Price changes

A new market equilibrium is created when demand or supply shifts. The price change then causes extensions or contractions along the other, unchanged curve.

Initial change	Immediate effect	New equilibrium	Effect on sales
Demand increases	Shortage at the old price	Price rises; quantity rises	More units are sold
Demand decreases	Surplus at the old price	Price falls; quantity falls	Fewer units are sold
Supply increases	Surplus at the old price	Price falls; quantity rises	More units are sold
Supply decreases	Shortage at the old price	Price rises; quantity falls	Fewer units are sold

Four price-change diagrams: demand increases (price rises, quantity rises), demand decreases (price falls, quantity falls), supply increases (price falls, quantity rises) and supply decreases (price rises, quantity falls)

Figure 2.4: The four single-shift outcomes. Compare the old equilibrium E1 with the new equilibrium E2.

A* chain example: Higher incomes increase demand for restaurant meals -> D shifts right -> a shortage exists at the old price -> price rises -> supply extends -> a higher price and quantity are established.