So it’s pretty easy to figure out what happens to the equilibrium point if we change demand or supply while one factor constant, but what happens if we change both at the same time? This is when things get a bit trickier and graphical analysis doesn’t tell us everything that we need to know.
There are four possible complex cases, where both demand and supply change at the same time:
Demand increases and supply increases
Demand increases and supply decreases
Demand decreases and supply increases
Demand decreases and supply decreases
Let me show you why they’re complex. Let’s take a look at the first case graphically.
All you know is that demand increases and supply increases, but you don’t know by how much. Let’s say that demand increases by a lot, but supply only increases by a little.
The end result is that the equilibrium price and quantity increases.
Hold on though. What if demand increases by a little and supply increases by a lot?
This time, the equilibrium price decreases while the equilibrium quantity increases.
What if demand and supply both increase by a similar amount?
Again, we have a different end result. This time, the equilibrium price stays constant while the equilibrium quantity goes up.
In each of these cases, we increased both demand and supply, but we ended up with three different outcomes.
The more factors that we change at once, the more difficult it becomes to analyze the situation. That’s why we have simplifying assumptions like ceteris paribus to make our lives easier.
Back to the case at hand. If demand and supply increases, it’s hard to tell what happens to the equilibrium price, so the effect is unknown or indeterminate. The equilibrium quantity on the other hand increased in all three cases. In fact, the equilibrium quantity will always go up for every case where demand and supply both increase.
There’s an easier way to see this without going through a bunch of graphs. Let’s go back to my last post where I talked about changing demand or supply while keeping the other constant.
If demand increases while supply stays constant, the equilibrium price will go up and the equilibrium quantity will go up. If supply increases while the demand stays constant, then the equilibrium price will go down while the equilibrium quantity goes up.
Note that increasing demand and increasing supply while the other is constant has opposing effects on price. That’s why when we combine the two together, we can’t tell what happens to the equilibrium price. However, we can tell what happens to the equilibrium quantity because they both move in the same direction.
Demand increases; supply increases: equilibrium price – indeterminate, equilibrium quantity – increases
Demand increases; supply decreases: equilibrium price – increases, equilibrium quantity – indeterminate
Demand decreases; supply increases: equilibrium price – decreases, equilibrium quantity – indeterminate
Demand decreases; supply decreases: equilibrium price – indeterminate, equilibrium quantity – decreases
McConnell, Campbell R., Stanley L. Brue, and Sean Masaki. Flynn. Macroeconomics: Principles, Problems, and Policies. Boston: McGraw-Hill Irwin, 2009. Print.
Next economics post: Market Equilibrium: Price Ceilings and Price Floors
Previous economics post: Market Equilibrium: Shifting Demand and Supply
All works here are my own and are considered works in progress and may be subject to change at any time. The opinions expressed here are mine only unless otherwise noted. I am not being paid by a third party to endorse a product of any sort. These writings are written for my own references. I do not claim to be a professional of any kind so follow any information you find here at your own risk. The facts that I post on here are things that I believe to be true, but may not necessarily be so. This is the internet; do your own fact checking and take everything with a grain of salt.