Effects of Shifts in Both
Supply and Demand on Equilibrium Price and Quantity:
Shifts in Demand and Supply:
We have so
far discussed the effects of changes
in demand and supply on equilibrium price separately. Let us now consider a case
in which changed in demand and supply take place, simultaneously. This can be
better explained with the help of the following diagram.
In the figure
(8.11) DD/and SS/ are the original demand and
supply curves. When demand rises, the whole of demand curve DD1,
shifts upward and it intersects the old supply curve SS/ at point F.
The new equilibrium price is now equal to FK.
But if supply
also increases with the rise in demand, the new equilibrium price will be
established at a point where the new supply curve intersects the new
demand curve. In our diagram, when changes in both supply and demand take place,
the new equilibrium price is established at point N. NT becomes the new
equilibrium price and OT the new equilibrium amount.
(2) When Supply is Greater
Than Rise in Demand:
The new equilibrium price can
be higher or lower than the original price. It all depends upon the relative
changes in demand and supply. If the rise in
supply is greater than the rise in demand,
the price will be lower than the original price. In Fig. (8.12), the price has fallen from EQ to E/Q/.
Increase in Demand But Decrease
If the change in demand
is relatively higher than that of supply, the new equilibrium price will be
higher than the original price as is shown in fig. 8.13. The equilibrium price
has increased from EQ to E/Q/.