Henry

Supply and Demand

An increase in price will lead to a decrease in the quantity demanded whilst an increase in
demand will lead to an increase in price.

The demand curve shows the willingness of the consumer to buy a quantity at a certain
price. When the price rises from P1 to P2 the equilibrium moves left along the demand
curve this shows a reduction of quantity demanded from Q1 to Q2.
The decrease in quantity demanded happens because the law of demand states that price
and quantity demanded are inversely related, when one goes up the other goes down. This
is because the marginal utility the consumer receive at Q1 is not equal to or greater than the
cost causing an excess of demand, consumer aim to maximise welfare so they will buy less
of the product at P2 than P1 as shown from Q1 to Q2 to maximise their marginal utility,
therefore maximising their welfare.
In this example let the above supply-demand diagrams represent the price and quantity of
pizza. For example if Consumer A at P1 Q1 purchased 4 pizzas a week at £5 because he
thought the extra pizza was not worth an extra £5, its marginal utility being less than price,
but the supply curve shifts from S1 to S2 causing price to rise from P1 to P2, lets say 5 to 7
pounds, this will result in him deciding that the fourth pizza I not worth the marginal utility
and instead only buying three a week reducing quantity demanded.
Another way the price will rise is the demand curve shifting to the right, this would happen
due to non-price determinants like the item becoming fashionable, a subsidy, a rise in the
rise of a substitute or the fall in the price of a compliment to name a few, this will send a
signal to firms to raise their price as firms are profit monsters, they want to maximise
profits, as consumers are willing to pay more for the item, this is shown below as the curve
shifts from D1 to D2 along with the price increasing from P1 to P2