Changes in equilibrium price and quantity when supply and demand change | Khan Academy

What we're going to do in this video is think about all of the different ways that a supply curve or demand curve can shift. That's why we actually have eight versions of the exact same diagram. Each of them is showing where we are right now, let's say in a given region in the ice cream market. It's important to title your graphs, especially if you're taking some type of a standardized exam like an AP exam.

In the vertical axis, we have P representing price, and then the horizontal axis Q representing quantity. We have our upward sloping supply curve. I'm calling this S1 just as kind of our starting point. Then we have our downward sloping demand curve D1, and where they intersect that gives us our equilibrium price P1 and our equilibrium quantity Q1. Once again, if you're taking some type of a standardized test, it's important that you label all of these things, including P1 and Q1, and show this dotted line where it intersects the horizontal axis is Q1, and where it intersects the vertical axis is P1.

Now, with that out of the way, let's think about what happens to the equilibrium price and the equilibrium quantity given different shifts in the supply or the demand curve, or both of them. So in this first scenario, let's imagine that all of a sudden, a major ice cream producer enters into the market. Here we're going to this first one, we're going to think about a situation where the supply goes up. One way to think about it is at any given price, people are willing to supply more quantity.

So here we would have our supply curve shift to the right. I'll call this S2 right over here; it's shifting to the right and down. Given this, what happens to our equilibrium price and our equilibrium quantity? Well, you see it right over here. If I draw a dotted line, we see our equilibrium price P2 is lower and our equilibrium quantity Q2 is higher. Once again, assuming that we have a downward sloping demand curve like this, which is what you would typically see.

In this case, let me just write it here. Do we have our quantity? Or actually, let me write it this way: we have our price goes down and our quantity goes up. All right, now let's do this example. Let's imagine the other way; let's imagine in this scenario our supply goes down. What is going to happen to this graph in particular? What's going to happen to our equilibrium price and our equilibrium quantity?

Well, in this situation, for a given price, people are willing to supply less. Less—that's how I'd like to think about it. So we would have a shift to the left and up, and so we could call this supply curve 2 right over here. Then what is our equilibrium point? It's right over there; it is right over there. This would be our new price; it has gone up, and this would be our new quantity; it has gone down.

So price has gone up, and quantity has gone down. Once again, in either of these scenarios, hopefully, this feels a little bit like common sense. If you have a supplier enter into the market, there's going to be—quantity might go up, and there's more competition amongst the suppliers, so the price would go down. Here, where the supply goes down, maybe some of the ice cream stores close down. Well, now the quantity will go down; there's just less people supplying, but the price goes up for the ice cream that's there. The equilibrium price is going to be higher.

Now let's do the same thing with the demand curve. Let’s think about a situation where first, let’s think about a scenario where demand goes up. What is going to happen in this world? Well, demand might go up because maybe there's some type of report that ice cream is much healthier for you than expected. At a given price, people are willing to demand a higher quantity.

For example, that price, people would demand a higher quantity, so we would have a shift to the right and up. Let's call this D2 right over here, and this is our new equilibrium point. Notice what has just happened here at our new equilibrium point. This is Q2, and then this right over here is P2, our new price, our new equilibrium price, and our new equilibrium quantity.

In this situation where demand goes up, both price and quantity are going to go up, assuming we have this upward sloping supply curve again. Once again, that makes sense. More people just want to buy ice cream. The supply curve dynamics have not changed, so we're going to move along that supply curve to the right and up. So both price and quantity go up.

Well, if demand goes down, you could imagine the opposite is going to happen. Here, if we have demand goes down, let's say a big study comes out that ice cream is even unhealthier than we originally thought. Well, then at a given price, people are going to want—they're going to demand less ice cream.

So our demand curve would shift to the left and down, so we'll call this D2 right over here. We can see our equilibrium price and quantity. Let’s show that new equilibrium price is P2 right over here, and then our new equilibrium quantity is Q2. Notice both price and quantity go down. People just don't want to buy ice cream as much because they think it's unhealthy now, so price goes down and quantity goes down.