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.

Change in Demand Supply and Market Equilibrium

We have already discussed the price determination of a commodity whose demand and supply curves are given, but generally demand and supply keeps on changing, resulting in shift in demand (factors like income, tastes and preferences etc.) and supply( change in technologies, input prices etc.) curves.

Let us now see the effect of change in demand and supply, on the equilibrium price and quantity.

Change in demand and Market Equilibrium

Change in demand has two aspects:

1) Increase in demand- demand curve shift to the right

2) Decrease in demand- demand curve shift to the left

Increase in demand:

demand supply

In the above diagram, DD and SS are the initial demand and supply curves. Equilibrium is struck at E, P and Q is the initial equilibrium price and quantity.

Determination of Market equilibrium Under Perfect Competition

Market equilibrium is a situation of the market in which demand for a commodity is exactly equal to its supply, corresponding to a particular price.
Thus, in a state of equilibrium, the market clears itself, as

Market demand = Market Supply

There is neither excess demand nor excess supply.
In this situation , the price that prevails in the market is called Equilibrium Price, Quantity supplied and demanded is called Equilibrium Quantity.

In a competitive market a single consumer or a single seller has no influence over the market price and so has no role to play in the determination of price.

Instead the price is determined in the competitive market through the interaction of market demand and supply.

How is the equilibrium price determined by the market forces of demand and supply?

Explanation through Table :

Price of X(apples) (Rs.)	Quantity Supplied (kg/week)	Quantity demanded (kg/week)	Market Position
5 4 3 2 1	50 40 30 20 10	10 20 30 40 50	Excess supply Excess supply Equilibrium Excess demand Excess demand

The above table shows as the price of commodity X falls, quantity demanded rises (law of demand)

and quantity supplied falls(law of supply).

Geometric Method for calculating Price Elasticity

(Linear Demand Curve)

Geometric method measures price elasticity of demand at different points on the demand curve.
It is also called ‘point method’ of measuring elasticity of demand.
We would be using linear demand curve, which is a straight line demand curve.
As shown in the below graph :

linear demand curve

MN is a straight line demand curve sloping downwards.

P is a mid point on the demand curve.
It divides the demand curve into two equal segments,
lower segment (PN) and upper segment (PM)
PN = Line segment below the point on  the demand curve

PM =  Line segment above the point on the demand curve

e_p(at P)  = PN / PM

Total expenditure method for calculating Price Elasticity

Prof. Marshall works out a relationship between price elasticity of demand and total expenditure.

He estimates the degree of price elasticity of demand depending on the change in total expenditure following a change in own price of the commodity.

He observes three different situations :
1) If the rise or fall in own price of a commodity causes no change in total expenditure on the commodity,

then elasticity of demand is unitary i.e. unitary elastic demand.

2) If  a fall in own price of the commodity causes a rise in total expenditure and a rise in price causes a fall in total expenditure on the commodity,
then elasticity of demand is greater than unitary i.e. elastic demand.

3) If  a fall in own price of the commodity causes a fall in total expenditure and a rise in price causes a rise in total expenditure on the commodity,
then elasticity of demand is less than unitary i.e. inelastic demand.

Relationship between price elasticity of demand and Total expenditure -
When price of the commodity falls

situation	Price (Rs.) (falls)	Quantity (kg)	Total expenditure (Rs)	Change in Total expenditure	Elasticity Of demand
1	2 1	4 8	8 8	Constant	ep = 1, unitary elastic
2	2 1	4 10	8 10	Increases	ep > 1, elastic
3	2 1	3 4	6 4	decreases	ep < 1, inelastic