PRICE CHANGES
Market prices do not remain constant. If we remove the ceteris parabus assumption, prices become free to move according to changes in supply and demand conditions.
If any of the conditions of supply and demand change, the equilibrium price will change.
An increase in demand:
should lead to the demand curve shifting outwards, and an extension of supply.
This should cause the equilibrium price and quantity traded to increase.
An increase in supply:
should lead to the supply curve shifting outwards, and an extension of demand.
This should cause the equilibrium price to fall and quantity traded to increase.
A decrease in demand:
should lead to the demand curve shifting inwards, and a contraction of supply.
This should cause the equilibrium price and quantity traded to fall.
A decrease in supply:
should lead to the supply curve shifting inwards, and a contraction of demand.
This should cause the equilibrium price to rise and quantity traded to fall.
A good application of how changes in the conditions of supply and demand influence prices can be found by looking at changes in house prices. Looking at this news article will give specific examples of how changes in the conditions of supply and demand have affected house prices.
A note of caution:
You must be able to differentiate between changes in Qd and Qs and changes in demand and supply. These phrases may look similar, but in fact they demonstrate major changes on the supply and demand curves.
Changes in Qd/Qs: these are caused by price changes and are shown by movements along the supply/demand curve
Changes in supply/demand: these are caused by non price factors changing and are shown by movements of the supply/demand curves.