Question

Explain what it means if demand increases.

Short answer

An increase in demand refers to a situation where, at the same price, consumers are willing to buy more of a product or at the same quantity, they're willing to pay a higher price. This leads to a rightward shift of the demand curve on the graph. If supply remains constant, this results in a shortage, leading to an increase in the price and a new equilibrium at a higher price and quantity.

Step-by-step solution

Understanding the Concept of Demand

Demand in economics refers to the quantity of a product that consumers are willing and able to purchase at various prices during a certain time period. It is depicted on the graph as a downward sloping line, which shows that as the price of a product increases, the demand for it decreases and vice versa.

Concept of Increase in Demand

An increase in demand refers to a situation where, for the same price, consumers want to buy more units of a product. Or, at the same quantity, they are willing to pay a higher price for the product. This is shown on the demand-supply graph as a rightward shift of the demand curve.

Impact on Price and Quantity

When demand increases, and if the supply remains constant, it results in a shortage of the product at the original price, which leads to an increase in the price of the product. The new equilibrium will be established at a higher price and higher quantity. Higher price eliminates the shortage and aligns the quantity supplied and quantity demanded.

Key concepts

Increase in Demand

When economists talk about an "increase in demand," they are referring to a change in the number of goods consumers are willing to purchase, independent of price changes. Imagine you suddenly find out there's a new movie everyone is talking about. As a result, more people, including you, want to purchase tickets, even if the price is still the same. This change can occur due to several factors:

• A rise in consumer income, making people more willing to spend.
• Changes in tastes and preferences, perhaps due to trending products.
• An increase in the population, leading to more consumers.
• Expectations of future price increases, pushing people to buy now.

An increase in demand simply means at every price point, more will be purchased than before.

Demand Curve Shift

In economics, the demand curve visually represents the relationship between the quantity of a product demanded and its price. It typically slopes downwards, meaning as price decreases, demand increases. However, when there is an increase in demand, the entire curve shifts to the right. This rightward shift means that, for each price on the original demand curve, consumers are now willing to buy a larger quantity.
It’s important to differentiate between moving along a demand curve, which happens when prices change, and shifting the entire demand curve, which happens when other demand factors, like consumer preferences or incomes, change. A demand curve shift signifies a fundamental change in the demand factors.

Price and Quantity Equilibrium

The concept of equilibrium in a market setting is a key principle in economics. When supply and demand intersect, they establish an equilibrium price and quantity. This is where the market is stable, and the quantity supplied equals the quantity demanded.
Now, consider a scenario where demand increases. Suddenly, more consumers want the good at the current price, leading to a shortage. Producers are driven to raise prices, responding to higher demand. This adjustment continues until a new equilibrium is found. The new equilibrium typically features a higher price and greater quantity, balancing the market once again. Understanding this dynamic helps clarify why market prices and available quantities change, reflecting consumer demand and producer supply.