Shift In Demand

Definition:

A shift in demand occurs when more or less of a quantity of good is demanded at each price level.

The diagram shows the effect of a rise in the price of butter on the market for margarine.

Here is how the new equilibrium is established:

·        Equilibrium initially at P0Q0.

·        Rise in price of butter causes a contraction in the demand for butter (not shown: this is a model of the margarine market) as consumers switch expenditure towards margarine, a substitute.

·        Rise in demand for margarine, shown by shift from D to D1, causes a shortage of Qd-Q0 at price P0.

·        Price rises. Demand contracts and supply extends.

·        New equilibrium at Q1P1.