Change in Equilibrium Price Due To Shift in Demand

Bookmark added to your notes.
View Notes
×

Demand Curve

The demand curve is a graphical depiction of the relationship between the price of a service or good, and the quantity required for a given time. The amount will appear on the left vertical axis in a typical representation, the quantity demanded on the horizontal axis. The demand law is elucidated by the shift of the demand curve from left to right, with the rise of the price of a commodity, there is a decrease in quantity demand, all other being equal. In general, the term ‘demand’ indicates the need, the desire, the want or the necessity for a commodity. In an economic sense, demand refers to the desire for an item. This desire is a unification of the willingness and ability to pay for it. 


Change in Demand vs Change in Quantity Demanded 

It is essential not to confuse the change in demand and change in quantity demanded as the same. Quantity demanded defines the total amount of services or goods demanded at any provided period in time, depending on the amount being charged for them in the marketplace. On the other hand, change in demand focuses on all determinants of demand other than price changes.

  • Change in demand curve refers to an increase or decrease in demand for a product due to different demand determinants while maintaining the price at constant. 

  • Change in quantity demanded refers to contraction or expansion of demand.

Therefore, the demand curve movement changes in quantity demanded while the changes in demand measure shift in the demand curve.


Shift in Demand Curve

[Image will be Uploaded Soon]

The shift in the demand curve is when a final demand other than cost changes. It happens when the need for services and goods changes even though the price doesn’t change. The shift in the demand curve is a unique event when the opposite transpires. Price stays equal, but one among the five determinants changes. The determinants are the buyers’ income, consumer trends and tastes, The future price, supply, and needs expectations, related price of goods, and the number of potential buyers. This determinant refers to aggregate demand only.


Supply Curve 

A graphic representation of the relationship within the quantity of product and product price that a seller is compliant and able to supply is called a Supply Curve. Product price is estimated on the graph’s vertical axis, and the quantity of the product is provided on the horizontal axis. The supply curve is represented as a slope extending upward from left to right since its price and supplied quantity are directly linked. This relationship is reliant on certain ceteris paribus (other things equal) conditions staying constant. Such situations involve:

  • The state of technology.

  • The number of sellers in the market.

  • The level of production costs.

  • The seller’s price expectations.

  • Related products’ prices. 

Equilibrium Price 

Equilibrium price can be defined as the price point where the quantity demanded and quantity supplied match each other, for a given commodity at a particular time. At equilibrium, both producers and consumers are satisfied, thereby conserving the product’s price or stable service. A four-step process enables us to predict how an event will help to observe the change in equilibrium price and quantity using the supply and demand framework.

  • Outline the market model (a demand curve and a supply curve) depicting the situation before the economic event took place.

  • Determine whether the economic event being investigated influences supply or demand.

  • Figure out the movement or shift of the curve to the right or left and draw the new supply or demand curve, based on the impact of demand or supply

  • Identify the new equilibrium quantity and price and analyse the original equilibrium price and quantity to the new one.

[Image will be Uploaded Soon]

FAQ (Frequently Asked Questions)

Q1. Define the Term Expansion and Contraction of Demand.

Ans: The changes in quantities required of a product with the difference in its price, while other factors are constant are termed as expansion or contraction of demand. Expansion of demand applies to when the quantity demanded is higher because of the fall in prices of a product. However, the contraction of demand occurs when the quantity required is less due to the surge in a product’s price. For example, customers would reduce milk consumption if the prices of milk rises and vice versa. The transition from one point to another in a descending direction shows the increase of demand, while an upward inclination illustrates the contraction of demand.

Q2. Define the Term Elasticity of Demand.

Ans: The degree to which increasing-price transposes into falling demand is called demand elasticity of demand elasticity price. It is an economic principle that measures the degree of consumer response to changes in quantity demanded due to a price change, as long as all other factors are equivalent. In other words, it displays how many products customers are willing to buy as the rates of these products increase or decrease. The demand equation's elasticity is measured by dividing the percentage that quantity changes by the percentage price changes in a given period.