The equilibrium price and quantity

A supply-demand graph can be described as having a demand curve that begins in the upper left and slopes downward to the lower right; and having a supply curve that begins in the lower left and slopes upward to the upper right. Using words in a narrative, please describe and explain how both the equilibrium price and quantity will change when:

a) Only supply decreases
b) Only supply increases
c) Only demand increases
d) Only demand decreases

A supply-demand graph, also known as a supply and demand curve, is a graphical representation of the relationship between the supply of a product or service and the demand for that product or service in a particular market. This graph is a fundamental tool in economics and is used to analyze and understand how changes in supply and demand factors can affect prices and quantities in a market. The axis typically represents the quantity of the product or service being exchanged in the market. It is often labeled as "Quantity" or "Quantity Demanded/Supplied." The axis represents the price of the product or service. It is usually labeled as "Price" or "Price per unit."

The Demand Curve

The demand curve shows the relationship between the price of the product and the quantity demanded by consumers. It typically slopes downward from left to right, indicating that as the price decreases, the quantity demanded increases. This reflects the law of demand, which states that all else being equal, as the price of a good decreases, the quantity demanded for that good increases.

The Supply Curve

The supply curve shows the relationship between the price of the product and the quantity supplied by producers. It typically slopes upward from left to right, indicating that as the price increases, the quantity supplied also increases. This reflects the law of supply, which states that all else being equal, as the price of a good increases, the quantity supplied of that good increases.

Equilibrium Point

The equilibrium point is the point where the supply and demand curves intersect. At this point, the quantity supplied equals the quantity demanded, and the market is said to be in equilibrium. The price and quantity at this point are often referred to as the equilibrium price and equilibrium quantity.

Surplus and Shortage

If the price in the market is above the equilibrium price, it can result in a surplus (excess supply) of the product, as suppliers are producing more than consumers are willing to buy at that price. If the price is below the equilibrium price, it can lead to a shortage (excess demand), as consumers want to buy more than what suppliers are willing to produce at that price.

Now, let's delve into how changes in supply and demand affect the equilibrium price and quantity in a supply-demand graph.

a) Only supply decreases

Imagine a situation where the supply of a product suddenly decreases. Perhaps there's a shortage of resources needed to produce it. As a result, the supply curve shifts to the left. This shift creates a new supply-demand equilibrium point. Now, with less supply available, the equilibrium price will rise, and the equilibrium quantity will decrease. In other words, the price of the product will go up because it's scarcer, and fewer units of the product will be bought and sold in the market.

b) Only supply increases

Conversely, if the supply of a product increases, such as due to innovations in production methods, the supply curve will shift to the right. This shift results in a new equilibrium point. With more supply, the equilibrium price will fall, and the equilibrium quantity will increase. In this scenario, the product becomes more abundant, so its price drops, and consumers are willing to purchase more of it.

c) Only demand increases

Now, let's consider a situation where only the demand for a product surges. This might occur due to changing consumer preferences. When demand rises, the demand curve shifts to the right. As a consequence, the equilibrium price will increase, and the equilibrium quantity will also increase. The product becomes more sought after, leading to higher prices and more units being bought and sold.

d) Only demand decreases

Conversely, if only the demand for a product decreases, perhaps due to shifting consumer tastes, the demand curve shifts to the left. This change will result in a new equilibrium point. With lower demand, the equilibrium price will decrease, and the equilibrium quantity will also decrease. In this case, the product is less desirable to consumers, leading to lower prices and reduced market activity.

In summary, changes in supply and demand can have significant impacts on the equilibrium price and quantity in a supply-demand graph. When supply increases or demand decreases, prices tend to fall, and quantities increase. Conversely, when supply decreases or demand increases, prices tend to rise, and quantities decrease. Understanding these dynamics is crucial for businesses and policymakers to make informed decisions in various market situations.

Reference

Encyclopædia Britannica, inc. (2023, September 11). Supply and demand. Encyclopædia Britannica. https://www.britannica.com/money/topic/supply-and-demand 

Learning, L. (n.d.). Microeconomics. https://courses.lumenlearning.com/wm-microeconomics/chapter/equilibrium-surplus-and-shortage/