Chapter 3A, Problem 1QFR

To determine

Combined effect of simultaneous changes in demand and supply on price and quantity

Explanation of Solution

After the market equilibrium is established once, if the situation arises when demand and supply change simultaneously at the same time, it will surely affect the original equilibrium price, equilibrium quantity demanded and supplied. The consequent situations can be discussed under 6 categories: -

1. If the demand and supply increase in the same proportion:

When demand and supply increase at equal rate, the equilibrium price remains unchanged but the equilibrium quantity changes. This is shown in the Figure 1. In the figure, equilibrium quantity has increased from OQ to OQ'

Figure 1

  

2. If the demand and supply decrease in the same proportion:

When demand and supply decrease at equal rate, the equilibrium price remains unchanged but the equilibrium quantity changes. This is shown in the Figure 2. In the figure, equilibrium quantity has decreased from OQ to OQ'

  

Figure 2

3. If the increase in demand is more than the increase in supply:

When the proportionate increase in the demand is greater than that of supply, then the equilibrium price increases a little while the equilibrium quantity increases greatly. This is shown in the Figure 3. In the figure, equilibrium price OP increases to OP' and the equilibrium quantity OQ increases to OQ'.

Figure 3

  

4. If the decrease in demand is more than the decrease in supply:

When the proportionate decrease in the demand is greater than that of supply, then the equilibrium price decreases a little while the equilibrium quantity decreases greatly. This is shown in the Figure 4. In the figure, equilibrium price OP decreases to OP' and the equilibrium quantity OQ decreases to OQ'.

Figure 4

  

5. If the increase in demand is less than the increase in supply:

When the proportionate increase in the supply is greater than that of demand, then the equilibrium price decreases a little while the equilibrium quantity increases greatly. This is shown in the Figure 5. In the figure, equilibrium price OP decreases to OP' and the equilibrium quantity OQ increases to OQ'.

Figure 5

  

6. If the decrease in demand is less than the decrease in supply:

When the proportionate decrease in the supply is greater than that of demand, then the equilibrium price decreases greatly while the equilibrium quantity increases a little. This is shown in the Figure 6. In the figure, equilibrium price OP increases to OP' and the equilibrium quantity OQ decreases to OQ'.

Figure 6

  

In all of the above figures,

D= Original demand curve, D'= New demand curve E= Equilibrium

S= Original supply curve, S'= New supply curve E= New Equilibrium

Economics Concept Introduction

Introduction:

Market equilibrium take places at the momentwhen market demand and market supply become equal. This situation determines the equilibrium price, equilibrium quantity demanded and supplied also. After the market equilibrium is established, change in demand or supply as well as simultaneous changes in demand and supply at the same time affects the original equilibrium price, equilibrium quantity demanded and supplied. Sometimes these result in the establishment of a new market equilibrium.