We’re gonna see that what happens when there’s a simultaneous change in both demand and supply? There are four different things that can happen with simultaneous change. We can have
- Demand and Supply both increase together.
- Demand and Supply both decrease together.
or, we could have where there’s an opposite effect where,
- Demand is increasing but Supply is decreasing.
- Demand is decreasing but Supply is increasing.
So those are the four different scenarios and there’s a different effect on the equilibrium quantity and the equilibrium price in each situation.
I’ve just summarized them for you, basically, if you have an increase in demand and an increase in supply, people are wanting to buy more of the good and suppliers are wanting to supply more of it there are these changes happening, then the equilibrium quantity is definitely going to increase. It’s definitely going to go up but the effect on the equilibrium price is going to be indeterminate that means that we don’t know what’s going to happen and that is because we need to know which effect is stronger. Because we have two different things going on here we’ve got an increase in demand and an increase in supply.
Normally, if we just had an increase in demand with no increase in supply the demand curve would shift to the right and so then we would have an increase in the price. However, think about the opposite, if we had an increase in supply but no increase in demand just an increase in supply by itself the supply curve would shift to the right and we would have a decrease in the price. So the increase in demand by itself causes an increase in price but the increase in supply by itself would cause a decrease in price. So the effect on price is indeterminate, we don’t know what would happen.
I’ve laid out the different situations and in each case, we either know definitively what happens to either the quantity and then the effect on prices indeterminate or we know what happens to the price in a couple of situations and then the effect on the quantity is indeterminate. Now this is all pretty theoretical I want to draw an example for you and I’ll use the first combination where we have an increase in demand and supply. I think once I sketch it for you with the graph it’ll be a little easier for you to understand.
So let’s take the market for Wind Energy. So we’re talking about wind energy which could be produced with windmills and let’s say that the two things happen. So first we have some increases in technology that make it easier and cheaper to produce wind energy. Because it’s cheaper to produce that’s going to cause an increase in supply. So we’ve got an increase in supply but then also let’s say there’s a second thing and that consumer preferences are changing. So that now people are preferring more renewable energy, so they prefer wind energy to energy produced by coal or something like that. So now there’s going to be an increase in demand so we’re going to have both of these. There’s going to be a shift of the demand curve to the right and there’s gonna be a shift of the supply curve.
Let’s just graph this out and I’m just gonna show you a really generic graph. So we’ve got our price and we’ve got our quantity and so we have a downward sloping demand curve and then we’ve got our upward-sloping supply curve. I’ll call this supply curve S1. Our initial equilibrium would have been right there where S1 and D1 intersect which is E1. Then our supply curve is going to shift to the right. We’ll call that S2.
Now our demand curve is also going to shift to the right, we’ll call that D2. Here our new equilibrium is E2 where D2 intersects S2. Now let’s draw the new equilibrium. It’s gonna be right here.
So if we were to say, “Well, what happened to our equilibrium quantity?” Initially, our equilibrium quantity was Q1 but now we are here at Q2. So our equilibrium quantity has increased considerably. That’s when we have an increase in supply and an increase in demand. We know that the equilibrium quantity is gonna go up and that’s guaranteed.
Now, what’s the effect on price? Well, take a look here, the price is basically unchanged in this example. Now it’s not always gonna be indeterminate and the reason is that I could draw this differently. I could draw this differently so that we would have a situation where the increase in demand is going to increase the price and the increase in supply is going to decrease price.
So if the increase in demand is is kind of weak and the increase in supply was really strong then the increase in supply that the effect it has on depressing the price would outweigh the increase in price from the increase in demand. Now again that’s kind of theoretical, let me give you an example of this. So now that graph we draw before is just kind of a generic scenario where I have basically the increase in demand and supply we’re about the same amount but let’s say in the new scenario where the increase in the supply is really strong but the increase in demand is it’s kind of weak. By weak, I just mean it’s not as a large effect. So let’s do this, I’m not using numbers and everything I just want to save you time and go through this quickly.
Let’s say that here’s our demand curve we’ll call it D1 and then we have a supply curve and we call them S1. Then that’s E1 is our initial equilibrium, so we’d have Q1 and we’d have P1. So again we’re gonna have an increase in demand and an increase in supply simultaneously but I’m gonna draw it such that the increase in demand it’s just it’s kind of a small increase in demand. Let’s say the increase in demand happens and the D1 shifts to the right to D2. But it’s not as wide as we had before.
Now let’s draw a big increase in supply which is S2. So our new equilibrium is going to be where S2 and D2 intersect which is E2. Q2 is our new equilibrium quantity and P2 is our new equilibrium price. Now you see the new P2 is less than P1 and Q2 is greater than Q1.
Remember? We said with an increase in demand and supply at the same time there’s always going to be an increase in quantity in the equilibrium. So we know that that’s not changing based on which effect is strong or weak or whether the supply change or demand changes. Now, look at the price, before we said we don’t really know what’s gonna happen but now because this shift in demand was was kind of weak it wasn’t as strong as the shift in supply. The effect of the shift in supply which by itself if we had an increase in supply that would decrease the equilibrium price. Now that is the stronger effect so that decrease in price is like it’s winning the battle.
So to speak and think of that increase in supply and its effect on price is stronger than the increase in demand because the increase in demand there’s just this little shift here but then look at this shift of the supply curve which is greater. Conversely, if we had done something where we had a really strong increase in demand and a kind of small increase in supply then the opposite thing would have happened. Then we would have actually had an increase in price.