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5.5 Impact of Shift in Supply and Demand

Supply Shift
 
•The figure shows the impact of a shift in supply curve on the equilibrium price and quantity.
•Initially, the market is in equilibrium at point E where the market demand curve DD0 intersects the market supply curve SS0 such that the equilibrium price is p0 and the equilibrium quantity is q0.
 
Supply Shift Leftwards
 
•Let the market supply curve shifts leftward to SS2 with the demand curve remaining unchanged
•Because of the shift, at the prevailing price, p0, there will be excess demand equal to 0 q'‘0qo in the market.
•Some consumers who are unable to obtain the good will be willing to pay higher prices and the market price tends to increase.
•The new equilibrium is attained at point G where the supply curve SS2 intersects the demand curve DD0 such that q2 quantity will be bought and sold at price p2.
 
Supply Shift Rightwards
 
•Let supply curve shifts rightward, as shown in Figure.
•At p0 there will be supply excess of goods equal to q0 q0' .
•In response to this excess supply, some firms will reduce their price and the new equilibrium will be attained at F where the supply curve SS1 intersects the demand curve DD0 such that the new market price is p1 at which q1 quantity is bought and sold.
•Thus the directions of change in price and quantity are opposite whenever there is a shift in supply curve.
 
Impact of increase in the price of an input
 
•Let all other things remaining constant, but there is an increase in the price of an input used in the production of a commodity.
•This will increase the marginal cost of production of the firms using this input.
•Therefore, at each price, the market supply will be less than before.
•Hence, the supply curve shifts leftward.
•This increase in input price has no impact on the demand of the consumers since it does not depend on the input prices directly. Therefore, the demand curve remains unchanged.
•Hence, the market price rises and quantity produced decreases.
 
Impact of an increase in the number of firms
 
•Since at each price now more firms will supply the commodity, the supply curve shifts to the right but it does not have any effect on the demand curve.
•Hence, there will be a decrease in price of the commodity and increase in the quantity produced compared to the initial situation.
 
Simultaneous Shifts of Demand and Supply
•The simultaneous shifts can happen in four possible ways:
     (i) Both supply and demand curves shift rightwards.
     (ii) Both supply and demand curves shift leftwards.
     (iii) Supply curve shifts leftward and demand curve shifts rightward.
     (iv) Supply curve shifts rightward and demand curve shifts leftward.
 
Impact of Simultaneous Shifts on Equilibrium
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