The law of supply and demand represents the interaction between manufacturers and consumers. This theory shows how these two concepts are interlinked, and the price of a product can affect its sales. The supply-demand curve represents this concept in a graphical manner for better understanding.
Supply and demand law are one of the fundamentals of economics that is related to almost every principle of economics. Moreover, this supply-demand principle also affects the equilibrium prices of a product and often determines its price. However, there are various reasons that can affect this principle.
Shift in Supply Demand Curve
If there are any changes in this curve, it has a direct effect on market equilibrium. Here are some notable factors that can affect supply and demand –
1. Change of Demand
The demand for a product changes due to one of the following factors –
Population
Per capita income
Preferences
Value of the essential commodities
Value of substitute items
Forecast of change in prices
2. Change in Supply
Supply of an item alters owing to the following reasons –
Number of manufacturers
Taxes levied
Technological advancement
Aim of the companies
Cost of factors of production
Cost of competitive products
Expectation of future price change
This offers a brief idea about the major factors that have an effect on supply and demand. However, to understand this concept in detail, one must understand how a market reacts when both supply and demand curve shifts.
When Demand Changes
Increase in demand and decrease in demand plays a crucial role in determining the price of a product. Here is a detailed discussion regarding that –
Demand Increase
When supply remains constant, but the demand surges, it tends to shift the demand curve rightwards. If the demand for a product steadily rises, it ultimately affects the equilibrium price. Therefore, this price rise also increases competition among buyers, which also hikes the price of a product.
On the flip side, this rise in price serves as an incentive to the manufacturers. They will then increase production and supply that will result in falling demand. A point to note here is that this process stays operational until a new equilibrium is set. Resultantly, there is a hike in both the equilibrium price and quantity.
Demand Decrease
Similarly, if the supply remains constant, and demand for a product plummets, the demand curve will shift towards the left. In a situation like this, a condition of excess supply occurs at the equilibrium level. This situation leads to a competition between sellers, who want to sell their products due to this fall of prices.
Alternatively, once a product’s prices go down its market demand increases. This demand then leads to an increase in supply and manufacturing. This process then continues till a new equilibrium is in place. Resultantly, there is a reduction in the equilibrium price as well as quantity.
When Supply Changes
Supply-demand curve also observes a shift when there is any alteration in the supply of a product. Here are two phenomena regarding that –
Increase in Supply
When demand remains constant with a change in supply, it tilts the supply curve towards right. Therefore, when the supply of a product rises its demand at the equilibrium level also increases. This situation leads to a competition among sellers, which results in a drop in prices of a product.
Moreover, this lowering of prices also increases the demand for a product in the market, which also affects its production. This process continues till a new equilibrium is found, and at that point, the price of a product decreases and its quantity increases.
Decrease in Supply
Similarly, when the demand of a product remains constant, but its supply plunges, it shifts the supply curve towards left. This reduction of supply creates an excess demand at the equilibrium level, which results in an increase in the price.
Contrarily, this price hike will be accompanied by a lowering of demand and excess supply. This process will also carry on until a new equilibrium is found. Thus, the equilibrium price of a product will rise, but its quantity will fall.
Change of Both Supply and Demand
The market situation is more complicated than the above-mentioned increase and decrease in supply and demand. Usually, supply and demand do not alter individually; instead, they change simultaneously. Here are four such occasions that arise in the real world –
Demand decreases and supply decreases
Demand increase and supply increases
Supply increase but demand decreases
Supply decreases and demand increases
A supply-demand curve is a pictorial representation of this discussion. This chapter of modern economics is vital for individuals to learn as it can help them comprehend the basis of economics. On e-learning platforms like Vedantu, they can access relevant study materials of this chapter. Also, they can register for an online class and doubt clearing session to enhance their preparations further.
FAQs on Demand and Supply Shifts Explained
1. What is meant by a 'shift' in the demand or supply curve in economics?
A 'shift' in the demand or supply curve represents a change in the quantity demanded or supplied at every price level. It is caused by a change in a non-price determinant, also known as a 'shifter'. For example, an increase in consumer income can shift the entire demand curve to the right, meaning more is demanded at all prices. This is different from a 'movement along the curve', which is caused only by a change in the product's own price.
2. What are the main factors that cause the demand curve to shift?
The demand curve for a product shifts when factors other than its own price change. As per the CBSE Class 12 Economics syllabus for 2025-26, the key determinants include:
- Income of the Consumer: An increase in income generally leads to an increase in demand for normal goods.
- Prices of Related Goods: Demand changes based on the price of substitutes (e.g., tea vs. coffee) and complements (e.g., cars and petrol).
- Tastes and Preferences: Changes in consumer preferences, influenced by trends or advertising, can shift demand.
- Consumer Expectations: If consumers expect future price rises, current demand may increase.
- Population and Demographics: An increase in the number of buyers in the market will shift the demand curve to the right.
3. What are the key determinants that cause a shift in the supply curve?
A shift in the supply curve is caused by changes in factors other than the product's own price that affect the cost or willingness to produce. The primary determinants are:
- Input Prices: A change in the cost of factors of production (like labour or raw materials) affects profitability and shifts supply.
- Technology: Technological advancements that make production more efficient will increase supply, shifting the curve to the right.
- Government Policies: Taxes (like GST) can increase production costs and decrease supply, while subsidies can decrease costs and increase supply.
- Prices of Other Goods: A firm may reduce the supply of one good to produce more of another, more profitable good.
- Producer Expectations: If producers expect future prices to rise, they might reduce the current supply to sell more later at a higher price.
4. How do shifts in demand and supply affect the market equilibrium?
Shifts in demand or supply disrupt the original market equilibrium, which is the point where quantity demanded equals quantity supplied. When a curve shifts, it creates either a shortage or a surplus at the initial equilibrium price. The market then self-corrects through price adjustments until a new equilibrium price and quantity are established where the new demand and supply curves intersect.
5. What is the difference between a shift in the demand curve and a movement along the demand curve?
This is a fundamental concept in economics. A movement along the demand curve occurs solely due to a change in the product's own price, leading to a change in quantity demanded. In contrast, a shift of the entire demand curve (either left or right) is caused by a change in any non-price factor, such as consumer income, tastes, or the price of a related good. A shift signifies a change in demand at all price points.
6. Why does a change in a product's own price not cause its demand curve to shift?
A product's own price does not shift the demand curve because the curve itself is a graphical representation of the relationship between price and quantity demanded. Price is a variable measured on the vertical axis. A change in an axis variable causes a movement along the curve, not a shift of the curve itself. The 'shifters' of the curve are external factors (like income or preferences) that are not represented on the axes of the demand-supply graph.
7. What happens to the equilibrium price and quantity if demand increases while supply remains constant?
When demand increases while supply stays the same, the demand curve shifts to the right. At the original price, the quantity demanded now exceeds the quantity supplied, creating a shortage. This shortage puts upward pressure on the price. As the price rises, producers are willing to supply more, and consumers demand less. This process continues until a new, higher equilibrium price and a new, higher equilibrium quantity are reached.
8. How would an advancement in technology for production affect the supply curve and market price?
An advancement in technology typically lowers the cost of production, making it more profitable for firms to produce at any given price. This causes the supply curve to shift to the right (an increase in supply). At the original equilibrium price, a surplus develops because quantity supplied now exceeds quantity demanded. To sell the excess goods, producers lower the price. The final result is a lower equilibrium price and a higher equilibrium quantity in the market.
9. What is the market outcome when both demand and supply for a product increase simultaneously?
When both demand and supply increase (both curves shift right), the effect on the equilibrium price is indeterminate, while the equilibrium quantity definitely increases. The outcome for price depends on the magnitude of the shifts:
- If the increase in demand is greater than the increase in supply, the equilibrium price will rise.
- If the increase in supply is greater than the increase in demand, the equilibrium price will fall.
- If both increase by the same magnitude, the equilibrium price will remain unchanged.
10. What happens to the market equilibrium if demand for a product decreases, but its supply increases?
In this scenario, the demand curve shifts to the left, and the supply curve shifts to the right. The combined effect on the equilibrium price is definitive: the equilibrium price will definitely decrease. However, the effect on the equilibrium quantity is indeterminate and depends on which shift is larger. If the decrease in demand is more significant than the increase in supply, the equilibrium quantity will fall. If the increase in supply is larger, the quantity will rise.
