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Equilibrium - CMA

Change in Equilibrium Price due to Shift in Demand

A shift in demand curve can be a complex concept to understand. Therefore, it is important to start with the basics of demand and equilibrium.

Introducing Demand and Demand Curve

In general sense of the term, ‘demand’ means the desire, the need, the want or the requirement for a commodity. In an economic sense, demand refers to the desire for a commodity. This desire is a combination of the ability and willingness to pay for it.

For example, the willingness by car but does not have enough resources to buy the same.

Demand can either individual demand or market demand. Market demand is the sum of individual demand for a given product.

Market Demand = Qda + Qdb+Qdc+…….+Qdn

Some of the factors that affect the demand and the demand curve are as follows:

  • Price of the product (P)
  • Tastes and Preferences of the Consumers(T)
  • The income of the buyer (y)
  • Changes in Prices of the Related Goods (Py)
  • Advertisement Expenditure (A)
  • Taxes (X)
  • Technology (H)
  • Social and peer group influences (S)

Demand Schedule is a tabular representation of the demand curve, that is the total quantity demanded at various prices. It shows how much a customer is willing to purchase at various prices. However, the demand curve is the graphical representation of the demand schedule or a demand function.

shift in demand curve

The shift in Demand Curve

There are 2 types of shifts:

  1. Extension and Contraction
  2. Increase and Decrease

Extension and Contraction in the demand curve

The change in the quantity demanded can be due to various factors affecting the demand. However, when the quantity demand change is due to the price changes, it is called “Change in Quantity Demanded”.

Further, a reduction in the quantity demanded due to increase in price leads to “Contraction” whereas an increase in quantity demanded due to a decrease in price is called “Expansion or Extension”. The changes happen along the demand curve itself.

One should remember that the extension and contraction in the demand or demand curve, usually, takes place as a result of only price changes, when all the other determinants of demand remain constant. Some of these determinants are tastes, income, propen­sity to consume and prices of the related goods.

When these other factors remain constant, it means that the demand curve remains the same. In other words, it does not change its position; and it is only the consumer who moves downward or upward on it.

Increase in Demand or Decrease in Demand

The shift in the demand curve or the change in the demanded can be due to any other factors affecting the demand, while the price is constant is called “Change in Demanded”.

Reduction in demand due to change in variables other than price leads to “Decrease in Demand”, whereas, on the other hand, increase in demanded due to change in variables other than price is called “Increase in Demand”.

The change in demand results in the shift of demand curve upwards (increase) or downwards (decrease).

         

The demand curve change means an increase or decrease in the volume of demand from its equilibrium. There, however, exist some determinants other than the price of the commodity.

These determinants affect the quantity of demand, like the income of consumers, the taste of consumers, preference of consumers, population, technology, etc. Due to the influence of these, the demand or the supply of a product changes, consequently resulting in demand curve shifts.

Questions on Shift in Demand Curve

Q. When does contraction in the demand curve occur?

Answer: Contraction of the demand curve occurs when the price of the product increases and the quantity demanded of the product reduces.

Q.When does the demand curve shift to the right?

Answer: The demand curve shifts to the right when the price of a product remains constant but the quantity demanded of the product increases.

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