We know that if the price rises, other things remaining the same, people buy less of that commodity and if price falls, people buy more of that commodity. Let us now discuss the effects on market equilibrium price due to changes (shifts) in demand.
A change (shift) to demand can take place independently of change in price, i.e., price remaining the same, people may purchase more or less of the commodity. When larger quantity is demanded at the same old price or the same old quantity is demanded at a higher price we say, the demand has risen. In such a case, the whole of demand curve rises above the original demand curve. In case of a fall in demand, the whole of the demand curve falls below the original demand curve.
In order to study the effects on market equilibrium price due to changes (shifts) in demand, let us assume that no change takes place in the supply schedule, i.e., it remains fixed. If demand rises, more quantity will be purchased at a higher price. On the other hand, if demand falls, less commodity will be purchased at a lower price. This can also be illustrated in the following diagram.
In the figure (8.2) DD/is the original demand curve. PM is the equilibrium price and OM is the equilibrium quantity. When demand rises, supply remaining the same, the equilibrium quantity increases from OM to OG and the equilibrium price rises from PM to FG. In case of fall of in demand, which is indicated by D2D2 curve, the quantity demanded decreases from OM to OK and the equilibrium price falls from PM to LK.
Now a question can be asked that when the demand rises, does it affect more on the price or on the quantity of the commodity to be sold? The answer to this simple question, is that if the supply is perfectly elastic, a rise in demand will increase the quantity but will not affect the price. If the supply is perfectly inelastic, then a rise in demand will affect the price but not the quantity. This can be shown with the help of the diagram. In case of perfect elastic supply, (Fig. 8.3) when demand rises, the supply (quantity) increases from OK to OI with further rise in demand D2D2 the supply increases from OI to ON.
Effects of Perfectly Inelastic Supply on Demand:
In fig. 8.4, the supply is perfectly inelastic. A rise in demand affects the price which rises from RM to KM and with the further rise in demand to LM. The quantity supplied remains the same OM.