Demand and Supply Equilibrium

The demand curve shifts rightward when cookie

demand increases

When a market is in equilibrium, the price of a good or service tends to stay

the same. Equilibrium is the price at which the quantity demanded by
consumers is equal to the quantity that's supplied by suppliers. When either
demand or supply changes, however, the equilibrium price and quantity will
also change. That's what we're talking about in this lesson - changes in the
market equilibrium.

Let's look at some examples of changes in demand and supply, including an

illustration of what happens when both demand and supply increase or
decrease simultaneously. Before we begin, here's a helpful list of all the
possible changes to equilibrium that you'll encounter in macroeconomics:

Overview of Changes in Equilibrium Prices

Shifts in the Demand
Curve
(when supply is
unchanged)

means an increase in causes equilibrium to

to the right
demand increase

means a decrease in causes equilibrium to

to the left
demand decrease

Shifts in the Supply

Curve
(when demand is
unchanged)

means an increase in causes equilibrium to

to the right
supply decrease
 means a decrease in causes equilibrium to
to the left
supply increase
As you can see, an increase in demand causes the equilibrium price to rise.
On the other hand, a decrease in demand causes the equilibrium price to fall.
An increase in supply causes the equilibrium price to fall, while a decrease in
supply causes the equilibrium price to rise.

Well, as it turns out, I'm thinking about chocolate chip cookies right now. For
some reason, talking about macroeconomics really increases my demand for
cookies. Ever since they removed the Cookie Monster from public television's
'Sesame Street,' I've noticed a remarkable decrease in the supply of cookies
in my house; however, my demand for cookies has only gone up and up and up!
So, let's look at an example of equilibrium in the cookie market and see what
happens when things change.

Let's say the equilibrium price for a chocolate chip cookie is $3. Here's an
example of the supply and demand curves, with an equilibrium price of $3,
which is at the intersection of the supply and demand curves. At a price of $3,
consumers will demand and suppliers will supply 5,000 cookies per year. Wow,
that sounds great, doesn't it? What happens when something causes a shift in
demand? Well, I'm glad you asked!

A drop in cookie demand causes the demand curve

to shift to the left

When household incomes increase by 30% this year (hey, this could happen!),
that means that the demand for cookies goes up. If the demand for cookies
increases, then this causes a shift of the demand curve to the right. As you
can see, a new equilibrium is created after the shift. The new equilibrium
price is higher than the old one because demand increased. At the new
equilibrium, the price for a cookie is now $5, and the quantity demanded,
which is the same as the quantity supplied, is 7,500 cookies at this higher
level of price.

Okay, so now, let's say that instead of increasing, household incomes

decrease this year by 30%. When they do, the demand for cookies is definitely
going to go down. A decrease in the demand for cookies will cause the
demand curve to shift to the left, and, assuming no change in anything else,
the equilibrium price will go down. The new equilibrium price is going to be
$2. At this price, only 2,500 cookies will get sold in this market instead of
5,000.

So far, we've talked about what happens to the demand for cookies. Let's look
at the supply side now.

There are various things that could lead to a shift in supply, but let's say that
a weird blue tornado flies through the city of Chiphaven, in West Cookieland.
(It's a beautiful place. I've been there - you should go there. It's a great place
for vacation - the kids would love it.) Unfortunately, half of all the cookie
factories are located here in Chiphaven, and the tornado picks up all the
cookie factories in the air (in addition to tens of thousands of cookies, if you
can imagine that) and destroys them. Thankfully, Studio 65, the nearby disco,
is perfectly intact!

So, what's the effect of this event? This natural disaster is going to lead to a
decrease in the supply of cookies. A decrease in the supply of cookies causes
the equilibrium price to rise. The new equilibrium price is $5 a cookie, and the
associated quantity has gone down to 2,500 cookies.