How are the equilibrium price and quantity affected when both demand and supply curves shift in the same direction?

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both demand and supply curves shift in the same direction

Cases	Equilibrium Price	Equilibrium Quantity	Figure
1) Increase in Dd = Increase in supply	Unchanged	Increases
2) Increase in Dd more than increase SS	Increases	Increases
3) Increase in Dd less than increase in SS	Falls	Increases
4) Decrease in Dd = decrease in SS	Unchanged	Falls
5) Decrease in Dd more than decrease in SS	Falls	Falls
6) Decrease in Dd less than decrease in SS	Increases	Falls

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demand and supply curves shift in opposite direction

Cases	Equilibrium Price	Equilibrium Quantity	Figure
1. Increase in Dd = decrease in SS	Increase	Unchanged
2. Decrease in Dd = increase in SS	Unchanged	Increase
3. Decrease in Dd < increase in supply	Decrease	Increase
4. Decrease in Dd > increase in supply	Decrease	Decrease
5. Increase in Dd < decrease in SS	Increase	Decrease
6. Increase in Dd > decrease in SS	Increase	Increase

As we have seen, when either the demand or the supply curve shifts, the results are unambiguous; that is, we know what will happen to both equilibrium price and equilibrium quantity, so long as we know whether demand or supply increased or decreased. However, in practice, several events may occur at around the same time that cause both the demand and supply curves to shift. To figure out what happens to equilibrium price and equilibrium quantity, we must know not only in which direction the demand and supply curves have shifted but also the relative amount by which each curve shifts. Of course, the demand and supply curves could shift in the same direction or in opposite directions, depending on the specific events causing them to shift.

For example, all three panels of Figure 3.11 "Simultaneous Decreases in Demand and Supply" show a decrease in demand for coffee (caused perhaps by a decrease in the price of a substitute good, such as tea) and a simultaneous decrease in the supply of coffee (caused perhaps by bad weather). Since reductions in demand and supply, considered separately, each cause the equilibrium quantity to fall, the impact of both curves shifting simultaneously to the left means that the new equilibrium quantity of coffee is less than the old equilibrium quantity. The effect on the equilibrium price, though, is ambiguous. Whether the equilibrium price is higher, lower, or unchanged depends on the extent to which each curve shifts.

Figure 3.11 Simultaneous Decreases in Demand and Supply

Both the demand and the supply of coffee decrease. Since decreases in demand and supply, considered separately, each cause equilibrium quantity to fall, the impact of both decreasing simultaneously means that a new equilibrium quantity of coffee must be less than the old equilibrium quantity. In Panel (a), the demand curve shifts farther to the left than does the supply curve, so equilibrium price falls. In Panel (b), the supply curve shifts farther to the left than does the demand curve, so the equilibrium price rises. In Panel (c), both curves shift to the left by the same amount, so equilibrium price stays the same.

If the demand curve shifts farther to the left than does the supply curve, as shown in Panel (a) of Figure 3.11 "Simultaneous Decreases in Demand and Supply", then the equilibrium price will be lower than it was before the curves shifted. In this case the new equilibrium price falls from $6 per pound to $5 per pound. If the shift to the left of the supply curve is greater than that of the demand curve, the equilibrium price will be higher than it was before, as shown in Panel (b). In this case, the new equilibrium price rises to $7 per pound. In Panel (c), since both curves shift to the left by the same amount, equilibrium price does not change; it remains $6 per pound.

Regardless of the scenario, changes in equilibrium price and equilibrium quantity resulting from two different events need to be considered separately. If both events cause equilibrium price or quantity to move in the same direction, then clearly price or quantity can be expected to move in that direction. If one event causes price or quantity to rise while the other causes it to fall, the extent by which each curve shifts is critical to figuring out what happens. Figure 3.12 "Simultaneous Shifts in Demand and Supply" summarizes what may happen to equilibrium price and quantity when demand and supply both shift.

Figure 3.12 Simultaneous Shifts in Demand and Supply

If simultaneous shifts in demand and supply cause equilibrium price or quantity to move in the same direction, then equilibrium price or quantity clearly moves in that direction. If the shift in one of the curves causes equilibrium price or quantity to rise while the shift in the other curve causes equilibrium price or quantity to fall, then the relative amount by which each curve shifts is critical to figuring out what happens to that variable.

As demand and supply curves shift, prices adjust to maintain a balance between the quantity of a good demanded and the quantity supplied. If prices did not adjust, this balance could not be maintained.

Notice that the demand and supply curves that we have examined in this chapter have all been drawn as linear. This simplification of the real world makes the graphs a bit easier to read without sacrificing the essential point: whether the curves are linear or nonlinear, demand curves are downward sloping and supply curves are generally upward sloping. As circumstances that shift the demand curve or the supply curve change, we can analyze what will happen to price and what will happen to quantity.

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- Upon successful completion of this unit, you will be able to:
  - define demand, supply, and market equilibrium;
  - determine the equilibrium in a market under situations that cause shifts in demand and supply that affect changes in prices and quantities;
  - apply elasticity of demand and elasticity of supply to scenarios where they cause changes in prices and incomes; and
  - analyze how the market can be manipulated through price controls.
- - Ceteris Paribus Book
    Read this brief text to learn the formal definition of ceteris paribus. As a practice activity, identify a variable and list the multiple factors that may be influencing it. For example, say you are planning to request an increase in your salary. What are the factors that influence your salary? Do you think you can attribute the change in your salary to any one of these factors if all of the factors influencing it were simultaneously changing?
- - Demand Book
    Read this section to learn about the theory of demand. Attempt the "Try It" problem. Use the data from the text to practice constructing and drawing the demand curve on your own, either on a paper or in Excel. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section.
  - Factors Affecting Demand Book
    Read this to learn about how factors that affect demand, such as income and change in tastes, are graphed as shifts of the demand curve. Make sure to answer the "Try It" questions.
  - Law of Demand Page
    Watch this video about the law of demand for understanding consumer behavior. The basic premise of the law of demand, as the video explains, is that if a consumer sees the price of product rising then this consumer will be less likely to buy that product or will lower the amount of consumption of that product. Think about the rise of gasoline prices and the effect it has on the average consumer as most consumers will try to reduce their gasoline consumption, assuming that one's income and wealth remains the same.
  - Price of Related Products and Demand Page
    Watch this video about the price of related products and how the demand curve for a product gets affected. Examples of related products are those that can substitute for each other like oranges and apples. If the price of apples increases and the price of oranges remains the same, then consumers are more likely to buy less apples and more oranges.
  - Changes in Income, Population, or Preferences Page
    Watch this video about how changes in income, population, and preferences affect the demand curve. Make sure to understand the difference between "a change of where we are in the demand curve" and "a shift of the demand curve".
  - Normal and Inferior Goods Page
    Watch this video about normal and inferior goods to better understand the different types of consumer products. Make sure that you go back to the reading in Unit 2.2 to learn about the terms normal and inferior goods. The term inferior good usually relates to the standing in quality that a product has in society. For example, fast food is normally considered to be on a lower quality standing than restaurant food. Thus, when the incomes of people rise, less fast food is consumed and more of restaurant food is consumed instead, making fast food the inferior good and restaurant food the normal good.
  - Inferior Goods Clarification Page
    Watch this video about inferior goods in order to see the relation between price and quantity demanded. Remember that inferior goods are considered to be on the low quality level in society and consumers would want to purchase less of them as their incomes rise and they are able to afford better quality products.
- - Supply Book
    Read this section to learn about the theory of supply. Attempt the "Try It" problem. Use the data from the text to practice drawing the supply curve on your own, either on paper or in Excel. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter.
  - Factors Affecting Supply Book
    Read this section to learn more about how factors that affect supply, such as increases or decreases in the costs of production, are graphed as shifts of the supply curve. Make sure to answer the "Try It" quiz questions.
  - Law of Supply Page
    Watch this video about the law of supply as it is graphed with an economic model. Make sure to go back to the main reading Unit 2.3 to learn that the law of supply states that a rise in prices makes producers want to sell more of that product in order to earn more revenue from their sales.
  - More on Factors Affecting Supply Page
    Watch this video about to see how factors affecting supply make shifts of the supply curve. Remember that the main factors that affect supply are: land, labor, and capital.
- - Demand, Supply, and Equilibrium Book
    Read this section to learn how demand and supply interact with one another to determine prices and quantities that may or may not be optimal. Attempt the "Try It" problem. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter.
  - Market Equilibrium Page
    Watch this video about market equilibrium with the use of a graph so you can see the demand and supply curves come together in the market.
  - Changes in Supply and Demand Book
    Read this article to learn more about how changes in supply and demand affect the market price equilibrium. Make sure to answer the "Try It" questions.
  - Introducing Supply and Demand Book
    Read the sections on Demand, Supply, Market Equilibrium, and Government Intervention and Disequilibrium for a mathematical exposition of the demand and supply model, clicking through to the next when you have finished each page. The chapter also covers price ceilings and price floor analysis as well as quantity regulations.
- - Demand, Supply, and Efficiency Book
    Read this section to learn more about how price floors and price ceilings create inefficiencies in the market. Pay special attention to the concepts of Consumer Surplus, Producer Surplus, and Social Surplus and how they are affected due to price controls. Try solving the "Self-Check Questions".
  - Minimum Wage and Price Floors Page
    Watch this video about minimum wage and price floors with the use of a graph to understand the effect on the labor market.
- - Introduction to Elasticity Book
    Read this chapter to learn about the concept of elasticity. Be sure to read all the sections in this chapter (Sections 5.1-5.4) following the introduction.
  - Calculating Elasticity Page
    Watch this lecture, focusing on both how elasticity is calculated as well as its potential implications for health care. Consider if you agree or disagree with the possible social and health implications of changing the overall elasticity of demand for national health systems.
  - Defining Price Elasticity of Demand Book
    Read this section about price elasticity when there is a change along the demand curve. Make sure to back to the main reading in Unit 2.6 as it explains the concept of elasticity. Also, make sure that you understand the concept of "price elasticity of demand", which is about how the percentage change in the price of a product affects the amount of quantity demanded but measured as a percentage change.
  - Price Elasticity of Demand Page
    Watch this video about how the price elasticity of demand is depicted with the use of a graph. Make sure that you understand when the elasticity of demand is elastic, inelastic, and unit elastic.
  - More on Elasticity of Demand Page
    Watch this video to understand how to use the formula for calculating the elasticity of demand. You can also refer to the previous video listed for this unit titled "Price Elasticity of Demand".
  - Constant Unit Elasticity Page
    Watch this video to understand how the constant unit elasticity looks like as the demand curve. Note that the demand curve is not straight in the case of a constant elasticity of demand.
  - Total Revenue and Elasticity Page
    Watch this video about how total revenue for the producer is affected depending on the elasticity of demand for a product.
  - More on Total Revenue and Elasticity Page
    Watch this video about to learn about the effect on the total revenue for a producer when the demand elasticity changes. The price elasticity of demand is oftentimes used a way to calculate changes in total revenuw for a producer.
  - Cross Elasticity of Demand Page
    Watch this video to learn how to calculate the cross elasticity of demand for products that are complements and for products that are substitutes. You can think of complemenatry products like popcorn and a movie ticket, when the price of one goes up, the quantity demanded goes down for both, thus their cross price elasticity will show a negative relationship. The same applies for products that are substitutes, like popcorn and candy at a movie theater. When the price of popcorn rises, the quantity demanded for popcorn decreases but for candy it goes up, thus their cross price elasticity will show a positive relationship.
  - Elasticity of Supply Page
    Watch this video about the concept of elasticity of supply. Just like the elasticty of demand, the elasticity of supply relates the percentage change in the quantity supplied to a percentage change in the price.
  - Elasticity and Strange Percent Changes Page
    Watch this video to learn more about how to calculate the price elasticity of supply using the geometric approach. You should also go back to the reading for Unit 2.6 to learn in detail about the formulas used.
  - Taxes and Perfectly Inelastic Demand Page
    Watch this video to learn about how taxes relate to a perfectly inelastic demand. Remember that a perfectly inelastic demand curve is one where the quantity demanded is constant regardless of changes in the price.
  - Taxes and Perfectly Elastic Demand Page
    Watch this video to learn about how taxes relate to a perfectly elastic demand curve, which is one that is very sensitive to changes in prices.

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