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The demand and supply are
different functions that are co-related. The change of
demand curve influences the supply curve and vice verse.
The higher degree of change on one curve is making higher
influence to the other curve.
In order to analyze how an
event affects the market, we do so in three stages:
1.) First, determine whether the event shifts demand
curve, supply curve or both curves
2.) Second, determine whether the curve shifts to the
right or left
3.) Third, with the help of supply and demand chart
compares the original and the new balance.
Suppose
that we are in the middle of the heat of summer. How this
event affects the ice cream market? Let's do the three
steps analysis:
Phases
in the analysis:
1.The heat affect the demand curve. Because of the heat,
people want to buy a larger quantity of ice cream. Offer
curve does not change.
2.Since people consume more ice cream, the demand curve
shifts right.
3.Increase of demand increases equilibrium price with
$2,00 to $ 2.50 and the equilibrium quantity from 7 to 10 ice creams.
CONCLUSION: The heat increases the price of ice
cream, but sell much more ice cream.
Let
suppose that the sugar production fell short, and that
there has been an increase in sugar prices. How this event
affects the ice cream market?
Phases
in the analysis:
1.Change of sugar prices (inputs needed for production
of ice cream), affects the supply curve. It increases
the production costs, and reduces the amount of ice
cream produced by the company. Demand curve remains
unchanged.
2.Supply curve moves to the right
3.Shift of supply curve increases the equilibrium of the
price from 2:00 to $ 2.50, while decreases
equilibrium quantity from 7 to 4 cones.
If we
combine both cases into one case, than the phases in the
analysis are:
1.Both curves must shift.
2.Every curve moves in the same direction as in a
separate analysis, ie the demand curve to the right and
supply curve to the right.
3.There are two possible outcomes depending on the
relative size of demand and supply shifts.
a) If the demand increases significantly and supply has
only a small decline, then the equilibrium
quantity increases.
b) If the demand slightly increases and supply
significantly decreases, equilibrium quantity decreases
too
 .
Recommended
reading:
Aggregate
Demand of Market
Aggregate Supply of Products
Market
Balance: Demand and Supply Equilibrium
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