Equilibrium reflects the perfect balance of supply and demand.

Equilibrium is achieved at the

price where the quantities demanded and supplied are equal. Also, equilibrium is what
determines market output and price. A market in equilibrium can be represented on a graph by
indicating the combined price and quantity where the supply and demand curves intersect.

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m

Changes in determinants of supply or demand result in a new equilibrium price and quantity.
If there is a change in supply or demand, the old price will no longer reflect an equilibrium.
There will even be a shortage or a surplus and the price will be adjusted later until a new
equilibrium is established. When prices are below the equilibrium level, excess demand will
occur. That is, the quantity demanded exceeds the quantity supplied at the given price. When
the price is more than the equilibrium level, there will be excess supply. The equilibrium price
represents the market clearing price. That is, there is no excess demand or excess supply.

The changes in equilibrium can be summarized with the table below.

Change Change in P* Change in Q*

Supply increases (shifts P↓ Q↑
right)
Supply decreases (shifts P↑ Q↓
left)
Demand increases (shifts P↑ Q↑
right)
Demand decreases (shifts P↓ Q↓
left)
Demand increases, P↕ Q↑
supply increases (indeterminate)
Demand increases, P↑ Q↕
supply decreases (indeterminate)
Demand decreases, P↓ Q↕
supply increases (indeterminate)
Demand decreases, P↕ Q↓
supply decreases (indeterminate)

Change in Demand

When there is a change in demand, the entire demand curve shifts either to the left or to the
right. The initial demand curve shifts to D0, D1 or D2.

Effect of Income on Demand

Higher income leads to more demand at any price. This is true for most goods and services. In
short, the demand curve shifts to the left when income increases. Increasing demand means
that quantity demanded is higher at each price offered, resulting in a rightward shift of the
demand curve from D0 to D1. Declining demand, on the other hand, means that the quantity
demanded at each given price is lower, thus shifting the demand curve to the left from D0 to
D2.
In the graph below, there is a shift in demand due to the increase in income.

With an increase in income, consumers will buy more quantities and hence push demand to
the right. (Graphic Below)

With the increase in income, consumers will buy more quantity, pushing demand to the right,
causing the demand curve to shift to the right. (Graphic Below)
Change in Supply

The resulting change in supply involves shifting the entire supply curve to the left or right.
The initial supply curve shifts to either S0, S1 or S2.

Shifts in Supply

If supply decreases, there is less quantity supplied at each given price, resulting in a leftward
shift of the supply curve from S0 to S1. Increasing supply means that at any given price, the
quantity supplied is greater, so the supply curve shifts rightward from S0 to S2.

The supply curve describes the minimum price a firm will accept to produce a certain quantity
of product. If the cost of production increases, the price of the product will also increase. The
graphic below shows an example of a shift in supply because of production cost.
There are many factors that determine consumer behavior. Consumer choice has two related
parts: the budget line and the consumer's preferences. One of the concepts that serves to
explain consumer behavior is the indifference curve. The indifference curve denotes a
combination of two goods that provide equal satisfaction and utility to the consumer, thereby
making the consumer indifferent. Through indifference curve analysis, topics such as
marginal utility theory, subjective theory of value, individual choice and income can be
studied. Indifference curve analysis focuses on marginal rates of substitution (MRS) and
opportunity costs. Indifference curves are used to show consumer preference and the limits of
a budget. Typically, indifference curves are specified convex to the origin, and no two
indifference curves intersect. Consumers are always considered to be more satisfied when
acquiring goods on indifference curves further away from the origin. If the income of the
consumer increases, the level of consumption will also change. Because he/she will be able to
buy more goods. As a result, he/she will find himself/herself on an indifference curve further
away from the origin. That is, the consumer will be in a better economic situation.

Indifference Curve

On the other hand, another concept that has an important role in determining consumer
behavior is the budget line. The budget line represents all combinations of goods for which
consumers spend all their income. A budget constraint is a constraint of opportunities. It
includes all possible combinations of consumption that a person can afford, given product
prices and an individual's income. Budgetary constraint also restricts individuals' ability to
consume within the framework of the prices that must be paid for various goods and services.
As a result, consumers choose the most appropriate way to leverage their purchasing power to
maximize their benefits and minimize opportunity costs. Thanks to the budget constraint,
consumers can maximize their overall benefits. If consumption moves along a budget line
from the intersection, the consumer spends less on one item and more on the other. The slope
represents the negative of the ratio of the prices of two goods. Also, the slope reflects the rate
at which two goods can be substituted without a change in the amount of money spent.

Budget Curve

The Effects of Changes in Income

When there is an increase in income, the budget line shifts outward parallel to the original
line. On the other hand, when there is a decrease in income, the budget line shifts inward
parallel to the original line.

The Effects of Changes in Prices

When the price of one good rises, the budget line turns inward from the intersection of other
goods. When the price of the good falls, the budget line shifts outward from the intersection
of the other good. Also, if the price of the two goods increases but the ratio of the two prices
does not change, the slope does not change either. But the budget line shifts inward to a point
parallel to the original budget line. On the other hand, if the price of two goods falls, the slope
does not change if the ratio of the two prices does not change. However, the budget line shifts
towards a point parallel to the original budget line.

Consumer Preferences with Indifference Curves

A consumer will be equally happy with any combination of Good X and Y on the indifference
curve I1, although he/she may prefer any bundle on the indifference curve I2 or I3.

Impact of Price

Demand for normal goods or services is represented by a descending curve; where the
quantity on the x-axis usually increases as the price on the y-axis decreases. In most cases,
consumer preferences are determined by prices. As the price increases, the quantity demanded
by consumers decreases. A critical assessment of pricing depends on the price elasticity of the
commodity. Elasticity is an indicator of how sensitive demand is to price changes. If a good is
highly elastic, consumers will be less likely to buy it when prices are high. When prices are
low, they will be much more likely to buy. On the other hand, if a good has low elasticity,
consumers will buy the same quantity, unaffected by small price changes.

Impact of Demand

The relationship between the price of the good and the quantity demanded by the consumers
of that good helps in the analysis of the demand curves regarding wider consumer choice and
purchasing behavior. Movement along the demand curve is determining what quantity to buy
at different price points. This illustration demonstrates the way in which economists can
identify a series of prices and quantities for goods demanded, which ultimately represents the
overall demand curve for a given product/service.

Below is the graph that represents the general demand curve for a particular product,
showing how to define a set of prices and quantities for the goods demanded.