2.1.2
Note

Simultaneous Shifts in Demand and Supply

2.1.2 Demand & supply

Idea

When demand and supply shift together, one of equilibrium price and equilibrium quantity moves unambiguously (definitely), while the other is indeterminate — its direction depends on the relative magnitudes of the two shifts. The method is to resolve each shift separately against the unchanged other curve, then combine.

Diagram

PriceQuantityD0S0D1S1Q0P0Q3P3
Simultaneous increase in demand and supply. Demand D0 to D1 alone raises price and quantity; supply S0 to S1 alone lowers price and raises quantity. Quantity rises unambiguously (Q0 to Q3); the change in price (P0 to P3) is indeterminate, depending on the relative size of the shifts.

Mechanism

Resolving each of the four combinations into its two component shifts:

  • Both increase. Demand up raises both price and quantity; supply up lowers price but raises quantity. Quantity rises in both, so quantity rises unambiguously; price is pushed both ways, so price is indeterminate.

  • Both decrease. Demand down lowers price and quantity; supply down raises price but lowers quantity. Quantity falls unambiguously; price is indeterminate.

  • Demand up, supply down. Both push price up (demand up raises price, supply down raises price); quantity is pushed both ways. Price rises unambiguously; quantity is indeterminate.

  • Demand down, supply up. Both push price down; quantity is pushed both ways. Price falls unambiguously; quantity is indeterminate.

Considerations

The indeterminate variable is resolved by the relative shift: the larger shift dominates. If demand shifts more than supply when both increase, the upward pressure on price from demand outweighs the downward pressure from supply, and price rises on net; if supply shifts more, price falls. The same comparison settles the indeterminate quantity in the price-definite cases. A complete answer therefore states which variable is definite, names the other as indeterminate, and conditions its direction on the relative magnitude of the two shifts. The single-curve building blocks are set out in shifts in demand and supply.