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Returning to determinants of supply and demand

Exploring further the determinants of supply and demand and how changes can impact on the point of equilibrium.

External factors such as the determinants of demand and supply cause the curves to move and intersect elsewhere. This causes a change to the point of equilibrium because increases or decreases of profits either attract or repel suppliers from the market. Watch the video to find out how.

The content from the video is also below, if you want to work through it at your own pace.

Increasing demand

Imagine a hot spell of sunny weather increases the demand for trips to the coast. An increase in demand moves the demand curve to the right.

This results in a price increase from £2 to £2.50 and an increase in journeys to the coast from seven to 10. The demand curve moves to the right, creating a new equilibrium.

This graph is based on the equilibrium of demand and supply graphs from the last step. As a reminder, the equilibrium of demand and supply graph compares price and quantity, with quantity on the x-axis and price on the y-axis. The supply curve slopes diagonally up and to the right, while the demand line (marked here as D1) slopes diagonally down and to the right, so the two curves create an X-shape. Where they intersect is marked as initial equilibrium. There is a dotted line going horizontally from initial equilibrium, marking a price of £2 on the y-axis. There is a dotted line going vertically down from the point of initial equilibrium, marking a quantity of seven transport quantities on the x-axis. Hot weather increases the demand for trips to the coast, which means there is a new demand line added. This new line is labelled D2, and is parallel to D1 but positioned to the right, shifted along the supply line. The point where D2 intersects the supply line is marked new equilibrium. There is a dotted line going horizontally from new equilibrium, marking a price of £2.50 on the y-axis, which is above the price of £2 at initial equilibrium. There is a dotted line going vertically down from new equilibrium, marking a quantity of 10 transport quantities. This is a higher quantity of journeys compared to the seven journeys at initial equilibrium, indicating a higher quantity are sold at new equilibrium.

Reducing supply

Now consider the effect of an earthquake on the supply of transport, which will reduce supply and move the supply curve to the left.

With less transport, the resulting price will rise from £2 to £2.50 and there will be a reduction in the number of journeys sold, in this instance from seven to four journeys. The supply curve moves to the left, creating a new equilibrium.

This graph is based on the equilibrium of demand and supply graphs from the last step with quantity on the x-axis and price on the y-axis. The supply curve slopes diagonally up and to the right (marked here as S1), while the demand line slopes diagonally down and to the right, so the two curves create an X-shape. Where they intersect is marked as initial equilibrium. There is a dotted line going horizontally from initial equilibrium, marking a price of £2 on the y-axis. There is a dotted line going vertically down from the point of initial equilibrium, marking a quantity of seven transport quantities on the x-axis. An earthquake reduces the supply of transport, which means there is a new supply line added. This new line is labelled S2, and is parallel to S1 but positioned to the left, shifted along the demand line. The point where S2 intersects the demand line is marked new equilibrium. There is a dotted line going horizontally from new equilibrium, marking a price of £2.50 on the y-axis, which is above the price of £2 at initial equilibrium. There is a dotted line going vertically down from new equilibrium, marking a quantity of four transport quantities. This is a lower quantity of journeys compared to the seven journeys at initial equilibrium, indicating a lower quantity are sold at new equilibrium.

However, the story doesn’t end there. The increase in price will attract more suppliers interested in the extra profits, which will increase supply again, reduce price and move the supply curve back to the initial equilibrium point.

To conclude, demand and supply react in a market based on changes in price, which always move along the supply and demand curves, and by the determinants of demand and supply that shift the curves left or right.

By recognising these movements, suppliers and producers can allocate or withdraw scarce resources, depending on what the market requires. Remember, this is a basic outline of the mechanisms of a market and is dependent on many suppliers and buyers, easy entry and exit to the market, and perfect information.

Your task

Using your understanding of supply and demand concepts and what makes either curve move or change equilibrium, how can governments assist the market to achieve the aim of increasing the demand and supply of rail services?
Discuss this in the comments area in preparation for the next step.

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This content is taken from Coventry University online course
What is Economics in Global Logistics?
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