ECONOMIC PRINCIPLE: Demand- The Factors That Can Shift Demand & The Impact of an
Increase or Decrease in Demand on Equilibrium Price (Pe) and Quantity (Qe)
A change in demand will cause equilibrium price and output to change in the same
direction. A decrease in demand will cause a reduction in the equilibrium price and quantity of
a good. The decrease in demand also causes excess supply to develop at the initial price.
Excess supply will cause prices to fall, and as the price falls producers are willing to supply less
of the good, thereby decreasing output. An increase in demand will cause an increase in the
equilibrium price and quantity of a good. The increase in demand causes excess demand to
develop at the initial price. Excess demand will cause the price to rise, and as price rises
producers are willing to sell more, thereby increasing output.
There are many factors that can cause a change in demand but there seems to be four
main factors that effect it the most. First, a change in consumers income can shift the curve. If
there is an increase in consumers income, the demand curve will shift to the right. Second, a
change in population can shift the curve. If the population increases, the demand curve shifts to
the right. Another important factor is the preferences of the consumer. If the consumers
preference for a certain good increases, this will also shift the curve to the left. The last and
possibly most important factor is the prices of related goods. In regard to substitutes, if the price
of a substitute increases, the demand curve for the original good will shift to the right. For
example, if the price of Pepsi rises, the demand curve for Coke shifts to the right. In regard to
complements, if the price of a complement increases, the demand curve for the original good
will shift to the left. If McDonalds raises the price of its Big Mac, the demand for french fries
shifts to the left because fewer people walk in the door to buy the Big Mac.
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