Changes in Equilibrium Price and Quantity the Four Step Process Study Pack

Equilibrium Defined

• •Equilibrium is the price at which the quantity consumers are willing and able to buy exactly matches the quantity producers are willing and able to sell.
• •At this price, the market clears — there is neither a surplus of unsold goods nor a shortage of unfilled demand.
• •On a supply-and-demand diagram, equilibrium sits at the intersection of the demand curve and the supply curve.

What Can Disturb Equilibrium

• •Only a shift of an entire curve — not movement along a curve — disrupts equilibrium; a price change alone simply moves buyers and sellers along their existing curves.
• •Demand shifts when any determinant of demand changes: consumer income, prices of related goods (substitutes or complements), consumer tastes, population size, or expectations about future prices.
• •Supply shifts when any determinant of supply changes: input costs (wages, raw materials), technology, government taxes or subsidies, the number of producers in the market, or expectations about future prices.
• •Weather, natural disasters, and policy changes are common real-world triggers for supply shifts in agricultural and energy markets.

• •Step 1 — Establish the Initial Equilibrium
• •Draw or visualize a supply curve and a demand curve intersecting at a known equilibrium price (P₁) and equilibrium quantity (Q₁).
• •This baseline is your reference point; every later comparison is made against it.
• •Step 2 — Identify Which Curve Shifts
• •Ask whether the event affects how much buyers want to purchase at every price (demand) or how much sellers want to produce at every price (supply).
• •If the event changes a determinant of demand, the demand curve shifts; if it changes a determinant of supply, the supply curve shifts; if it affects both sides of the market, both curves shift.
• •A common error is confusing a change in price — which only causes movement along a curve — with a change in a non-price determinant, which causes a full curve shift.
• •Step 3 — Determine the Direction of the Shift
• •An increase in demand shifts the demand curve to the right, meaning consumers demand more at every given price.
• •A decrease in demand shifts the demand curve to the left.
• •An increase in supply shifts the supply curve to the right, meaning producers supply more at every given price.
• •A decrease in supply shifts the supply curve to the left.
• •Step 4 — Compare New and Old Equilibria
• •After shifting the appropriate curve, identify the new intersection point (P₂, Q₂).
• •State clearly whether equilibrium price rose or fell and whether equilibrium quantity rose or fell relative to the original values.
• •This comparison is the actual answer to the economic question.