Market Shifts

Question 1

What happens when Demand increases on a diagram?

Answer 1

• Demand shifts right from D1 to D2

• At original price P1, there is now an
excess demand.

• This signals to producers to increase price and extend their supply from Q1 to Q2 to restore the market equilibrium.

• The new equilibrium is at P2 and Q2

Question 2

What happens when Demand decreases on a diagram?

Answer 2

• Demand shifts left from D1 to D2

• At original price P1, there is now an
excess supply.

• This signals to producers to reduce
price and contract their supply from
Q1 to Q2 to restore the market
equilibrium.

• The new equilibrium is at P2 and Q2.

Question 3

What happens when Supply increases on a diagram?

Answer 3

• Supply shifts right from S1 to S2

• At original price P1, there is now an
excess supply, so price falls.

• This signals to consumers to extend their demand from Q1 to Q2 to restore the market equilibrium

• The new equilibrium is at P2 and
Q2.

Question 4

What happens when Supply decreases on a diagram?

Answer 4

• Supply shifts left from S1 to S2

• At original price P1, there is now
an excess demand , price rises.

• This signals to consumers to
contract their demand from Q1 to Q2 to restore the market equilibrium

• The new equilibrium is at P2 and Q2.

Question 5

What happens to the demand of a substitute good when supply shifts left?

Answer 5

Supplt of a good shifts left, this increases the market price, so
the demand for a substitute will shift to the right

Question 6

What happens to complementary goods when supply shifts to the right?

Answer 6

If the supply of a good shifts right, this decrease its market price, which will cause demand for the complement to shift right