We know that buyers’ taste and income, future expectations of price, and change in price affect demand. At the same time price of related goods, future expectations of price, change in resource prices, technology, taxes and subsidies may produce change in supply. But how changes in demand and supply affect equilibrium price and quantity?
If supply remains constant but demand increases then new intersection of supply and demand is at a higher value, then both price and quantity increases. A decrease in demand while supply is constant decreases both price and quantity.
If we keeping demand constant and increasing supply, then our new point of intersection of these curves is located at lower equilibrium price, but at higher quantity produced. In contrast, a decrease in supply would lower the equilibrium quantity and increase the equilibrium price.
Increase in Demand
Supply decrease, Demand Increase
A decrease in supply and an increase in demand both increase the equilibrium price. This has a greater effect than that caused separately. In this case equilibrium quantity remains indeterminate, so it depends on the relative size of change in supply or demand. If the decrease in supply is greater than the increase in demand, then equilibrium quantity will decrease. If the increase in demand is higher than the decrease in supply then the equilibrium quantity will increase.
Supply Increase, Demand Increase
If both supply and demand are increasing then the equilibrium quantity is increased, because both changes raise it by some amount. In contrast, a increase in supply lowers the equilibrium price, but a increase in demand rises it, then if increase in supply is greater than increase in demand- equilibrium price lowers, if increase in demand is higher than increase in supply-equilibrium price rises.
Decrease in Demand
Supply Increase, Demand Decreases
Both these changes decrease the price. What about change in equilibrium quantity? The increase in supply increases equilibrium quantity, but decrease in demand reduces it. The change of equilibrium quantity depends on relative size of both these changes. If the increase in supply is higher than the decrease in demand, then the equilibrium quantity increases. If the decrease in demand is greater than the increase in supply, then equilibrium quantity decreases.
Supply Decrease, Demand Decrease
Both these changes will reduce equilibrium quantity. If decrease in supply is greater than decrease in demand then the equilibrium price will rise, otherwise it will fall.
Special Cases arises when increase in demand and increases in supply, or decrease in demand and decrease in supply are exactly the same. The resultant effect on equilibrium price will be zero, then there is no change in it.