Using the Supply and Demand Curves to Find Equilibrium - Online Tutor, Practice Problems & Exam Prep

Understanding supply and demand is crucial for analyzing market equilibrium, where quantity demanded equals quantity supplied at a specific price, known as the equilibrium price (P_star) and quantity (Q_star). Shifts in demand or supply can lead to changes in equilibrium, affecting prices and quantities. For instance, an increase in demand typically raises both equilibrium price and quantity, while a decrease in supply can lead to higher prices and lower quantities. Recognizing these dynamics helps in grasping market behavior and economic principles like consumer surplus and market failure.

Equilibrium

Alright, so now we have the tools to analyze supply and demand together on one graph. We're going to see how different price levels can affect the amount of quantity demanded and quantity supplied, as well as see how markets tend to move towards equilibrium. So I use this word equilibrium and it really just means balance. We're going to try and balance the market. So what does it mean for the market to be in balance? That is going to be when the quantity demanded equals the quantity supplied. So the amount that people are willing to buy in the market is the same amount that the producers are willing to supply to the market at that price. Cool. So there is going to be this equilibrium and at that equilibrium we're going to have an equilibrium price and an equilibrium quantity, right?

So at this price we're going to call it p star. This star means equilibrium, right? That's the notation that we use for the equilibrium price and at that price, quantity supplied is going to equal quantity demanded. And the same thing with equilibrium quantity, we're going to use a q star to tell us that it's the equilibrium quantity and this is going to be the quantity at that price, right? So I think it's going to be really easy to see this on the graph. So let's go down here. Now if you guys were going to guess where equilibrium was on that graph, where would you guess? This would be my first guess and I'm hoping that it was your first guess too. It's going to be right here where the lines intersect, right? So let's go ahead and label our graph, right? We have our price axis here, our quantity axis over here, right, and which line is supply and which line is demand. So demand, you remember demand, we've got the demand downward, the double d's. We know that this is our demand line right here and this is our supply line going up and at that point where they intersect, that is our equilibrium point.

So at this point, let’s notice a few things. Notice what the price is here. We’ve got the price of 6, which is going to be what we call p star, right? Equilibrium price. And let's go down on the quantity for each of the graphs. Let’s look at the quantity supplied and the quantity demanded at this point. Well, at this point, right, we see on the red line, if we go down from that point, we’re going to see a quantity of 10, right? And that’s the quantity I'm going to put equals quantity supplied as well as if you look on the blue line going down from that point, we’re at the same point, right, which equals quantity demanded as well. So that is our q star here at 10, right? So we found our equilibrium price and our equilibrium quantity by the intersection of the two lines on the graph. Pretty easy.

We can also find equilibrium on a schedule like we have on the right here. So notice I've got our prices for supreme pizza and by the way this is the same information that's on the graph. I’ve graphed the information from the schedule and we’re going to find the same equilibrium in this schedule. So notice the way to find it here in the schedule is to find where the quantity supplied equals the quantity demanded, right? And that was our definition of equilibrium. So let's look at all the different quantities demanded and the different quantities supplied at the different prices and you’ll find that at a price of $6 we are going to have equal quantity supplied and quantity demanded and that’s exactly what we found on the graph as well, right? So we’ve got our P star right here of $6 and our Q star is going to be these 10 units. Cool? I hope that makes sense. It shouldn’t be too hard to find equilibrium. Let’s go ahead and move on to the next video.

Law of Supply and Demand

So we have what some books call the law of supply and demand; it's not as emphasized as the law of supply and the law of demand that we covered earlier, but it is a good idea to have in mind just to understand the logic. This law talks about how the price is going to constantly adjust in an attempt to find the equilibrium price. Okay, let's do an example here as if we were in this situation in the market, right.

Let's say that we're in the market for pizzas in your town and we know the equilibrium price here being $6, but the price was set too high at about $8. In this situation, at this price, they were supplying way too much; there was all this excess supply, and all the suppliers had all these extra pizzas lying around, and they're like, "What do we do with these pizzas? Let's lower our price so we can get rid of the pizzas." So they go ahead and they're like, "Alright, let's do a sale. We're going to sell all these pizzas half off." So they have this sale, and now they have a half-off sale on all the pizza, and they end up somewhere down here, and they're like, "Whoa, whoa, whoa, now people are buying way too much pizza; we could probably be charging more money for these pizzas." So you could see what could happen. They're eventually going to raise the price and see if there's still a shortage or a surplus, right, and eventually, the market is going to find this equilibrium of $6. Cool, so that's the idea of the law of supply and demand: it's going to constantly adjust until it finds this equilibrium. Cool, let's move on.

Demand Shifts

So now we can see how shifts in demand or supply are going to affect our equilibrium price and quantity. Alright, so we're going to start with demand here, but we're also going to see how supply shifts are going to affect equilibrium price, and then we are also going to see how shifts in both, we're actually going to shift demand and supply on the same graph. So that'll be pretty interesting, but these are the steps that we're usually going to follow here on the right. These are the steps we're going to follow when we're doing these analyses. So step 1 is you know the problem is going to give you some sort of information about the situation, right? They could say that consumer income is increasing or a natural disaster occurred, right? So your first job is to take this information and say, is this going to affect demand or supply or sometimes the event could affect both. Then we are going to decide which direction to shift, right. If we've decided that it affects demand, was it a good thing for demand or a bad thing demand, right? Are we going to shift to the right or the left? Then what we're going to do is use this notation, remember the p₂q₂ and p₁q₁ so we're going to find this new price and quantity these are going to be our new equilibrium price and quantity and we're going to compare it to the original price and quantity p₁q₁. So let's go ahead to the graph here and do an example so you can see how these steps work in action.

First thing I want to know about this graph is that now I'm only using one color for demand and supply, right. I'm just going to use blue and the reason here is that by now you guys should feel pretty comfortable that demand is going to be the downward slope line, right. We've got demand downward, the double D's, you guys can't forget that, right. Supply just it's the other one. So what I want to do, the reason I'm doing one color is because it's a lot easier to analyze the change. If you see, okay, blue is my original lines and I'm going to use red for my new lines and then it's a lot easier to say, oh, this is the new supply because it can get hairy once we're drawing a lot of lines on the same graph. So let's go ahead and label our axes here. We've got our price, our quantity, our demand line, and our supply line. Right? So what I want to do first is I'm going to label our original equilibrium right here. I'm going to put a circle and we're going to have notation for our original equilibrium versus our new equilibrium to help us distinguish one from the other as well. This was our original equilibrium and I'm going to use P₁ and Q₁ to notate that on the graph here. So we've got Q₁ here and P₁ over here right? And now let's say something caused demand to shift to the right, say consumer preferences for the product, increased, right? So we're going to shift our demand curve to the right and I'm going to use red for my new demand curve so that we can see different from the original situation. So I'm going to move my demand curve out here and I'm going to label it D₂. So we should call them D₁ and D₂, that also helps us distinguish one from the other, right? So I'm going to always use 1 for the original situation and 2 for the new situation after the changes. Cool, so we've got our new demand line there in red.

So let's go ahead and find our new equilibrium, and what I like to do is for the old equilibrium we're going to use a circle, and for the new equilibrium we'll use a square. So I'm going to go ahead and at this point, I'm going to draw a square around it and this helps me see the difference, right, now I can easily pinpoint the original one and the new one, the circle and the square. You can use any system you like but this works for me so I'm going to go ahead and at this point I'm going to find my new quantity and my new price. So our new equilibrium quantity we can see here is at Q₂ and our new equilibrium price is at P₂. So a lot of times what a question will ask you is okay whatever demand shifted to the right, what happened to equilibrium price and quantity? Usually don't have numbers to deal with it, you're just going to say something like equilibrium price has gone up and equilibrium quantity has gone up, right? And we know that from our analysis here on the graph that we've got this new quantity and this new price. Cool. Let's do the same thing with a shift to the left down here. So we're going to follow the same steps. Let's go ahead and label our axes PQ in alphabetical order left to right, downward demand, upward supply, cool, and let's go ahead and put our original equilibrium price and our original equilibrium quantity here on the side. Yep. And let's say that demand is shifting to the left now, right. So let's say that the price of a complementary good has increased, right, so if a complementary good's price has increased, demand for this product is going to shift to the left. So let's go ahead and put that in here. We've got our D₁ and our S₁, right? So let's put our D₂ in here which is going to be a line let's say over here and we'll call that D₂, and it's pretty clear where our new equilibrium is right here where the new line crosses the old line. Right. Cool. So let's go ahead and find our new equilibrium quantity and our new equilibrium price and we're going to see that the price has decreased and quantity has also decreased, right. So we'll see in situations where everything is held constant except demand shifts to the left, we're going to see that price decreases and quantity decreases as well, and that's going to be consistent for all problems where this graph occurs. Cool. So let's go ahead and do the same thing with supply shifts.

Supply Shifts

Okay. Let's do the same thing here with supply. So now we'll hold the demand line constant, and we're going to move the supply line to the right or the left. Right? So let's go ahead on the graph. We'll label our axes p and q. We've got our downward demand and our upward supply. Right? This will be d₁ and s₁, and let's go ahead and use red, to make our new supply line shifting to the right. So this could be some situation, let's say technology increased in the industry, so we've decided that the supply line is going to shift to the right. So let's go ahead and draw this on the graph, and then we'll find our prices and quantities. So I'll draw my new supply line over here, S₂. I'm going to do my square here for my new spot and my circle for my original. Now let's go ahead and find our original price and quantity and our new price and quantity. So supply has shifted to the right, our original price and our original quantity here P₁Q₁ and now let's go to the square, our new equilibrium, which is somewhere around here at P₂Q₂. So what has happened in this situation? When supply shifted to the right, we had our equilibrium price decrease, and our equilibrium quantity increase, and that almost seems a little logical to me. I guess the supply shifting to the right, it's more efficient, they're able to make it a better price, and, they're able to bring more to market. I don't know, there's some logic there that kind of sits in the back of my head, but it's just always easier to just see it on the graph, and you can't get it wrong, right. If you look at it on the graph, we are going to get it right every time.

Let's do the same thing with the supply shift to the left over here. Alright, cool. Let's go ahead and label our axes. We've got price, quantity. Notice I do this every time because I'm trying to drill it in. We've got our downward demand, d₁, upward supply, s₁. Cool. Alright. And let's go ahead and say that in this situation, our input prices increase, right? The price of gasoline increased, and we use gasoline to run our machines. So we are going to shift our supply line to the left and find our new equilibrium price and quantity. So I'm going to draw the shift to the left here. Something like that. That'll be S₂, and let's mark our old equilibrium and our new equilibrium. Right here was the old one where the blue lines cross, and here's the new one with the new line right there. Cool? Let's compare our equilibriums. So here was our original equilibrium quantity and our original equilibrium price, and let's see what happened to the new equilibrium. We've got an equilibrium price here and equilibrium quantity here. So what happened in this case? We're going to see that the price has increased and the quantity has decreased. Cool? Alright, so these are all the different one-sided shifts that we can do. Let's do some practice problems before we move on to 2-sided shifts. Alright, let's do it.

If the economy booms and incomes rise, what happens in the markets for inferior goods?

• A. Prices and quantities both rise
• B. Prices and quantities both fall
• C. Prices rise and quantities fall
• D. Prices fall and quantities rise

A change in which of the following will NOT shift the demand curve for ice cream?

• A. The price of frozen yogurt
• B. The price of ice cream
• C. The price of ice cream cones
• D. The income of ice cream consumers

A decrease in _________ will cause a movement along a given supply curve, which is called a change in __________.

• A. supply, demand
• B. demand, supply
• C. demand, quantity supplied
• D. supply, quantity demanded

Gum and mints are substitutes. If the price of gum increases, what happens in the market for mints?

• A. The supply curve shifts to the left
• B. The supply curve shifts to the right
• C. The demand curve shifts to the left
• D. The demand curve shifts to the right

Which of the following situations would lead to an increase in the equilibrium price of carrots and a decrease in the equilibrium quantity of carrots sold?

• A. An increase in the price of hummus, a complement to carrots
• B. An increase in the price of celery, a substitute for carrots
• C. An increase in the price of fertilizer, an input for carrots
• D. An increase in consumers' incomes, assuming carrots are a normal good

The discovery of a new fertilizer will shift the ___________ curve for carrots, leading to a ___________ equilibrium price.

• A. demand, higher
• B. demand, lower
• C. supply, higher
• D. supply, lower

Both Shift - Warning!

Now we're going to study our most involved analysis of supply and demand where we're going to shift both supply and demand on the same graph. So this is going to be pretty exciting. We're going to be making 2 shifts on the same graph, and I want to make a quick note. Whenever we move both supply and demand on the same graph, we are always going to have one of our variables—price or quantity—ambiguous. So one of them we're not going to be able to tell whether it goes up or down whenever we move both supply and demand, okay? And we're going to see why that is in a second, but first I want to show you the correct way to draw curves when you are shifting both because when you shift both, it does make a difference how far you shift each curve. Alright. So let me show you this example here. I'm going to show you 2 incorrect ways to do it and show you why we get different answers when we do it each of these ways and then I'll show you the correct way, the way I like to do it so it's really hard to mess it up. So here we go, let's do the first one. In all of these situations we're going to be shifting supply to the right and demand also will shift to the right, okay. But whatever I'm doing here holds true for shifts to the left, mix shifts of right and left, so first I want to draw a situation where I'm going to shift the supply curve really far to the right and the demand curve just a little bit to the right. Okay. So I'm going to shift the supply curve way to the right, this exaggerated shift all the way over here. Okay. And I'm going to shift the demand curve to the right as well, but I'm only going to shift it just a little bit. So this tiny little shift comparatively, right? So let's see what has happened to our equilibrium price and quantity in this situation. We started here where we had a price of p₁ and a quantity of q₁. Right, price axis, quantity axis, and now let's see where we are in our new situation and see how easy it is to see our new equilibrium even though we've got all these lines on the graph, it's going to be where these two red curves intersect, right? Those are the new lines that we drew our new situation. So let's see what's happened here. It appears that our equilibrium price has decreased and it appears that our equilibrium quantity has increased, right? P₂, it looks like it's decreased, right? I'm going to put a question mark here because I don't want you to get confused later. That is not going to end up being correct and then we've got a quantity increase here, right? So now let's see this next situation. I'm going to do something similar except this time, I'm going to only shift supply a little bit and demand a lot in this one. So let's go ahead and start with demand and shift it a lot. I'm going to shift it way out here, right. I did a way, way big shift in demand and a tiny shift in supply, this little baby shift in supply. Cool, let's go ahead and analyze our points now. So this was our original equilibrium where we had this price and this quantity, and now let's look at our new equilibrium, and notice in both of these cases we have shifted both to the right, okay, but we're going to get a different answer in this case. Look what has happened to our equilibrium price. Our equilibrium price in this case looks like it has increased and equilibrium quantity, again, looks like it has increased. Okay. So something about equilibrium quantity seems like we're doing it right. Let me get out of the way just so you see the whole thing. Right, but the big deal here is that our equilibrium price in one graph decreased and in the second graph it increased, so what is happening? We don't know. In the end, we're going to learn that this price variable is actually ambiguous and we can't make an actual conclusion about what has happened to price. So let me show you the correct way to put this on the graph and it'll help you not make this mistake. So here let's go on to this last graph. I think there's space for me here. Alright, cool. So let's go ahead and in this one, whenever we have shifts in both, what I like to do is shift them both an equal amount, okay? So what I'm going to do is shift the demand and supply as equally as I can and then there's a good test to see if you did that right. So I'm going to shift this about this far to the right for our demand and about this far for our supply. Right? So I did approximately a good job here. What what can tell you that you did a good job is you're going to get this square. Right? You're going to get this square. Let me do it in a different color. I'll do it in green. This square and you want it to be as even as possible. Alright. You want this square to come out as even as possible, and you'll get a good answer. Okay, so in this situation I didn't do it exactly perfect, but it's good enough for our analysis. So let's go ahead and label our original equilibrium and our new equilibrium right here. Cool? So the idea is that now the price looks just about the same as where it was, right? It's just about where it was, it kind of looks like it went up a little bit because of how I drew it, but the idea is by drawing it like this, I can tell that it didn't it definitely didn't change very much and that's how I know it's going to be the ambiguous variable whereas our quantity clearly has increased. There's no way to be ambiguous about this. Quantity definitely went up from q₁ to q₂. The price is very close to each other, right? If I had drawn both prices they would have been something like that and that's how I know it's ambiguous. The q is certain, right? We can totally tell that it's moved up, but the price it's very close to where it originally was, so I know that that is the ambiguous variable. And when I write this out, different teachers are going to have different notation, some might even write out the whole word ambiguous, but to save space and time, I'm going to do p question mark for when the price is ambiguous or q question mark for when it's ambiguous. I've seen teachers use this this kind of double sided arrow for ambiguous, meaning I don't know which way it's going to go, left or right, so the same thing for quantity with that double sided arrow, or something like they'll just write P ambiguous or unsure or not enough information, right? Same thing, q ambiguous. So in this situation, what did we have? We had a situation where p was ambiguous and q increased. Cool? So that was our answer for this question if they were to ask us what had happened in this situation. Let's go ahead and analyze all the different combinations of shifts to the left and the right, and you'll see that there is kind of a pattern, when we're doing the double shifts. Alright, let's do that now.

Results of Both Shifting

Now let's see what happens in all the different combinations of double shifting with supply and demand. So I've got our same steps listed here, right, we're not really going to use them on this page, but it's just that this is the same process that we've been following. But let's go ahead and start with this one here on the left. Supply is shifting to the left and demand is shifting to the left, right. I'm just going to shorten it here. Supply left, demand left as well. Alright. So let's go ahead and draw our new curves here. I will use red as usual. So our new demand curve is to the left, and remember our trick is to try and draw them as evenly in the shifts. To shift them both as evenly as possible, and you know you did that when you get a nice square shape in the middle. So I'm going to try and do that here. There we go. That was a really good one. You could see that this square came out really good in this one, and this is kind of what you're aiming for when you do this, to get this square to come out as even as possible because it's going to be really clear what is the ambiguous variable. So let's go ahead and mark our original equilibrium as the intersection of the blue lines, our new equilibrium as the intersection of the red lines, and let's go ahead and see which variable is ambiguous. So at our original price, and you can kind of already see which one's going to be ambiguous here, it seems that our price here is going to be along the same line, and let's look at our quantities. So the quantity looks like it has clearly decreased where quantity 1 was there, quantity 2 was there, and the price kind of stayed on top of each other. So that ends up being the ambiguous variable. So in here, I'm going to write p question mark q down, right. Quantity clearly decreased in this situation, but the price was ambiguous as to what happened. So let's go ahead and do the same thing here on the right, supply shifting to the right and demand shifting to the right. So the same thing, we're going to draw the curves as evenly as we can in the shifts to try and get that square shape. So there's my new supply curve. Let me draw my new demand curve. Alright. We did a pretty good one here too. You can see we got a good square. So let's go ahead and analyze our original equilibrium and our new equilibrium. So let's start with price. It looks like the price again for both of them are along just about the same line, so we're going to know that that's going to be our ambiguous variable because they kind of stayed in the same place and we can expect the other variable to have changed our quantity variable and it looks like it has. Our q1 was here, q2 is here, quantity has clearly increased. So in this situation, we have the price being ambiguous again and quantity has definitely increased. Cool? Alright, let's go on to the bottom half of the page, and I think I can fit in here for the first graph. I get lonely when I'm not on the screen left and demand is shifting to the right. So let's start with supply to the left, demand to the right, And again, we've got a pretty good square going here. So let's go ahead and mark our original equilibrium, our new equilibrium, and let's compare. So let's start with price again. Now we've got an original price here p1 and a new price here p2. So it looks like prices have clearly increased. Right? They're not landing on top of each other. Let's see what happened with quantity. We should expect something ambiguous with quantity, which it does look like that's what we're getting, right. It looks like they're right on top of each other at this quantity that's going to end up being ambiguous. So we have a clear increase in our price, but an ambiguous outcome with our quantity. We're not sure whether the quantity will go up or down, so let's go ahead and do this last one. Now supply is shifting to the right and demand is shifting to the left. So supply shifting to the right, demand shifting to the left. Pretty good. That's okay, but we did get that square shape. And let's go ahead and mark our points. So there is our original equilibrium and our new equilibrium. So at our original equilibrium, we had this price right here, p1, and what price did we have here at our new equilibrium p2. So it looks pretty clear that the price has decreased, so quantity should be our ambiguous variable, which it looks like it is. Right? They're right on top of each other. Quantity is going to be ambiguous. So we have price decreasing for sure and quantity is ambiguous. Alright. So notice what we've got in all these situations. Up here, when both move the same way, supply shifted to the left, demand shifted to the left, we've got an ambiguous price and since they both shifted to the left, it was a bad thing, quantity decreased, and in the other situation, they both shift to the right, price being ambiguous but now quantity increased with rightward shifts. And down here when they're doing opposite shifts, that's when we get an ambiguous quantity and then the price will either shift up or down. So we kind of have that going for us, but it is always going to be easier to just put it on the graph and analyze it for every problem. Alright? There's no way you get it wrong when you put it on the graph and you do the analysis. Cool? Alright. Let's go ahead and do some double shifting practice problems.

What happens in the market for cream cheese if (1) the price of butter, a substitute for cream cheese, falls and (2) the cost of milk, an input in cream cheese production, rises?

• A. Equilibrium price rises, equilibrium quantity falls
• B. Equilibrium price falls, equilibrium quantity falls
• C. Equilibrium price ambiguous, equilibrium quantity rises
• D. Equilibrium price ambiguous, equilibrium quantity falls

If the wages of bus drivers increases at the same time that the income of consumers decrease, what happens in the market for bus rides (assuming that bus rides are an inferior good)?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price rises, equilibrium quantity rises
• C. Equilibrium price falls, equilibrium quantity ambiguous
• D. Equilibrium price ambiguous, equilibrium quantity rises

If producers of garden hoses have discovered new technology to improve production, while the number of gardeners increases, what happens in the market for garden hoses?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price falls, equilibrium quantity falls
• C. Equilibrium price ambiguous, equilibrium quantity rises
• D. Equilibrium price ambiguous, equilibrium quantity falls

What happens in the market for tennis balls if (1) the price of tennis rackets, a complement for tennis balls, increases and (2) the price of baseballs, a substitute in production, decreases?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price ambiguous, equilibrium quantity falls
• C. Equilibrium price ambiguous, equilibrium quantity rises
• D. Equilibrium price falls, equilibrium quantity ambiguous

What happens in the market for wheat if (1) the cost of fertilizer, an input in production, increases and (2) tornadoes ravages the Midwest, where wheat is grown?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price rises, equilibrium quantity falls
• C. Equilibrium price falls, equilibrium quantity rises
• D. Equilibrium price ambiguous, equilibrium quantity falls

What happens in the market for online tutoring services if (1) the government decides to provide funding for online tutors and (2) the price of private tutoring, a substitute for online tutoring services, increases?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price ambiguous, equilibrium quantity falls
• C. Equilibrium price falls, equilibrium quantity ambiguous
• D. Equilibrium price ambiguous, equilibrium quantity rises

Here’s what students ask on this topic:

What is market equilibrium and how is it determined using supply and demand curves?

Market equilibrium is the point where the quantity demanded by consumers equals the quantity supplied by producers. This balance is achieved at a specific price, known as the equilibrium price (P_star), and a specific quantity, known as the equilibrium quantity (Q_star). To determine this using supply and demand curves, you plot both curves on a graph. The demand curve typically slopes downward, indicating that as price decreases, quantity demanded increases. The supply curve usually slopes upward, showing that as price increases, quantity supplied increases. The intersection of these two curves represents the market equilibrium, where P_star and Q_star are found.

How do shifts in demand or supply affect market equilibrium?

Shifts in demand or supply can significantly impact market equilibrium. If the demand curve shifts to the right (increase in demand), both the equilibrium price and quantity typically rise. Conversely, if the demand curve shifts to the left (decrease in demand), both the equilibrium price and quantity usually fall. For supply, a rightward shift (increase in supply) generally leads to a lower equilibrium price and a higher equilibrium quantity. A leftward shift (decrease in supply) typically results in a higher equilibrium price and a lower equilibrium quantity. These shifts reflect changes in market conditions, such as consumer preferences or production costs.

What is the law of supply and demand?

The law of supply and demand states that the price of a good or service will adjust to bring the quantity supplied and the quantity demanded into balance. When there is excess supply (surplus), prices tend to fall to encourage more consumption and less production. Conversely, when there is excess demand (shortage), prices tend to rise to encourage more production and less consumption. This continuous adjustment helps the market find its equilibrium price and quantity, ensuring that resources are allocated efficiently.

How do you find the new equilibrium after a shift in supply or demand?

To find the new equilibrium after a shift in supply or demand, follow these steps: First, determine whether the shift affects the supply or demand curve. Next, identify the direction of the shift (right for an increase, left for a decrease). Then, redraw the affected curve on the graph. The new equilibrium is found at the intersection of the new curve and the unchanged curve. Label the new equilibrium price (P₂) and quantity (Q₂). This new point reflects the market's response to the change in conditions.

What happens to equilibrium price and quantity when both supply and demand shift simultaneously?

When both supply and demand shift simultaneously, one of the variables (price or quantity) will be ambiguous. For example, if both curves shift to the right, the equilibrium quantity will increase, but the change in equilibrium price will be uncertain. Conversely, if both curves shift to the left, the equilibrium quantity will decrease, but the change in equilibrium price will be ambiguous. The exact outcome depends on the relative magnitudes of the shifts. Analyzing the graph helps determine the specific changes in equilibrium price and quantity.