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A discussion on the effects of supply and demand

The following points highlight the three effects of changes in demand and supply on the equilibrium price and quantity.

  • The housing market is a prime example of this type of impact;
  • Initial equilibrium price and quantity are represented by OP and OQ, respectively.

Under the circumstances, own price of the commodity remains fixed. Thus, change in demand means shifting of the demand curve—either in the upward or in the downward direction.

Demand and Supply & The Equilibrium Price and Quantity

If demand increases, demand curve will shift to D1D1 and the new equilibrium price will rise to OP1and quantity demanded and supplied will increase to OQ1. Initial equilibrium price and quantity are represented by OP and OQ, respectively.

Now an increase or decrease in demand will not cause equilibrium price OP to change. An increase in demand will only cause equilibrium quantity to rise to OQ1.

If the supply curve is drawn perfectly inelastic [as in Fig.

Factors That Affect Supply & Demand

Equilibrium quantity will remain the same OQ. By change in supply, we mean shifting of the supply curve.

If supply increases or decreases supply curve will shift rightward or leftward.

How Supply and Demand Impacts Decisions in Business

Now, suppose supply increases and the new supply curve S1S1 intersects the demand curve. As a result, equilibrium price drops to OP1 and the equilibrium quantity demanded and supplied increases to OQ2.

Similarly, a fall in supply results in an opposite effect. As supply increases, supply curve shifts to S1S1. Increase in supply means shifting of the supply curve to S1S1.

  • An increase in demand will only cause equilibrium quantity to rise to OQ1;
  • During a recession when there are fewer jobs available and there is less money to spend, the price of homes tends to drop;
  • Video of the Day Brought to you by Techwalla Brought to you by Techwalla Availability of Alternatives or Competition When an alternative product hits the market, the competition between the existing product and the new one can cause the demand to drop;
  • Demand The law of demand states that, all other factors being equal, demand will be reduced as the price of a product is raised;
  • Seasons The seasons can affect supply and demand drastically.

If increase in supply is greater than the increase in demand as in Fig. Equilibrium quantity will increase. Or if increase in demand is greater than the increase in supply as in Fig.

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Increase in demand and decrease in supply will lead to an increase in price [Fig. Same conclusion holds if decrease in demand and increase in supply take place [Fig. Anyway, how much equilibrium quantities and equilibrium price will undergo a change largely depends on the elasticities of demand and supply.