A decrease in demand

If there is a decrease in demand; say from DI to D2, the price falls from OPI to OP2, if supply remains constant. The fall in price compels producers and sellers to reduce output and supply in order to avoid losses.

cropped7598943719792555818

 



The fall in supply makes price to rise from OP2 to OP3 and a new equilibrium is therefore established at E2, as illustrated in figure 18. The effects of a decrease in demand is therefore to cause a fall in both price and supply.

 

Effects on the economy (country)

  1. A fall in output.
  2. A fall in Income.
  3. A fall in employment.
  4. A fall in standard of living.

 

An increase in demand

If there is an increase in demand (and assuming that supply doesn’t instantly rise), the demand curve will shift upwards to a new position D2. And this causes price to rise from OP1 to OP2 as indicated in figure 19.

Usually an increase in price always triggers off (causes) increase in supply as producers and sellers make more pure profit. The increase in supply from OQI to OQ2 brings about a fall in price from OP2 to OP3 and a new equilibrium is thus established at E2. The effects of an increase in demand is therefore to cause a rise in both price and supply.

 

The effects on the economy

  1. A rise in production output.
  2. An increase in income.
  3. An increase in level of employment.
  4. A rise in the standard of living.

 

Fourth law of supply and demand

The fourth law of supply and demand says that

“An increase in demand tends both to increase price and to call forth a larger supply”.

 

Effects of changes in supply

A decrease in supply

If there is a decrease in supply and assuming that demand is held constant, the price will rise from OP1 – OP2. This increase in price compels consumers to reduce their demands. As demands fall, the price gradually moves downwards to P3 where a new equilibrium E2 is established as illustrated in figure 20. Thus the effects of a fall in supply is to increase price and lower quantity demanded.

 

Effects on the economy

  1. A fall in output.
  2. A decrease in income.
  3. A rise in the level of unemployment.
  4. A fall in standard of living.

cropped2357398078300450024

 

An increase in supply

If there is an increase in supply assuming that demand is held constant, the price will fall from OP1 to OP2 as illustrated in figure 21. The fall in price induces (encourages) consumers to buy more of the product. As the demand gradually rises, the price steadily moves up to P3 where a new equilibrium is established at E2. Thus the effects of an increase in supply is to lower price and raise demand. Thus the quantity demanded rises from OQI to OQ2.

 

Effects on the economy

  1. An increase in output.
  2. A rise in the level of income.
  3. A rise in employment.
  4. A rise in standard of living.

 

Fifth law of supply and demand

From the above explanation, we derived the fifth law of supply and demand which says that:

‘An increase in supply tends to lower price and to increase quantity demanded’

 

Effects of changes in both supply and demand

An increase in both supply and demand

If there is an increase in supply from Sl to S2 and demand also increases proportionately at the same time from D1 to D2, the price level will remain the same. The major effects are to raise output, quantity supplied and demanded from Q1 to Q3. This is illustrated in figure 22.

 

cropped4466900881593278939

 

Effects on the economy

  1. A rise in the level of output.
  2. A rise in income of producers and sellers.
  3. A rise in the level of employment.
  4. A rise in the general standard of living.

 

A decrease in both supply and demand

If there is a decrease in supply from Sl to S2 and demand also falls proportionately (equally and at the same time) from D1 to D2 as illustrated in figure 23, the price remains the same. That is, there will be no change in price. However, the quantity of goods supplied and demanded will fall from Q1 to Q3.

 

Effects on the economy

  1. It causes a fall in production (output).
  2. A fall in income.
  3. A rise in the level of unemployment.
  4. A fall in the general standard of living.

Leave a Reply

Your email address will not be published.