How to Determine Price When Supply or Demand Curves Shift

Economic markets tend toward equilibrium, the price and quantity that correspond to the point where supply and demand intersect. But equilibrium itself can change.

Because equilibrium corresponds to the point where the demand and supply curves intersect, anything that shifts the demand or supply curves establishes a new equilibrium.

The illustration shows what happens when demand increases. Originally, the market was in equilibrium at price P₀ and quantity Q₀. If demand increases, the demand curve shifts to the right from D₀ to D₁. The quantity demanded associated with the price P₀ is now Q_D.

Because this is greater than the quantity producers are providing (still Q₀ as determined off the supply curve), a shortage exists. The market moves from the original equilibrium price P₀ to the new equilibrium price P₁ and from the original equilibrium quantity Q₀ to the new equilibrium quantity, Q₁.

The impact of an increase in supply is illustrated below. Originally, the equilibrium price and quantity are P₀ and Q₀, respectively. An increase in supply shifts the supply curve to the right from S₀ to S₁. The supply increase immediately creates a surplus because at P₀, the new quantity supplied Q_S is greater than the quantity demanded, which is still at Q₀.

Because there is a surplus, the good’s price falls from P₀ to the new equilibrium price P₁, and the quantity demanded and quantity supplied move to the new equilibrium quantity Q₁, which is greater than the original equilibrium quantity Q₀.

There are instances where both demand and supply shift at the same time, and this makes determining the changes in equilibrium price and quantity more difficult.

When both demand and supply shift simultaneously, the change in only one equilibrium characteristic — price or quantity — can be definitely determined.

The illustration below shows a simultaneous decrease in both demand and supply — the demand curve shifts left from D₀ to D₁, and the supply curve shifts left from S₀ to S₁. The original equilibrium price and quantity are P₀ and Q₀, corresponding to the intersection of the original demand and supply curves.

Given the shifts to D₁ and S₁, the equilibrium quantity decreases from Q₀ to Q₁ while the equilibrium price has not changed — P₀ = P₁. But note that in this illustration, the demand and supply curves shift by the same amount.

In the next illustration, two decreases in supply are illustrated along with the decrease in demand. The first decrease in supply is a relatively small one, from S₀ to S_A. The new equilibrium quantity decreases from Q₀ to Q_A, and the equilibrium price also decreases from P₀ to P_A.

The second decrease in supply is a relatively large one, from S₀ to S_B. In this case, the new equilibrium quantity still decreases, now from Q₀ to Q_B. But note what happens to equilibrium price: It increases from P₀ to P_B. Given the decrease in demand, a small decrease in supply results in a lower equilibrium price, while a large decrease in supply results in a higher equilibrium price.

These two illustrations show that when both demand and supply simultaneously decrease, equilibrium quantity always decreases, but equilibrium price can increase, decrease, or remain the same. So, only one equilibrium characteristic — equilibrium quantity — can be definitely determined.

The crucial thing to note is that no matter what happens to supply and demand, the market always adjusts to its equilibrium point.