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Home Equilibrium of Demand and Supply Effects of Changes in Demand on Equilibrium Market

Effects of Changes in Demand on Equilibrium Market:

 

We know that if the price rises, other things remaining the same, people buy less of that commodity and if price falls, people buy more of that commodity. Let us now discuss the effects of changes in demand on equilibrium price

                             

A change to demand can take place independently of change in price, i.e., price remaining the same, people may purchase more or less of the commodity. When larger quantity is demanded at the same old price or the same old quantity is demanded at a higher price we say, the demand has risen. In such a case, the whole of demand curve rises above the original demand curve. In case of a fall in demand, the whole of the demand curve falls below the original demand curve.

 

In order to study the effect of the changes in demand on equilibrium price, let us assume that no change takes place in the supply schedule, i.e., it remains fixed. If demand rises, more quantity will be purchased at a higher price. On the other hand, if demand falls, less commodity will be purchased at a lower price. This can also be illustrated in the following diagram.  

 

Diagram/Figure: 

 

 

In the figure (8.2) DD/ is the original demand curve. PM is the equilibrium price and OM the equilibrium amount. When demand rises, supply remaining the same, the equilibrium amount increases from OM to OG and the equilibrium price rises from PM to FG. In case of fall of in demand, which is indicated by D2D2 curve, the quantity demanded decreases from OM to OK and the equilibrium price falls from PM to LK.

 

Now a question can be asked that when the demand rises, does it affect more on the price or on the quantity of the commodity to be sold? The answer to this simple question, is that if the supply is perfectly elastic, a rise in demand will increase the quantity but will not affect the price. If the supply is perfectly inelastic, then a rise in demand will affect the price but not the quantity. This can be shown with the help of the diagram. In case of perfect elastic supply, (Fig. 8.3) when demand rises, the supply increases from OK to OI with further rise in demand D2D2 the supply increases from OI to ON.

 

 

Supply Perfectly Inelastic:

 

 

In fig. 8.4, the supply is perfectly inelastic. A rise in demand affects the price which rises from RM to KM and with the further rise in demand to LM. The quantity supplied remains the same OM.

 

In the the world in which we live, the supply is seldom perfectly elastic or perfectly inelastic. It is either equal to unity or greater than unity, or less than unity. We will, therefore, examine these, cases now. If elasticity of supply is to unity and demand rises, the price and quantity will change in equal proportion.

 

(i) Elasticity of Supply is Equal to Unity:

 

The quantity and price change in equal proportion with a rise in demand as is clear in fig. 8.5. 

 

 

(ii) Elasticity of Supply Greater Than Unity:

 

If the elasticity of supply is greater than unity, a rise in demand will affect the supply which will change in greater proportion than the price as is obvious from the following fig. 8.6.

 

 

In fig. (8.6) when demand rises, KL quantity supplied is greater in proportion than PN price.

 

(iii) Elasticity of Supply Less Than Unity:

 

If the elasticity of supply is less than unity, a rise in demand will change the price in greater proportion than the quantity as shown in fig. 8.7.

In fig. 8.7 the proportionate change in quantity demanded KL is less than the change in price RN.

Relevant Articles:

Equilibrium of Demand and Supply
Effects of Changes in Demand on Equilibrium Market

Effects of Shifts in Supply on Market Equilibrium

Effects of Shifts in Both Supply and Demand on Equilibrium Price and Quantity
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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