Changes in Both Demand and Supply

Increase in Both Demand and Supply

• If both the demand and the     supply of a good or service increase, both the demand and supply curves     shift rightward. The quantity unambiguously increases but the effect on     the price is ambiguous.

·        Ifthe increase in demand is greater than the increase in supply, the price rises.

·        Ifthe increase in demand is the same size as the increase in supply, the pricedoes not change.

·        Ifthe increase in demand is less than the increase in supply, the price falls.

·        Thefigure illustrates an increase in both demand and supply: the demand curveshifts from D₀ to D₁ and the supplycurve shifts from S₀ to S₁. The shifts are the same size, so the equilibriumprice does not change and the equilibrium quantity increases from 30 to 50.

Decrease in Both Demand and Supply

• If both the     demand and the supply of a good or service decrease, both the demand and     supply curves shift leftward. The quantity unambiguously decreases but the     effect on the price is ambiguous.

·        Ifthe decrease in demand is greater than the decrease in supply, the price falls.

·        Ifthe decrease in demand is the same size as the decrease in supply, the pricedoes not change.

·        Ifthe decrease in demand is less than the decrease in supply, the price rises.

Increase in Demandand Decrease in Supply

• If the demand increases     and the supply decreases, the demand curve shifts rightward and the supply     curve shifts leftward. The price unambiguously rises but the effect on the     quantity is ambiguous.

·        Ifthe increase in demand is greater than the decrease in supply, the quantityincreases.

·        Ifthe increase in demand is the same size as the decrease in supply, the quantitydoes not change.

·        Ifthe increase in demand is less than the decrease in supply, the quantitydecreases.

·        Thefigure illustrates an increase in demand and a decrease in supply. In thefigure the demand curve shifts from D₀ to D₁ and the supplycurve shifts from S₀ to S₁. The shifts are thesame size, so the equilibrium quantity does not change and the equilibriumprice rises from $3 to $5.

Decrease in Demand and Increase in Supply

• If the demand     decreases and the supply increases, the demand curve shifts leftward and     the supply curves shifts rightward. The price unambiguously falls but the     effect on the quantity is ambiguous.

·        Ifthe decrease in demand is greater than the increase in supply, the quantity decreases.

·        Ifthe decrease in demand is the same size as the increase in supply, the quantitydoes not change.

·        Ifthe decrease in demand is less than the increase in supply, the quantityincreases.

The entire chapter builds up to usingthe demand/supply model to predict changes in the equilibrium price andquantity. Students are remarkably ready to guess the consequences of some eventthat changes either demand, or supply or both. They must be encouraged to workout the answer and draw the diagram. Explain that the way to answer anyquestion that seeks a prediction about the effects of some event or events on amarket has five steps. The five steps are:

Step 1. Drawa demand-supply graph and label the axes with the price and quantity of thegood or service in question.

Step 2. Thinkabout the event or events that you are told occur and decide whether theychange demand, supply, both demand and supply, neither demand nor supply.  If an event impacts demand or supply,students must always be able to identify one of the factors from the list offactors that have been established that change demand and supply.  Students should make flash cards of these twolists to study and keep along side them while working on homework assignments.

Step 3. Dothe events that change demand or supply bring an increase or a decrease?

Step 4. Drawthe new demand curve and supply curve on the diagram. Be sure to shift thecurve or curves in the correct direction—leftward for decrease and rightwardfor increase. (Lots of students want to move the curves upward for increase anddownward for decrease—works ok for demand but exactly wrong for supply.Emphasize the leftward versus rightward shift.)

Step 5. Findthe new equilibrium and compare it with the original one.

Walk themthrough the steps and have one or two students work some examples in front ofthe class.  It is critical at this stageto return to the distinction between a change in demand and a change in thequantity demanded and between a change in supply and a change in the quantitysupplied. You can now use these distinctions to describe the effects of eventsthat change market outcomes. After working through some examples as a class,break students into smaller groups and have them practice examples in thatsetting – always verbalizing their thought process as they work through thesteps.  This group setting allows for thepeer effect to take hold, as some students will pick up the model work veryquickly, while others will take a bit longer. Once groups are able to work through these examples fairly quickly andaccurately, have students try examples individually and you can walk around andmonitor their progress.  This can helpyou identify which students are still struggling and will need additionalassistance and practice.  For allstudents, there’s almost no way you can give them enough practice with thismodel.  I tell my students that thesupply and demand model is to economics what addition and subtraction are tomath – without mastering that basic foundation, it’s impossible to move on andlearn more complex material.