Question

Draw a demand and supply graph to show the effect on the equilibrium price in a market in the following situations. a. The demand curve shifts to the right. b. The supply curve shifts to the left.

Short answer

The equilibrium price increases when either the demand increases (demand curve shifts right) or supply decreases (supply curve shifts left). However, the equilibrium quantity increases with an increase in demand and decreases with a decrease in supply.

Step-by-step solution

Draw the initial graph

Firstly, draw a demand and supply graph to represent the initial situation. Label the quantity on x-axis and price on the y-axis. The point where the demand and supply curve intersect is the equilibrium point, representing the equilibrium price and quantity.

Illustrate a shift in demand curve to the right

Now, to represent an increase in demand, draw a new demand curve to the right of the original curve. As a result of this shift, the equilibrium price and quantity both increase. This new intersection point of the supply curve and the new demand curve indicates the new equilibrium.

Illustrate a shift in supply curve to the left

For representing a decrease in supply, draw a new supply curve to the left of the original curve. The equilibrium price increases, while the equilibrium quantity decreases with this shift. The new intersection point of the demand curve and the new supply curve represents the new equilibrium after the shift.

Key concepts

Demand and Supply Graph

Understanding the demand and supply graph is crucial for analyzing market conditions. Here’s a simple breakdown of how these graphs work. Imagine a standard graph where the x-axis represents the quantity of goods or services, and the y-axis represents the price. The demand curve slopes downwards, illustrating that as the price decreases, consumers generally demand more of the good. Conversely, the supply curve slopes upwards, indicating that as the price increases, producers are willing to supply more.

This graph is a fundamental tool in economics to visualize how different factors affect the market. You can easily see the impact of changes in market dynamics, such as shifts in demand or supply, and how they affect prices and quantities. When we talk about the 'equilibrium price', it's where the supply and demand curves intersect, showing the price and quantity where the amount consumers want to buy equals the amount producers want to sell.

Shift in Demand Curve

A 'shift in the demand curve' can occur for various reasons such as changes in consumer preferences, income levels, or prices of related goods. When the demand curve shifts to the right, it signifies an increase in demand at every price level.

In our exercise’s scenario, the curve moves to the right to show that consumers now demand more of the good, even if the price hasn't changed. This rightward shift might be due to a rising population, increased incomes, or a new trend making the good more popular. This shift results in a higher equilibrium price and quantity, demonstrating the law of supply and demand in action. It's important to understand this concept as it illustrates how market demand can vary independently of price changes.

Shift in Supply Curve

Similar to demand, the supply curve can also shift. However, while a rightward shift in the demand curve indicates an increase in demand, a leftward shift in the supply curve symbolizes a decrease in supply. This decrease might be due to production issues, increased costs of materials, or regulations that make it harder for companies to produce goods.

In the given exercise, the leftward shift illustrates a scenario where less of the good is supplied at each price point. This shift leads to a higher equilibrium price because the scarcer supply tends to push prices up, but it also results in a lower equilibrium quantity since less of the product is available to meet demand. Recognizing these shifts is key to understanding how external factors can affect the availability and pricing of goods in the market.

Market Equilibrium

The concept of 'market equilibrium' is where the demand and supply curves intersect, and represents a state of balance in the market. At this point, the quantity demanded by consumers and the quantity supplied by producers are equal, and there is no tendency for the price to change unless external factors cause a shift in supply or demand.

In the exercise, after experiencing the shifts, a new market equilibrium is established. It’s important to note that market equilibrium is not static — it changes as supply and demand change, reflecting the dynamic nature of real-world markets. Understanding equilibrium helps you interpret how price and quantity are determined in a competitive market and the effects of market changes on these two key elements.