We examined what happens to equilibrium price and quantity when just demand shifts or just supply shifts. But what if they both change? Things can get a bit trickier, and the answer depends on which curve shifts more.
Let's go back to our workhorse supply and demand curves and draw them really big because we're going to be showing a lot. We have downward sloping demand and upward sloping supply. Let's call this supply 1 and this demand 1. And let's label this equilibrium point A.
with, call this point A, with price A and quantity A. What happens when there's an increase in demand to demand curve 2? We know that equilibrium price and quantity go up to point B.
With quantity B and price B. But what if there's also a decrease in supply to a supply curve 2? Let's start with a small one. That's supply curve 2. We see that the equilibrium price goes up even more to point C.
Call this price C and quantity C. Quantity doesn't go up by as much as when we just changed the demand curve. Q sub C is lower than Q sub B. What about a large decrease in supply to a supply curve 3?
Supply curve 3. Price goes up a lot to point D. Price sub D. But the equilibrium quantity actually falls. to Q sub d.
So the effect on price and quantity depends on the degree to which the supply and demand curves both shift. Now what if demand goes up to curve 2 like before, but supply also goes up? I'm going to stick to the same graph to really illustrate this point.
With a small increase in supply to supply curve 4, supply curve 4, we see that price doesn't go up by as much. That's point E. Call this point E over here.
And quantity, sub E. But quantity increases by even more than when we just moved the demand curve. Now let's draw a big increase in supply to supply curve 5. Here, price actually falls. Call this P sub F because this is point F.
And the quantity increases by a lot to Q sub f. We have increase in demand in this example from demand curve 1 to demand curve 2. Depending on the direction and size of the change in supply, the new equilibrium price could have been higher than the old one. as in points C, D, and E, or it could have been lower, as in point F.
The equilibrium quantity could have gone up as in points C, E, and F, or it could have fallen as in point D. First, analyze the effect of the change in one curve, then analyze the effect of the change in the other to combine them. It depends can be an answer when both supply and demand change. When you're faced with a real world market, don't reason from a price change.
What does that mean? Suppose I tell you that the price of gas went up in the summer as it usually does. Very often people will imagine a story about what's going on.
People are taking more road trips and that's what's causing it. Or a hurricane reduced refinery capacity. But without knowing more about the situation, we don't know whether it was a change in demand or a change in supply that caused the price to increase.
If both supply and demand are changing, depending on the direction they're moving, we might be unsure of the overall effect on quantity and price. And that's why I keep emphasizing the importance of thinking through changes in willingness to pay and willingness to accept. There are too many possible combinations of changes in markets for you to memorize them. Follow the principles and you'll be able to analyze and understand the impacts on equilibrium prices and quantities and know when you might need more information.
Thank you.