The interaction between consumers and producers in a competitive market determines demand and supply equilibrium, price and quantity. Market forces tend to drop the price if quantity supplied exceeds quantity demanded and prices rise if quantity demanded exceeds quantity supplied. This movement continues until there are no more changes, and quantity demanded equals quantity supplied.

## Demand and Supply Equilibrium

In the diagram below, you can see the demand and supply equilibrium price and quantity.

P* is equilibrium price

Q* is equilibrium quantity

#### Why is Equilibrium Between Demand and Supply Specifically at Price P* and Quantity Q*?

At a higher price, there would be more quantity supplied than demanded so the seller would have to lower his price to sell his goods. If the sellers raise their price too high, where the demand is less than what they have to offer, then they will have a surplus that will force them to lower their price until they can sell their entire supply

At a lower price, there would be more quantity demanded than supplied so the buyer would have to spend more to buy goods. If the sellers set their price too low, then they will sell their entire supply before they can satisfy the demands of the market. This would result in a shortage in the market.

## A. How An Increase in Demand Affects Market Equilibrium

We will now look at how changes in demand and supply affect the demand and supply equilibrium. We will note the changes in equilibrium price and quantity.

In the above case, we see an increase or upward shift in the demand curve from D1 to D2. This increase can be because of some factors. The result of this increase in demand while supply remains constant is that the demand and supply equilibrium shifts from price P1 to P2, and quantity demanded and supplied increases from Q1 to Q2.

## B. How A Decrease in Demand Affects Market Equilibrium

In the above case, we see a decrease or downward shift in the demand curve from D1 to D2. This decrease can be because of some factors that affect demand. The result of this decrease in demand while supply remains constant is that the demand and supply equilibrium falls from price P1 to P2, and quantity demanded and supplied decreases from Q1 to Q2.

## C. How An Increase in Supply Affects Market Equilibrium

In the above case, we see an increase or upward shift in the supply curve from S1 to S2. This increase can occur because of a number of factors. The result of this increase in supply while demand remains constant is that the demand and supply equilibrium shifts from price P1 to P2, and quantity demanded and supplied increases from Q1 to Q2.

## D. How A Decrease in Demand Affects Market Equilibrium

In the above case, we see an decrease or downward shift in the supply curve from S1 to s2. This decrease can be because of a number of factors that affect supply. The result of this decrease in supply while demand remains constant is that the demand and supply equilibrium falls from price P1 to P2, and quantity demanded and supplied decreases from Q1 to Q2.

## What happens when there a decrease in Demand and Supply?

In this case, both demand and supply fall from D1 to D2 and S1 to S2 respectively. The result is price increasing from P1 to P2 and quantity demanded and supplied decreasing from Q1 to Q2 (inaccurately labeled as P2 in the diagram).

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