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Market Equilibrium
Changes in Equilibrium

The equilibrium price, and corresponding equilibrium quantity exchanged, will change when the demand for a product changes, the supply of a product changes, or both. Note that in order for either supply or demand to change, there must be a change in some factor other than the price of the good! Remember, only these "non-price" factors will shift the supply or demand curves.

Let us first consider what happens when there is a change in supply. (This must result from a change in the market conditions affecting supply, such as production costs, technology, or the prices of related goods.) If supply decreases, the supply curve will shift to the left. Draw a quick sketch of this situation on a piece of scratch paper. What happens to the equilibrium price? What happens to quantity?

If you have done it correctly, you should see that price will rise and quantity will fall. This makes sense. If we read in the papers that large floods in California have wiped out much of the country's strawberry crop, there will be fewer strawberries sold and their price will be higher than before the floods.

A similar situation is shown in the following figure for the coffee bean market after a frost damaged much of the coffee crop:

fig3_11.jpg

After the freeze, there was excess demand at the old market price of $1.20 per pound. The excess demand, as well as the competition among buyers trying to purchase coffee, pushed the price of coffee up to the new equilibrium price of $2.40.

tryitism.gifTry it now to test your understanding!

Now let us consider a situation where the demand for a product decreases. When demand falls, the demand curve shifts to the left. Sketch out this situation on your scratch paper. Do you see what happens to the equilibrium price and quantity? The price falls and so does the quantity. If for some reason (a change in tastes and preferences, income, or some other factor) consumers do not want a product as much as they did before, the price falls and fewer units are exchanged. You might recall the furor (and resulting lawsuit) that stemmed from the statement made on the Oprah Winfrey show that eating beef could infect people with "mad cow" disease. As a result of the show, the demand for beef dropped sharply, as did the amount of beef sold in the United States. For numerous real world examples of the effects of changes in both supply and demand, please see the current events articles and the companion web site.

For more practice looking at the results of shifts in demand and supply, try the following eGraph exercises:

Chapter 3: eGraph and Questions

tryitism.gifTry it now to test your understanding!



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