Table of Contents

  • Demand Increase
  • Demand decrease
  • Shift left
  • Shift right
  • Equilibrium price
  • Equilibrium quantity

Assuming there are no changes in the supply (ceteris paribus):

If the demand INCREASES (shown by a shift to the RIGHT of the demand curve), then generally, the equilibrium price INCREASES and the equilibrium quantity INCREASES.

If the demand DECREASES (shown by a shift to the LEFT of the demand curve), then generally, the equilibrium price DECREASES and the equilibrium quantity DECREASES.


Effect of increase or decrease in demand on equilibrium shown graphically:

http://www.econport.org/content/handbook/Equilibrium/shifts-graph/mainColumnParagraphs/0/content_files/file0/market_equilibrium_g34.gif
http://www.econport.org/content/handbook/Equilibrium/shifts-graph/mainColumnParagraphs/0/content_files/file0/market_equilibrium_g34.gif



Real life example:

http://www.americanprogress.org/issues/2010/10/cash_over_clunkers.html
Examine the graph under "Effect of the program on the used car market" and the graph under "Effect of the program on new vehicle sales." Then answer the following questions. To read suggested answers, highlight the blacked-out text beneath each question.

1. Why is there a steep rise in the prices of used cars immediately before the "Cash-for-Clunkers" program?
The Recession caused a great decrease in incomes. Used cars are an inferior good, so the decrease in income caused an increase in demand, which in turn increased the equilibrium price of used cars.

2. What do you believe happened to the quantity of used cars that were bought immediately before the "Cash-for-Clunkers" program and why?
The equilibrium quantity of used cars increased. This is because the demand for them increased due to the fact that used cars are inferior goods and the incomes of much of the population decreased greatly because of the Recession.

3. Why is there a decrease in the sales of new cars before the "Cash-for-Clunkers" program?
The Recession caused a decrease in incomes for many people. Since new cars are normal goods, the decrease in income caused a decrease in demand, which in turn decreased the equilibrium quantity of new cars.

4. What do you believe happened to the prices of new cars that were bought before the "Cash-for-Clunkers" program and why?
The equilibrium price of new cars decreased. This is because the demand for them decreased because new cars are normal goods and the Recession caused the decrease in incomes of many people.
5.If the government says that only in cars have the correct safety features, What will happen to equilibrium on price and quantity in the new car market?
Equilibrium price and Equilibrium quantity will increase due to the rightward shift of the demand curve caused by a change in consumer expectations.

'66 Volkswagen Bug
'66 Volkswagen Bug
http://volkswagennewbeetle.net/wp-content/uploads/2011/02/Black-Volkswagen-New-Beetle.jpg
http://volkswagennewbeetle.net/wp-content/uploads/2011/02/Black-Volkswagen-New-Beetle.jpg