THREE STEPS TO ANALYZING CHANGES IN EQUIUBRIUM

So far, we have seen how supply and demand together determine a market’s equilibrium, which in turn determines the price of the good and the amount of the good that buyers purchase and sellers produce. Of course, the equilibrium price and quantity depend on the position of the supply and demand curves. When some event shifts one of these curves, the equilibrium in the market changes, resulting in a new price and a new quantity exchanged between buyers and sellers.

When analyzing how some event affects the equilibrium in a market, we proceed in three steps. First, we decide whether the event shifts the supply curve, the demand curve or, in some cases, both curves. Second, we decide whether the curve shifts to the right or to the left. Third, we use the supply and demand diagram to compare the initial and the new equilibrium, which shows how the shift affects the equilibrium price and quantity.

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