Shifts And Equilibrium

1. A shift in demand or supply is caused by a change in a non-price determinant, not by a change in the good's own price.
2. Once a curve shifts, the old price no longer clears the market, so price and quantity adjust to a new equilibrium.
3. Working through one curve at a time reveals the direction of change in both equilibrium price and equilibrium quantity.

Demand Shifts

1. A rightward shift in demand raises both equilibrium price and equilibrium quantity.
   1. Higher demand creates a shortage at the old price, so price is bid up and quantity supplied expands along the supply curve.
2. A leftward shift in demand lowers both equilibrium price and equilibrium quantity, as a surplus at the old price forces price down.

Supply Shifts

1. A rightward shift in supply lowers equilibrium price but raises equilibrium quantity.
   1. Extra supply creates a surplus at the old price, so price falls until the larger quantity is bought.
2. A leftward shift in supply raises equilibrium price but lowers equilibrium quantity, as a shortage at the old price bids price up.

Combined Shifts

1. When both curves shift, one of price and quantity can be determined but the other is often indeterminate.
2. If demand and supply both rise, quantity clearly rises, but the price change depends on which shift is larger.
3. The direction of the indeterminate variable can only be pinned down once the relative size of the two shifts is known.

Elasticity And Volatility

1. The size of the price and quantity change depends on the price elasticity of demand and supply, not just the direction of the shift.
2. If supply is inelastic, a demand rise causes a large price change and only a small quantity change.
3. The basic model captures the main forces but leaves out speculation, expectations and government intervention, which also move real prices.

Do markets always return to equilibrium quickly?

1. The model's great strength is self-correction: any shortage or surplus at the old price creates pressure that, through the price signal, moves the market to the new equilibrium with no one directing it.
2. But real adjustment is often slow: prices can be sticky (menu costs, wage contracts and regulated tariffs), and supply lags mean quantity cannot respond at once, so disequilibrium can persist for months or years in markets such as housing.
3. Expectations and speculation can also push price away from the fundamental equilibrium rather than towards it, and government controls such as price ceilings or floors can lock in a shortage or surplus indefinitely.
4. On balance, competitive markets with flexible prices do tend back to equilibrium, but how quickly depends on the context: the stickier the price and the more inelastic and slow-moving supply, the longer the adjustment, so the model is a reliable guide to the direction of change but not always to its timing.