve for fur coats to the left, moving the equilibrium point downward along the supply curve and resulting in a decrease in the overall quantity of fur coats in the market.
The initial demand curve (D1) crosses the supply curve (S) at equilibrium point (E1). A rightward shift in the demand curve to (D2) moves the equilibrium point up along the supply curve (S) to a new equilibrium point (E2). At the new equilibrium, price, the quantity demanded, and the quantity supplied are higher.
A shift in supply can also move the equilibrium point. For example, the discovery of vast coal reserves will shift the supply curve for coal to the right, moving the equilibrium point downward along the demand curve. This means that more quantity will be supplied at a lower price.
The initial supply curve (S1) crosses the demand curve (D) at equilibrium point (E1). A rightward shift in the supply curve to (S2) moves the equilibrium point downward along the demand curve to a new equilibrium point (E2). At the new equilibrium, the price is lower, and the quantity demanded and quantity supplied are higher.
When both supply and demand curves shift, there might be ambiguous effects on price and quantity, depending on the direction of the shifts. For instance if in the year of the Olympics demand for soccer balls and supply of soccer balls both rise, quantity of soccer balls would definitely increase, but the change in the price would be ambiguous. If the demand increase is stronger, prices could increase; however, if the supply shift is stronger, prices could decrease.

Costs of inputs occasionally increase, as in processor chips used for laptops, for example. An increased cost of input causes supply to decrease and shift left. The equilibrium price would then rise and quantity would decrease. At other times there is a shift of both supply and demand; for example, consumers' preferences for organic vegetables increases because they are perceived to have positive health effects, shifting demand right. Additionally, suppliers have become more efficient at producing agricultural products, and this improvement shifts the supply curve to the right. The quantity increases but the effect on price is ambiguous because there is both more supply (which lowers prices) and more demand (which raises prices).