Changes in Equilibrium

Changes in Market Equilibrium

There are many factors that can affect a market's equilibrium. Consider this example below to understand how it shifts the market.

Suppose that due to a temporary economic downturn, average income sees a significant decrease. A decrease in consumers' income means that demand for some normal goods will decrease. Normal goods are products and services that are demanded in higher quantities when consumers' income rises; inversely, these goods will experience lower demand when consumers' income falls. Examples of normal goods include clothes, taxis, food staples, and electronics. Let us use taxi services for this step-by-step example of analyzing a change in market equilibrium.

Fig 1. - A leftward shift in Demand

In the example above we see that a decrease in income results in a shift in demand which changes a market to a new equilibrium. Economists who study this data can use it to guide business strategy in accordance with this change in the market. Demand for taxis decreases because income decreases, so how can firms use this information? They can allocate resources to goods and services that work better for lower-income individuals. This could be investing in public transit such as buses and trains. The private sector can respond by adding more rental scooters and bicycles as many US cities are already seeing.

Changes in Supply & Demand and their Effects on Equilibrium

As the supply and demand curves shift, the equilibrium point will shift as well. Thus, changes in supply and demand that lead either of the curves to shift will lead to changes in equilibrium. Changes in the market often affect both price and quantity as the two are linked. Elasticity describes how linked they are. When the market is at equilibrium, many consumers and producers obtain value from the efficiency of the competitive market. This is called consumer and producer surplus. Whenever something causes the equilibrium to deviate, the total economic surplus will change.

Learn more about what factors may lead to shifts in the supply and demand curves in our explanations of Shifts in Supply and Shifts in Demand.

Change in Equilibrium Quantity

While tied to price, there are other factors that alter the quantity demanded or supplied in a market. A common demand factor is changes in income, while a supply factor could be global supply chain issues as the pandemic revealed.

It's important to consider that the market will naturally balance itself, meaning that when change occurs in one area, the whole market is likely to shift to a new balance. This means it can be difficult to control – as the example shows, the minimum wage was increased, but as a result, so did prices. To know if the wage increases actually made anyone's life better would require comparisons of living costs.

Change in Equilibrium Price

There is a multitude of factors that affect a market and alter the equilibrium price. Demand factors that can change price range from changes in income or preferences, while supply factors can be taxes or production costs changes.

Now wait a minute, don't those two recent examples contradict each other? To some degree, yes – they did minimize the changes mentioned. That is the balancing aspect of the market, it's true that an increase in income raises consumers buying power, and it's also true that the increase in income raises supply costs. Each good may vary on whether consumers benefit from the income increase or the benefit is negated by the cost increase. Let's consider the debate of zero-sum vs positive-sum below.

Given that supply, demand, and other market factors are subject to changes and fluctuations, it follows that equilibrium may shift accordingly. A change in equilibrium can provide us with valuable information about the behavior and trends in the market, as well as point to changes in the economic environment.