Cambridge International as and a level Economics Ebook

A change in supply
Look at 
Figure 2.17
 – if there is an increase in supply 
(from 
S
0
to 
S
2
) then, at the original price (
P
0
), there is 
disequilibrium due to excess supply (
Q
1
−
Q
0
). This 
would, of course, eventually be eliminated as price 
falls towards its new equilibrium level and the 
quantity traded in equilibrium rises from 
Q
0
 
to
 Q*
where the plans of consumers and companies once more 
coincide.
A change in supply and demand
Th
e supply change analysis is useful to deal with simple 
situations. However, in many situations the conditions 
0
Price
Q
0
Q*
Q
1
P*
P
0
S
D
0
D
2
Quantity
Figure 2.16 
The eff ect of a shift of the demand curve on 
equilibrium price and quantity
61
Chapter 2: The price system and the microeconomy 

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of both supply and demand may change simultaneously. 
Look at 
Figure 2.18
. Th
e initial equilibrium is at 
P
and 
Q
with the demand curve 
D
0
and the supply curve 
S
0
. Th
e 
increase in demand for the product (caused by, say, the 
increase in the price of a substitute) puts upward pressure 
on price. However, the simultaneous increase in supply 
(caused by a fall in raw material and energy costs) puts 
downward pressure on price. Th
e resulting eff ect is that 
the equilibrium price remains unchanged, although of 
course there is a fairly signifi cant increase in the quantity 
traded (from 
Q 
0
to 
Q*
).