Shifts in demand and supply
So long as the demand and supply curves in any market remain stationary, the equilibrium price should be maintained. However, as we have seen, there are numerous factors that could shift either or both of these curves. If this were to happen, then the old equilibrium would be destroyed and the market should work to anew equilibrium. How does this happen?
In Figure 5.23 the original equilibrium price for Real Brew draught beer is P1. Assume that the demand curve moves from D1 to D2. This increase in demand could be due to a variety of factors. For example, the price of a rival drink may have increased; disposable income could have risen; or sales may have benefited from a successful advertising campaign. In any event, at the old equilibrium price there now exists an excess of demand over supply of Q1Q3. It is likely that price will be bid upwards in order to ration the shortage in supply. As price rises, demand is choked off and supply rises. Eventually there is a movement to a new equilibrium of P2. At this new price both supply and demand at Q2 are higher than they were at the previous equilibrium. If, alternatively, the demand curve had shifted to the left, then the process would have been reserved and the new equilibrium would have been at a level of demand and supply. Less that Q1, with a price below P1. Illustrate this process diagrammatically for yourself.
In Figure 5.24 there is a shift in the supply curve from S1 to S2. Refer back in this chapter to envisage specific reasons for a such a shift. At the original equilibrium price of P1 there would now be an excess supply over demand of Q1 Q3. Price would therefore fall in a free market. As it does so, demand will be encouraged and supply diminished. Eventually there will be a new equilibrium at P2 with a higher quantity demand and supply than at the previous equilibrium. If the supply curve had instead shifted to the left, then market forces would have resulted in a lower quantity supplied and demanded than before. Once again, illustrate this diagrammatically for yourself.
The analysis so far has been relatively straightforward; it has been assumed that either the demand or the supply curve moves. However, it is likely that in any given time period both curves could move in any direction and perhaps even more than once.