4.4 : Effect of Shift in Demand Curve on Market Equilibrium

Consider an example of a market for electric cars.

Rising Demand for Electric Cars: As environmental awareness grows, more consumers opt for electric vehicles (EVs) over traditional gasoline-powered cars. This change in consumer preferences signifies a rightward shift in the demand curve for electric cars, leaving the supply unchanged.

• Shortage and Price Increase: To address the resulting shortage, the price of electric cars rises. This higher price incentivizes manufacturers to increase production to meet the increased demand.

Decreasing Demand for Electric Cars: Conversely, should technological issues or concerns over electric vehicle battery life emerge, public interest might wane. Such worries lead to a leftward shift in the demand curve for EVs.

• Surplus and Price Reduction: This decline in demand generates a surplus of electric cars at the original price. Sellers lower their sale prices to clear this surplus. This may discourage manufacturers from maintaining high production levels, reducing the equilibrium quantity.

These scenarios illustrate the market's natural mechanism to adjust and find a new equilibrium point in response to shifts in demand. The duration of this adjustment process varies, influenced by the speed at which manufacturers can adapt to changes and how quickly consumer sentiments shift.