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Determination of Prices

Changes in Demand

The change means an increase or decrease in the volume of demand and supply from its equilibrium. There exist some determinants other than the price of the commodity which affects the quantity of demand, like the income of consumers, the taste of consumers, preference of consumers, population, technology, etc. Due to the effects of these determinants, demand or supply of a product changes and demand and supply curve shifts. Such shifts affect the equilibrium price and quantity. Here now we are going to discuss changes in demand.

Browse more Topics under Determination Of Prices

  • Intro to Determination of Prices
  • Changes in Supply
  • Simultaneous changes in Demand and Supply
  • Features of Perfect Competition
  • Price Determination under Perfect Competition
  • Long Run Equilibrium of Competitive Firm and Industry
  • Monopoly Market
  • Monopolist’s Revenue Curve
  • Price Discrimination
  • Monopolistic Competition
  • Oligopoly
  • Kinked Demand Curve

Changes in Demand

Changes in demand include an increase or decrease in demand. Due to the change in the price of related goods, the income of consumers, and the preferences of consumers, etc. the demand for a product or service changes.

So there are two possible changes in demand:

  • Increase (shift to the right) in demand
  • Decrease (shift to the left) in demand

Learn Changes in Supply here.

I) Increase in demand (Shift to the Right)

Suppose, the income of the consumer increases. The price of the product and supply of the product remain the same. Due to an increase in income of the consumer, the purchasing power of consumption increases.

So the demand for the product in the market will also increase. Resultantly demand will change even if the price and supply of the product remain the same. This is called an increase in demand.

Since supplies are short, the price of the product will increase. Now due to the higher price, manufacturers of the product also increase their supply to cover extra demand in the market. Ultimately new equilibrium between demand and supply will be established.

Now we can conclude, due to an increase in demand, there is an increase in the equilibrium price. Resultantly quantity supplied also rises because quantity sold and purchases have increased. The Demand curve will shift rightward. Keep in mind the following points:

  • No change in the price of the product
  • No change in the supply of product
  • Income of Consumer is increasing
  • Demand is increasing

Changes in Demand

Source: dreamstime.com

II) The Decrease in Demand (Shift to the Left)

Now, let’s think of the opposite of the above situation. Suppose the Income of the consumer decreases. But, the price of the product and the supply of the product remains the same. Due to the decrease in income of the consumer, the purchasing power of the consumer will also decrease.

So the demand for the product in the market will also decrease. Resultantly demand will change even if the price and supply of the product remain the same. This is called a decrease in demand.

Since supplies are excess in comparison to demand, the price of the product will decrease to OP1. Now due to the lower price, manufacturers of the product also decrease their supply to align with demand in the market. Ultimately new equilibrium between demand and supply will be E1. At new equilibrium E1, OP1 is the price and OQ1 is the quantity which is demanded and supplied.


Now we can say that due to the decrease in demand, there is also a decrease in the equilibrium price. Resultantly quantity supplied also decreases because the quantity sold and purchases have decreased. The demand curve will shift leftward. Keep in mind the following points:

  • No change in the price of the product
  • No change in the supply of product
  • Income of Consumer is decreasing
  • So demand for product decreasing

Solved Example on Changes in Demand

Q. With a given supply curve, the decrease in demand is caused by?

  1. An overall decrease in price, but an increase in equilibrium in quantity.
  2. An overall decrease in price, but a decrease in equilibrium in quantity.
  3. No change in overall price but the reduction in equilibrium quantity.
  4. An overall increase in price, but a decrease in equilibrium in quantity.

Ans: If there is a decrease in demand with a given supply curve, there will be excess supply in the market. Due to Excess supply price of the product will also fall. Hence option “C” is correct.

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