Effect of Simultaneous changes in Demand and Supply

We have already discussed the effects of changes either in demand alone or in supply alone on the equilibrium price and quantity. But in reality changes in demand and supply take place simultaneously.  When demand changes, supply will also change as a consequence of that.

We will discuss below two situations of simultaneous changes in demand and supply :

a) Simultaneous Increase in Demand and Supply :

Simultaneous increase in demand and supply must cause increase in equilibrium quantity of the commodity.

But would there be any changes in price or not depends on whether demand increases more than, equal to, or less than supply.

So there can be three situations in this respect. As shown by the graphs below.

1) When equilibrium price remains the same :

Demand and Supply

DD and SS are the initial demand and supply curve, with equilibrium at E.

OP is the equilibrium price and OQ is the equilibrium quantity.

Due to increase in demand, D₁D₁ is the new demand curve(shift rightward) and S₁S₁ is the new supply curve (shift rightward).

In this situation increase in demand equals the increase in supply.

Equilibrium shift to E₁ from E due to the intersection of new demand and supply curve.

Equilibrium quantity shifts from OQ to OQ₁, but price remain unchanged.

Thus, when demand and supply increases by same magnitudes, equilibrium price remains unchanged but the equilibrium quantity increases.

2) When equilibrium price rises :

Demand Supply

When the relative increase in demand is more than the increase in supply, the equilibrium price rises.

This is the situation of excess demand (shortage).

As can be seen in the graph above, demand curve shifts to D₁D₁ from DD and supply curve shifts to S₁S₁ from SS, but demand increases in larger proportion than increase in supply.

New equilibrium is E₁. Both equilibrium price (from OP to OP₁) and quantity (from OQ to OQ₁) rises.

Thus, when demand changes (increase) more than the supply, equilibrium price and quantity rises.

3) When equilibrium price falls :

Demand Supply

When the relative increase in demand is smaller than the increase in supply, the equilibrium price falls. It is the situation of excess supply (surplus).

As can be seen in the graph above, demand curve shifts to D₁D₁ from DD and supply curve shifts to S₁S₁ from SS, but supply increases in larger proportion than increase in demand.

New equilibrium is E₁. Equilibrium price falls from OP to OP₁, but equilibrium quantity rises to OQ₁.

Thus,when demand changes(increase) less than the supply, equilibrium price tends to fall but equilibrium quantity will rise.

b) Simultaneous Decrease in Demand and Supply :

Three situations can be seen in this respect also:

1) When equilibrium price remains the same :

Demand Supply

DD and SS are the initial demand and supply curve, with equilibrium at E.

OP is the equilibrium price and OQ is the equilibrium quantity.

Due to decrease in demand, D₁D₁ is the new demand curve (shift leftward) and S₁S₁ is the new supply curve (shift leftward).

In this situation decrease in demand equals the decrease in supply.

Equilibrium shift to E₁ from E due to the intersection of new demand and supply curve.

Equilibrium quantity shifts(falls) from OQ to OQ₁, but price remain unchanged.

Thus, when demand and supply decreases by same magnitudes, equilibrium price remains unchanged but the equilibrium quantity decreases.

2) When equilibrium price falls :

equilibrium price

When the relative decrease in demand is greater than the decrease in supply, the equilibrium price falls. It is the situation of excess supply (surplus).

As can be seen in the graph above, Demand curve shifts to D₁D₁ from DD and supply curve shifts to S₁S₁ from SS, but demand decreases in larger proportion than decrease in supply.

New equilibrium is E₁. Equilibrium price falls from OP to OP₁, and equilibrium quantity falls to OQ₁.

Thus,when demand changes(decrease) more than the supply, equilibrium price and quantity  falls.

3) When equilibrium price rises:

equilibrium price

When the decrease in supply is more than decrease in demand, the equilibrium prices rises. It is the situation of excess demand (shortage).

As can be seen in the graph above, Demand curve shifts to D₁D₁ from DD and supply curve shifts to S₁S₁ from SS, but supply falls in larger proportion than decrease in demand.

New equilibrium is E_1. Equilibrium price rises from OP to OP1 and equilibrium quantity decreases to OQ₁.

Thus, when the change (decrease) in supply is more than the demand, equilibrium price rises and equilibrium quantity falls.