Tip:
Highlight text to annotate it
X
The figure, shows the case of an increase in demand. The effect of this change in the
market is shown by the rightward shift of the entire demand curve from D1 to D2.
The immediate effect of the rightward shift in demand is the creation of a shortage shown
by the amount from Q1 to Q'. This shortage implies that there are consumers in the market
who are unable to obtain the quantity of the good or service they desire. As a consequence,
such consumers would offer to pay more to suppliers and gradually price rises in the
market. As price rises in this manner, there is an
increase in quantity supplied, since producers are encouraged to produce more output for
the market. This is shown by the extension of supply depicted by the yellow arrow.
At the same time, the gradual increase in prices discourages some consumers from purchasing
the good or service and quantity demanded declines. This is shown by the contraction
of demand represented by the green arrow. The price in the market would continue to
increase until equality between demand and supply is established .
This new equilibrium occurs at a price of P2. Overall the increase in demand has resulted
in a rise in the market price.