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DEMAND AND SUPPLY INCREASE:
A simultaneous increase in the willingness and ability of buyers to purchase a good at the
existing price, illustrated by a rightward shift of the demand curve, and an increase in the
willingness and ability of sellers to sell a good at the existing price, illustrated by a
rightward shift of the supply curve. When combined, both shifts result in an increase in
equilibrium quantity and an indeterminant change in equilibrium price.
A demand increase results from a change in any of the five demand determinants. A supply
increase results from a change in any of the five supply determinants. By itself, a demand
increase results in an increase in equilibrium quantity and an increase in equilibrium price.
By itself a supply increase results in an increase in equilibrium quantity and a decrease in
equilibrium price. A simultaneous increase in demand and increase in supply unquestionably
generates an increase in the quantity exchanged. However, the change in the price is
indeterminant. It might rise or fall depending on the magnitude of the demand and supply
changes.
Simultaneous Shocks
To see how an increase in demand and an increase in supply affects market equilibrium,
consider the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes.
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First, on the demand side, suppose that the Shady Valley economy begins to boom,
meaning more people have more jobs and higher incomes. Without question, Hot
Momma Fudge Bananarama Ice Cream Sundaes are a normal good. As such people
demand more Hot Momma Fudge Bananarama Ice Cream Sundaes. The buyers'
income demand determinant increases demand and shifts the demand curve
rightward.
Second, on the supply side, suppose that not one, but three new Hot Momma Fudge
Bananarama Ice Cream Shoppes begin operation in Shady Valley. As such the
number of Hot Momma Fudge Bananarama Ice Cream Shoppes willing and able to
sell Hot Momma Fudge Bananarama Ice Cream Sundaes is more. The number of
sellers supply determinant increases supply and shifts the supply curve rightward.
One Shift at a Time
Demand and Supply
What do these shifts do to the hot fudge sundae
market? Consider the shift of each curve separately.
The diagram at the right presents the Shady Valley
market for Hot Momma Fudge Bananarama Ice
Cream Sundaes. The initial equilibrium price is Po
and the initial equilibrium quantity is Qo. This
market equilibrium, of course, persists until and
unless a determinant changes, which is the nature of
equilibrium.
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An increase in buyers' income causes an
increase in demand and a rightward shift of
the demand curve. This creates a temporary
shortage. The shortage causes the price to
increase. The higher price eliminates the
shortage and the resulting equilibrium
quantity increases. By itself, an increase in
demand leads to a higher price and a larger
quantity. Click the [Demand Increase] button
to illustrate.
An increase in the number of sellers causes an increase in supply and a rightward
shift of the supply curve. This creates a temporary surplus. This surplus causes the
price to decrease. The lower price eliminates the surplus, and the resulting
equilibrium quantity increases. By itself, an increase in supply leads to a lower price
and a larger quantity. Click the [Supply Increase] button to illustrate.
Both at Once
Now consider simultaneous shifts of both curves. Combining both shifts generates an
obvious change in quantity, but a questionable change in price. If an increase in demand
increases equilibrium quantity and an increase in supply increases equilibrium quantity, then
an increase in both MUST increase equilibrium quantity. More Hot Momma Fudge
Bananarama Ice Cream Sundaes are exchanged in Shady Valley.
But what about price? The demand shift results in a higher price, and the supply shift leads
to a lower price. Does price end up higher or lower? Who knows? No one does, not with the
available information. The price is indeterminant.
Doing Both
Consider both shifts using the diagram to the right.
Once again the initial equilibrium price is Po and the
initial equilibrium quantity is Qo.
Click the [Both Curves] button to see how the
market is affected by an increase in both demand
and supply. Both curves shift to the right. The
resulting equilibrium can be identified by clicking the
[New Equilibrium] button. The equilibrium quantity
is now Qe, which as expected is an increase over the
original equilibrium quantity. Buyers want to buy
more and sellers want to sell more. The quantity
increases.
What about price? In this little illustration, the new
equilibrium price happens to be unchanged at Po,
the original equilibrium price. Maintaining the same
equilibrium price, however, is merely coincidence,
happenstance, quite literally the luck of the draw.
In particular, the new demand and supply curves are drawn in such a way that they shift by
the same amount. These two curves could have been drawn such that they shifted by
different amounts. And if so, the price would have ended up higher or lower than the
original. Price is indeterminant.
The reason for the indeterminant price is that the relative shift of each curve is unknown. If
demand shifts relatively more than supply, then the demand-induced higher price outweighs
the supply-induced lower price, and the price is higher. A lower price results if the supply
shift is relatively more than the demand shift. Because the extent of each shift is not
known, price is indeterminant. Whenever the demand and supply curves both shift, either
quantity or price is indeterminant.
One of Eight
A demand and supply increase is one of eight market disruptions--four involving a change in
either demand or supply and four involving changes in both demand and supply. The four
single shift disruptions are demand increase, demand decrease, supply increase, and supply
decrease. The other three double shifts are demand and supply decrease, demand increase
and supply decrease, and demand decrease and supply increase.