Question

If, over time, the demand curve for a product shifts to the right more than the supply curve does, what will happen to the equilibrium price? What will happen to the equilibrium price if the supply curve shifts to the right more than the demand curve? For each case, draw a demand and supply graph to illustrate your answer.

Short answer

If demand increases more than supply, equilibrium price rises. If supply increases more than demand, equilibrium price falls. These shifts in both scenarios can be illustrated with a supply and demand graph.

Step-by-step solution

Understanding the Theory

Before solving, it's important to understand that when demand increases (shifts to the right) and supply stays the same, the equilibrium price increases due to an excess demand at the old price. On the contrary, when supply increases (shifts right) and demand remains the same, the equilibrium price decreases due to excess supply at the old price.

Demand Increases More Than Supply

If demand curve shifts to the right more than the supply curve, this indicates an increase in demand greater than the increase in supply. Draw two graphs showing initially demand and supply curve intersecting at an equilibrium price. Now shift the demand curve to the right more than you shift the supply curve to illustrate this situation. This results in a new higher equilibrium price as there is more demand for the product than supply.

Supply Increases More Than Demand

If the supply curve shifts to the right more than the demand curve, this indicates an increase in supply which is greater than the increase in demand. Using the initial graph, you now shift the supply curve to the right more than the demand curve. This results in a new lower equilibrium price due to an increased supply relative to demand.

Key concepts

Demand Curve

Understanding the demand curve is crucial when analyzing market dynamics. The demand curve visually represents the relationship between the price of a product and the quantity demanded. Typically, it slopes downwards from left to right. This slope indicates that as the price decreases, consumers will usually demand more of the product.

This relationship is driven by basic economic principles such as utility maximization. In simpler terms, people want to get the most satisfaction (or utility) for their money. Thus, when prices drop, they find it a more attractive deal and are inclined to purchase more.

Think of it as a sale on your favorite snack – when the price is lower, you’re more tempted to stock up! That’s essentially how the demand curve behaves.

Supply Curve

The supply curve is the other half of the market story, showing the relationship between the price of a product and the quantity producers are willing to supply. It usually slopes upwards from left to right. This upward slope suggests that as the price increases, producers are more inclined to produce and sell more of the product.

Why does it slope upwards? Mainly because higher prices can cover the costs of additional production, allow for higher profits, and encourage more production.

• Producers expect higher profits if they can sell their goods at higher prices.
• Increased prices can compensate for additional costs incurred in production.

Thus, when prices rise, suppliers are more likely to increase their output.

Market Shifts

Market shifts occur when either the demand or supply curves change positions. This can happen due to various reasons such as changes in consumer preferences, technological advancements, or new regulations.

When the demand curve shifts to the right, it indicates increased demand at every price point. For example, if a new research study reveals that a certain fruit can significantly boost health, demand for it might increase sharply.

Conversely, if the supply curve shifts right, it reflects an increase in the willingness or ability of producers to supply more of a product. Imagine a technological breakthrough that allows manufacturers to produce gadgets more efficiently, causing the supply curve to shift right.

Excess Demand

Excess demand occurs when the quantity demanded at a certain price point exceeds the quantity supplied. This often happens when the demand curve shifts rightward drastically while the supply remains relatively unchanged.

In such scenarios, consumers are eager to purchase more than what's available at the current price. This creates upward pressure on prices, as sellers recognize they can charge more due to the strong demand.

• Consumers face shortages.
• Producers can raise prices to balance demand and supply.

Ultimately, the market will seek a new equilibrium where demand meets the updated supply level, often at a higher price.

Excess Supply

When the quantity supplied exceeds the quantity demanded at a given price, it results in excess supply. This situation typically occurs when the supply curve shifts significantly rightward while demand remains unchanged or shifts left.

Excess supply can lead to unsold products, putting downward pressure on prices as sellers try to clear out their stock.

• Unsold inventory piles up.
• Prices are slashed to attract buyers.

The new equilibrium will emerge at a lower price where supply and demand eventually meet again. This reflects the nature of markets to self-correct towards stability.