It is quite unlikely that supply and demand of a product remains fixed forever, sometimes, demand curve shifts, sometimes the supply curve shifts and in some cases both the curves shift together.
In each of these cases the initial price and quantity combination is disturbed and a new combination of equilibrium price and quantity emerge. Now, we try to examine each of these three possibilities separately.
(i) Only the demand curve shifts
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(ii) Only the supply curve shifts
(iii) Both the demand and supply curves shift together
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(i) Shift in Demand Curve and Change in Equilibrium:
A shift in the demand curve, caused by variation in non-price determinants of demand, leads to a change in both equilibrium price and equilibrium quantity. Figure 6.5 shows that ‘dd’ and ‘ss’ are initial market demand and market supply curves, which together determine the equilibrium point ‘A’. Point ‘A’ clearly identifies the equilibrium price and equilibrium quantity as OP1 and OQ1 respectively.
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Now, assume that income of the consumers (one of the non-price determinants of demand) rises. As a result of hike in income, the demand curve shifts to the right from its initial position (i.e., dd to d1d1) representing the consumers’ willingness to consume more of a product and their ability to pay for that at the prevailing price.
Since the supply curve remains unaffected by change in income, increase in demand as a result of increase in income will cause equilibrium price to rise from OP1 to OP2 and equilibrium output from OQ1 to OQ2. Point ‘B’ is the new equilibrium point.
In the case of a downward shift of the demand curve, equilibrium price and quantity both would decrease.
(ii) Shift in Supply Curve and Change in Equilibrium:
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Millions of Indians are now getting used to working with a home computer. Thirty years ago this could not have been imagined. It has also been observed that the price of computers is declining with time. In fact thirty years ago there was no home computer in the world. What existed were mainframe computers, each of which worth crores of rupees.
What can explain this transformation? The answer is the discovery of microchips that drastically reduced the cost and size of computers. As a result of this technological breakthrough, home computers are now available at low prices; furthermore, their power of computing is many times more than what existed in big mainframe computers thirty years ago.
Since change in technology is regarded as a non-price determinant of supply, this technological improvement in computer manufacturing results in a shift in the supply curve from S1 to S2 (see figure 6.6), which implies that now the suppliers can supply OQ2 computers at OP2 price per unit which was not possible earlier.
The demand curve remaining the same, this downward shift in the supply curve causes drastic reduction in price of computers from P1 to P2. Decline in computer price is accompanied by an increase in the quantity of computers demanded, indicated by a change from Q1 to Q2. The new equilibrium (price and quantity) combination is given by point ‘B’.
But what explains this shift in equilibrium from point ‘A’ to point ‘B’? Due to the technological breakthrough, the supply curve shifts from S1 to S2. It leads to a new equilibrium point where we observe a fall in price from P1 to P2 and increase in quantity supplied of compaters from Q1 to Q2.
From the buyers’ side, the moment prices of computers start declining, the quantity of computers demanded increases leading to a downward movement along the demand curve.
(iii) Simultaneous Shifts of Both Demand and Supply Curves:
Consider the market for chicken in India. During the 1980s and 1990s, process of producing chicken underwent a massive change. Using upgraded techniques for their preservation, growth and health, chickens began to be produced on mass scale.
In terms of demand and supply analysis, we say that technological improvement of chicken farming has caused the supply survey of chicken to shift from SS to S1S1 as shown in panel (a) of figure 6.7.
However, during the same time consumers’ income also increased manifold. Part of the consumers’ net increase in income could now be spent on consuming chicken, among other goods. Increase in the consumers’ willingness and ability to buy more chicken causes a rightward shift of the demand curve (i.e., from DD to D1D1 for chickens.
This is shown in panel (b) of figure 6.7 wherein the supply side shift in panel (a) is also superimposed. The new demand curve D1D1 and the new supply curve S1S1 intersect at point E’. As a result, the revised equilibrium price becomes OP3.
It is important to identify the accurate change in the shift of supply and demand curves.
