Shift in demand and supply

By John

We often hear news about how prices of gold change every single moment. They never seem to be static and are always fluctuating. Thus a graphical representation of market equilibrium for gold would always keep changing. This can happen due to many factors that come under the umbrella of either shift or increase in demand, supply or both.

The Shift in Demand and Supply
Definitely, if there is any change in supply, demand or both the market equilibrium would change. Let’s recollect the factors that induce changes in demand and supply:

Shift in Demand
The demand for a product changes due to an alteration in any of the following factors:

Price of complementary goods
Price of substitute goods
Tastes and preferences
An expectation of change in the price in future
Shift in Supply
The supply of product changes due to an alteration in any of the following factors:

Prices of factors of production
Prices of other goods
State of technology
Taxation policy
An expectation of change in price in future
Goals of the firm
Number of firms
Now let us study individually how market equilibrium changes when only demand changes, only supply changes and when both demand and supply change.

Learn more about Equilibrium, Excess Demand and Supply here in detail.

When only Demand Changes
A change in demand can be recorded as either an increase or a decrease. Note that in this case there is a shift in the demand curve.

Increase in Demand
When there is an increase in demand, with no change in supply, the demand curve tends to shift rightwards. As the demand increases, a condition of excess demand occurs at the old equilibrium price. This leads to an increase in competition among the buyers, which in turn pushes up the price.

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Shifts in Demand and Supply
Equilibrium, Excess Demand and Supply
Of course, as price increases, it serves as an incentive for suppliers to increase supply and also leads to a fall in demand. It is important to realize that these processes continue to operate until a new equilibrium is established. Effectively, there is an increase in both the equilibrium price and quantity.