Market Equilibrium
Shifts in demand and supply
Predict the effect of a change in income, related prices, input prices or firm numbers.
When demand or supply shifts, the equilibrium changes. With a fixed number of firms:
| Shift | Price | Quantity |
|---|---|---|
| Demand right (more income for a normal good; more consumers) | rises | rises |
| Demand left | falls | falls |
| Supply left (higher input prices) | rises | falls |
| Supply right (better technology; more firms) | falls | rises |
So a demand shift moves price and quantity in the same direction, while a supply shift moves them in opposite directions.
Related goods shift demand too. If petrol becomes dearer, people use their cars less, so demand for engine oil (a complement) falls, and its price and quantity both fall. If coffee becomes dearer, demand for tea (a substitute) rises, and the price of tea rises.
Example: higher incomes raise the demand for good clothes, so both their price and the quantity sold rise.
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