An increase/decrease in demand leads to a shift in the demand curve. These shifts are brought about by changes in the other conditions affecting consumer demand, and not price changes.
The distinction between an increase/decrease and expansion/contraction of supply is the same. An expansion/contraction in demand occurs when there is a price change and leads to movement along the supply curve. An increase/decrease of supply occurs when there are changes in the other conditions affecting consumer demand, other then price changes and leads to a shift in the entire supply curve for the good.
Show how demand and supply interact to determine market equilibrium
Market equilibrium occurs when, at a certain price, the quantity supplied and the quantity demanded of a particular good are equal. In this situation, the market clears (no excess supply or demand) and there is no tendency for change in either price or quantity.
In a graph with both supply and demand curves, market equilibrium occurs where the demand and supply curves intersect. It is the point where the quantity demanded is exactly equal to the quantity supplied.
Examine the effect on market equilibrium if there is a:
a reduction in supply [demand unchanged]
A reduction in supply means that fewer goods would be supplied, at the same price. For example, when there is a shortage of oil, the supply of oil decreases, so that less oil is available at any given price.
An reduction in supply raises equilibrium price, and lowers equilibrium quantity
An increase in demand [supply unchanged]
An increase in demand means that more of a good will be demanded at the same price. For example, on a hot day, the demand for ice blocks increases, so that more consumers are willing to buy ice blocks at any given price.
An increase in demand raises both equilibrium price and quantity.
A decrease in demand and a larger increase in supply
A decrease in demand and a larger increase in supply means that fewer goods will be demanded at the same price, yet even more goods are supplied at the same price.
A decrease in demand lowers equilibrium price and lowers equilibrium quantity. An increase in supply lowers equilibrium price but increases equilibrium quantity. When the increase in supply is larger then the decrease in demand, the equilibrium price is lower whilst there is a slight increase in equilibrium quantity.