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Go to the Introduction
This section is Changes in Supply, Demand and Market Equilibrium
Go to A Firm's Long Run Average Cost Curve
Go to Profit Maximization for a Competitive Firm
Go to Market Equilibrium in the Long Run
Go to The Aggregate Demand and Aggregate Supply Model
Go to Macroeconomic Phenomena in the AD/AS Model
Go to Economic Policy Tools

Changes in Supply, Demand and Market Equilibrium

Recall The price adjustment mechanism: If the quantity supplied, Qs, is greater than the quantity demanded, Qd, at a price P0, then a surplus exists at P0. Because of this surplus, consumers will bid down the market price. As the market price decreases, the quantity demanded will increase and the quantity supplied will decrease until the quantity demanded equals the quantity supplied, at which point the surplus is eliminated and a market equilibrium is established.
     
Claim   An increase in supply S with constant demand D will decrease the equilibrium price P* and increase the equilibrium quantity Q*. Similarly, a decrease in supply S with constant demand D will increase the equilibrium price P* and decrease the equilibrium quantity Q*.
   
Interactive Graph  
   
Claim   Alternatively, an increase in demand D with constant supply S will increase both the equilibrium price P* and equilibrium quantity Q*. A decrease in demand D with constant supply S will decrease both the equilibrium price P* and equilibrium quantity Q*.