Finding the New Normal: Shifts in Supply and Demand
The Starting Point: What is Market Equilibrium?
Imagine you are running a lemonade stand. You decide to sell each cup for $1.00. At that price, you are willing and able to make 50 cups a day. It turns out that on a hot day, exactly 50 people are willing to buy a cup for $1.00. You sell every single cup, and there are no disappointed customers left in line. This perfect match is called market equilibrium.
We can show this on a simple graph. The vertical axis (y-axis) shows the price. The horizontal axis (x-axis) shows the quantity. The demand curve (D) slopes downward: as price goes down, the quantity demanded goes up. The supply curve (S) slopes upward: as price goes up, the quantity supplied goes up. The point where the two lines cross is the equilibrium point ($P^*, Q^*$).
But what if something changes? A news report says lemonade boosts health, or a frost damages the lemon crop. These events don't just move us along the curves; they shift the entire curve left or right, creating a new crossing point. This is the core of our topic.
When Buyers Change Their Minds: A Shift in Demand
Demand can increase or decrease. An increase in demand means that at every possible price, people now want to buy a larger quantity. The entire demand curve shifts to the right. What causes this? A few common reasons:
- Popularity/Trends: A famous athlete says they love your lemonade.
- Income Increase: People have more money to spend.
- Price of Related Goods: The price of iced tea doubles, making lemonade seem like a better deal.
- Consumer Expectations: People expect a heat wave next week, so they stock up today.
Let's trace the steps with our lemonade stand. After the athlete's endorsement, demand increases (D shifts right to D1). At the old price of $1.00, there is now a shortage: quantity demanded is greater than quantity supplied. Seeing a line of eager customers, you (the seller) can raise your price. As the price rises, two things happen: some buyers drop out (moving up along the new demand curve), and you are motivated to make more lemonade (moving up along the supply curve). This continues until the shortage is gone at a new, higher equilibrium price and a new, higher equilibrium quantity.
When Production Gets Easier or Harder: A Shift in Supply
Supply can also increase or decrease. An increase in supply means that at every possible price, sellers are now willing and able to produce a larger quantity. The entire supply curve shifts to the right. What causes this?
- Lower Input Costs: The price of sugar and lemons falls.
- Better Technology: You get a faster lemon-squeezing machine.
- Good Weather: A fantastic lemon harvest.
- More Sellers: Your friend opens a competing stand next to yours, increasing total market supply.
Now, trace the steps. A great harvest means supply increases (S shifts right to S1). At the old price of $1.00, there is now a surplus: quantity supplied is greater than quantity demanded. You have unsold lemonade. To sell it, you lower your price. As the price falls, more people buy (moving down along the demand curve), and you may decide to make a bit less (moving down along the new supply curve). The market settles at a new, lower equilibrium price but a new, higher equilibrium quantity.
| Shift | Effect on Equilibrium Price | Effect on Equilibrium Quantity | Real-World Example |
|---|---|---|---|
| Demand Increases (D →) | Increases | Increases | New viral social media app; demand for it skyrockets. |
| Demand Decreases (D ←) | Decreases | Decreases | A study finds a food is unhealthy; people buy less. |
| Supply Increases (S →) | Decreases | Increases | A new farming technique increases wheat yield. |
| Supply Decreases (S ←) | Increases | Decreases | A hurricane damages oil refineries, reducing gasoline supply. |
A Real-World Case: The Video Game Console Launch
Let's apply this to a more complex, modern example: the launch of a new video game console.
Phase 1: The Hype (Demand Increases). Months before launch, exciting trailers and previews build massive hype. This increases consumer desire, shifting demand to the right. Even before any console is sold, we can predict the new equilibrium will have a higher price and quantity. This is why pre-order prices can be high.
Phase 2: The Shortage (Supply is Limited). The console launches, but due to complex global supply chains and chip shortages, the company cannot make enough units. This is a decrease in supply (supply curve shifts left). Analyzing this double shift is trickier: Both shifts (increased demand and decreased supply) push the price up. The effect on quantity, however, is conflicting: higher demand wants to increase quantity, but lower supply wants to decrease it. The final result depends on which shift is stronger. In the case of many popular consoles, the supply constraint is so severe that the quantity sold is actually lower than it could have been, despite huge demand, leading to empty shelves and very high prices on resale markets.
Phase 3: Stability (New Equilibrium). Over the next year, supply issues ease (supply increases, shifting right). The initial hype may also fade slightly (demand decreases a little, shifting left). These shifts work together to lower the price from its peak and increase the quantity available, eventually finding a stable, long-term equilibrium where everyone who wants a console at the market price can get one.
Important Questions
What is the difference between a "shift in demand" and a "movement along the demand curve"?
This is a crucial distinction. A shift in demand means the entire curve moves because a non-price factor changed (like trends, income, or expectations). A movement along the demand curve happens when the price of the good itself changes, causing consumers to adjust the quantity they demand. For example, if the price of bananas falls and people buy more, that's a movement down along the existing demand curve. If a news report says bananas prevent colds and people buy more at every price, that's a shift of the demand curve to the right.
Can the price change but the quantity stay the same in a new equilibrium?
Yes, but only in a very specific, and rare, scenario of equal and opposite shifts. Imagine demand increases (which pushes price and quantity up) but at the exact same time, supply decreases (which pushes price up but quantity down). The two forces on price combine, so the price definitely rises. However, the forces on quantity oppose each other perfectly. If the increase in demand and the decrease in supply are perfectly balanced in their effect on quantity, the new equilibrium quantity could remain exactly the same as the old one, but at a much higher price.
How quickly does a market reach a new equilibrium?
The speed of adjustment varies greatly. In financial markets (like stocks), adjustment is almost instantaneous through computerized trading. In markets for physical goods (like cars or houses), it can take months or even years. Factors include how quickly producers can change output, how flexible prices are (are they set by contract or can they change daily?), and how easily information flows. The lemonade stand adjusts in a day. The housing market after a major interest rate change may take over a year to find its new equilibrium price and quantity of homes sold.
Conclusion
The concept of a new equilibrium is a powerful tool for understanding our dynamic world. Markets are constantly reacting to news, trends, disasters, and innovations. Each event can shift demand or supply, creating temporary shortages or surpluses. But through the natural incentives of price changes—sellers wanting higher profits and buyers seeking the best deal—markets tirelessly work to match what is supplied with what is demanded. By following the step-by-step process of identifying the shift, the resulting imbalance, and the price adjustment that follows, we can make sense of why prices rise and fall, and why some items become easier or harder to find. It’s the invisible hand of the market, constantly feeling its way to a new point of balance.
Footnote
1 Equilibrium: A state of balance where opposing forces (here, demand and supply) are equal. In a market graph, it is the intersection point of the supply and demand curves.
2 Shortage (or Excess Demand): Occurs when the quantity demanded exceeds the quantity supplied at a given price. This puts upward pressure on price.
3 Surplus (or Excess Supply): Occurs when the quantity supplied exceeds the quantity demanded at a given price. This puts downward pressure on price.
4 Shift vs. Movement: A shift refers to a change in the entire demand or supply curve due to a change in a non-price determinant. A movement along a curve refers to a change in quantity demanded or supplied due solely to a change in the good's own price.