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In 1980 the English economist Alfred Marshall found how both supply and demand interact to determine price. The price level shows how the quantity supplied equals the quantity demanded. (graph 1) On this graph, there is only one price level at which the supplied and demanded curves cross. The law of supply and demand is that the price level will move toward the point that equalizes quantities supplied and demanded. The reason why this must be the equilibrium point, is that the situation in which the price is higher than the price in which the curves cross means the quantity supplied would be greater than the quantity demanded and there would be a surplus on the market. Suppose the seller lowered the price below the equilibrium point.
So the quantity demanded would increase beyond what was supplied and there would be a shortage. (graph 1 -> It´s the same graph) The equilibrium point must be the point where the supply and demand curves cross. The graph shows that this is the case at a price of $ 2,40 and a quantity of 34 units. (graph 2) You have to understand how the law of supply and demand works when there is a shift in demand. The result of this example is a new supply and demand. This means there would be a new equilibrium point.
The price and quantity are higher. The following summary are the results from shift in supply, demand and combinations of them. (graph 3) In the graph, the \"+\" (plus) on the table represent an increase and the \"-\" (minus) on the table represent a decrease. The question mark shows that the net change cannot be determined without knowing the size of the shift in supply and demand.
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