Economics (NCERT) Notes → Class XII

5.4 Impact of Shifts in Demand

Market Equilibrium curve
•The market equilibrium curve is under the assumption that tastes and preferences of the consumers, prices of the related commodities, incomes of the consumers, technology, size of the market, prices of the inputs used in production, etc remain constant.
•However, with changes in one or more of these factors either the supply or the demand curve or both may shift, thereby affecting the equilibrium price and quantity.   
 
Demand Shift
•Figure depicts the impact of demand shift when the number of firms is fixed.
•The initial equilibrium point is E where the market demand curve DD0 and the market supply curve SS0 intersect so that q0 and p0 are the equilibrium quantity and price respectively.
 
Demand Shift Rightward
 
•If the market demand curve shifts rightward to DD2 with supply curve remaining unchanged at SS0.
•This shift indicates that at any price the quantity demanded is more than before.
•Therefore, at price p0 now there is excess demand in the market equal to q0q0'' .
•In response to this excess demand some individuals will be willing to pay higher price and the price would tend to rise.
•The new equilibrium is attained at G where the equilibrium quantity q2 is greater than q0 and the equilibrium price p2 is greater than p0.
 
Demand Shift Leftward
•If the demand curve shifts leftward to DD1, at any price the quantity demanded will be less than what it was before the shift.
•Therefore, at the initial equilibrium price p0 now there will be excess supply in the market equal to q0'q0 in response to which some firms will reduce the price of their commodity so that they can sell their desired quantity.
•The new equilibrium is attained at the point F at which the demand curve DD1 and the supply curve SS0 intersect and the resulting equilibrium price p1 is less than p0 and quantity q1 is less than q0.
•Thus the direction of change in equilibrium price and quantity is same whenever there is a shift in demand curve.
 
Increase in Income
•With an increase in income, consumers are able to spend more money on some goods.
•Hence, the consumers will spend less on an inferior good with increase in income whereas for a normal good, the demand for the good to increase at each price.
•However, this income increase does not have any impact on the supply curve,
•Hence, at the new equilibrium, the price of clothes is higher and the quantity demanded and sold is also higher.
 
Increase in the number of consumers
•Let there be an increase in the number of consumers in the market for clothes.
•As the number of consumers increases, demand shall be more.
•Thus, the demand curve will shift rightwards.
•But this increase in the number of consumers does not have any impact on the supply curve.
•Thus compared to the old equilibrium point E, at point G which is the new equilibrium point, there is an increase in both price and quantity demanded and supplied.



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