APMacro: Supply and Demand Complex Cases


We know that demand might change because of fluctuations in consumer tastes or incomes, changes in consumer expectations or variations in the prices of related goods. Supply might change in response to changes in resource prices, technology, or taxes. When both supply and demand change, the effect is a combination of the individual effects.

Complex Shift S-Increase D-Decrease
When supply increases and demand decreases, both changes decrease price. Therefore, the net result is an equilibrium price drop greater than that resulting from either change alone. The effects of the changes in supply and demand on equilibrium quantity are opposed, therefore indeterminate. The increase in supply increases equilibrium quantity, but the decrease in demand reduces it. The direction of the change in quantity depends on the relative sizes of the changes in supply and demand. If the increase in supply is larger than the decrease in demand, the equilibrium quantity will increase. But if the decrease in demand is greater than the increase in supply, the equilibrium quantity will decrease.

Complex Shift S-Decrease D-Increase
A decrease in supply and an increase in demand both increase price. Their combined effect is an increase in equilibrium price greater than that caused by either change separately. However, their effect on equilibrium quantity is indeterminate, depending on the relative sizes of the changes in supply and demand.If the decrease in supply is larger than the increase in demand, the equilibrium quantity will decrease.If the increase in demand is greater than the decrease in supply, the equilibrium quantity will increase.

Complex Shift S-Increase D-Increase
What if supply and demand increased? A supply increase causes a decrease in price, while a demand increase causes a n increase in price. This makes equilibrium price indeterminate. If the increase in supply is greater than the increase in demand, the equilibrium price will decrease. If the opposite holds, the equilibrium price will increase. The effect on equilibrium quantity is certain. The increase in supply and the increase in demand raise equilibrium quantity. Therefore, the equilibrium quantity will increase by an amount greater than that caused by either change alone.

Complex Shift S-Decrease D-Decrease
Finally, what about decreases in both supply and demand? Their effect on equilibrium price is again indeterminate. If the decrease in supply is greater than the decrease in demand, equilibrium price will increase. If the decrease in demand is greater than the decrease in supply, equilibrium price will decrease.Because decreases in supply and demand reduce equilibrium quantity, it is sure that equilibrium quantity will decrease.

The table below summarizes these four cases.
Complex Shifts Chart

Special cases arise when a decrease in demand and a decrease in supply, or an increase in demand and an increase in supply, exactly cancel out.In both cases, the net effect on equilibrium price will be zero. Equilibrium price will not change.

Arrows-02-june

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