Shifts in demand are a natural and unavoidable event in a competitive economy, significantly affecting a firm’s strategy and revenue. They can happen because of changes in population, market environment, such as the prices of related goods, or consumer expectations, for instance, due to changing preferences or scientific or technological innovations. A change in fuel price, for instance, can affect the demand for cars. A decrease in fuel price will lead to an increase in demand for cars and vice versa.
As the demand for cars increases, so does each car’s price. Thus, the marginal revenue of production increases, as well. In the short run, manufacturers can increase their output until, ideally, their marginal revenue is zero again. However, the increased profitability of producing cars will cause other firms to enter the market, increasing supply. In turn, this will lead to cars’ prices falling back to their long-term equilibrium. In a graph, this will shift the demand line to the right in the short term, then the supply line will follow until an equilibrium is reached.
Another example of changes in demand affecting the market can be explained by consumer expectations. For example, environmental concerns can increase, leading to consumers becoming less interested in polluting cars and not willing to buy as many of them as before. The demand for them will fall, driving prices down; marginal revenue falls, forcing manufacturers to decrease their output. Some of them will be forced out of the industry if their marginal cost is too high. This, in turn, will lead to a further decrease in supply, creating a new long-term equilibrium. In a graph, the demand line will move to the left first, then the supply line will follow.