4/12/12

What happens to equilibrium price and quantity when demand goes down.



This economics post is going to go over the economic concept of a reduction in demand.  It includes some examples and graphs to help with the concept, let me know if there are any questions or additions in the comments below:

 If we start out with the typical supply and demand graph, we know that equilibrium is going to be where the supply and demand curves cross.  We can see this point on the graph to the right.  When you draw a line straight down from the intersection point you can find equilibrium quantity.  When you draw a line to the left you can find equilibrium price. 

The tricky part is figuring our why a demand curve shifts, and how to find out the resulting equilibrium price and quantity.  It is also important to determine if equilibrium price and quantity have gone up or down.  I made a supply and demand cheat sheet documenting all of the possible combinations of shifts the resulting equilibrium price and quantities in another post.

There are several determinants of demand that could decrease demand and shift the curve left.  Some of these include: less consumers, lower income, a negative change in tastes, or a price of a substitute good went down.

When we shift the demand curve to the left, we see that we now have a new equilibrium point.  This point is lower, and to the left of the original equilibrium level.  When we draw the lines to the price and quantity axis, we can see that both equilibrium price and equilibrium quantity have gone down. 

The intuition behind this is simple – imagine the market the athletic jersey of a famous football star before and after he changes teams.  Before he changes teams the market for his jersey is in equilibrium with a set number of people willing and able to buy it at some price.  However, after he changes teams, most people will not want to purchase the old jersey because it is no longer up to date, the resulting sales of the jersey decline (equilibrium quantity down) and the jerseys are usually placed on sale (equilibrium price down).

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