Economics Micro & Macro (CliffsAP)

When a producer finds itself in disequilibrium, it has two choices: either adjust the price to meet demand, or adjust output
to meet demand. If adjustments are not made in a timely manner, the firm will no longer be able to produce enough rev-
enue to cover its costs.

When examining both supply and demand, we must construct both a supply and a demand curve on the same graph.
Figure 2-5 shows a supply and demand graph.

Figure 2-5

You can see that when the supply and demand curves intersect, we have both an equilibrium price and quantity. Each
time the supply or demand curve shifts, a new equilibrium is created.

In Figure 2-6, the graph on the left shows the impact an increase in demand has on price and quantity. The graph on the
right illustrates the impact an increase in supply has on price and quantity.

Figure 2-6

Let’s look at some scenarios:

■ When the supply curve shifts to the right and the demand curve is constant, we have a decrease in price and an

increase in quantity.

■ When the supply curve shifts to the left and the demand curve is constant, we have an increase in price and

a decrease in quantity.

S^1

P^1

P^2

D

S^2

Price

Eq^1 Eq^2

S

P^2

P^1

Price D^1

D^2

Eq^1 Eq^2

Quantity

Equilibrium

Quantity

Equilibrium

Price

Price

(^4) D S
3
2
1
0155 10 20 25 30
Supply and Demand