Economics, 3rd Edition

How an Increase 

in Demand Affects 

the Equilibrium

An event that raises quantity 

demanded at any given price 

shifts the demand curve to 

the right. The equilibrium 

price and the equilibrium 

quantity both rise. Here, an 

abnormally hot summer causes 

buyers to demand more milk. 

The demand curve shifts 

from D

1

 to D

2

, which causes 

the equilibrium price to rise 

from 

€0.50 to €0.60 and the 

equilibrium quantity bought 

and sold to rise from 13,000  

litres to 16,000  litres.

H

H

I

I

FIGURE 3.8

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Price of milk

per litre (

€)

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

Quantity of milk

supplied (litres)

Shortage

D

1

D

2

S

---

64  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

Example: A Change in Supply 

Suppose that, during another summer, a drought drives up the price of 

animal feed for dairy cattle. How does this event affect the market for milk? Once again, to answer this 

question, we follow our three steps:

1. 

The change in the price of animal feed, an input into producing milk, affects the supply curve. By raising 

the costs of production, it reduces the amount of milk that firms produce and sell at any given price. 

Some farmers may send cattle for slaughter because they cannot afford to feed them anymore and 

some farmers may simply decide to sell up and get out of farming altogether. The demand curve does 

not change because the higher cost of inputs does not directly affect the amount of milk consumers 

wish to buy.

2. 

The supply curve shifts to the left because, at every price, the total amount that farmers are willing 

and able to sell is reduced. Figure 3.9 illustrates this decrease in supply as a shift in the supply 

curve from S

1

 to S

2

. At a price of 

€0.50 sellers are now only able to offer 2,000 litres of milk for sale 

but demand is still 13,000 litres. The shift in supply to the left has created a shortage in the market 

of  11,000 litres. Once again, the shortage will create pressure on price to rise as buyers look to 

purchase milk.

3. 

As Figure 3.9 shows, the shortage raises the equilibrium price from 

€0.50 to €0.70 per litre and lowers 

the equilibrium quantity bought and sold from 13,000 to 8,000 litres. As a result of the animal feed price 

increase, the price of milk rises, and the quantity of milk bought and sold falls.