Simultaneous Changes In Demand And Supply

We saw in the previous section that when either demand or supply changes, it is possible to predict the impact this will have on the equilibrium price and equilibrium quantity.

We know that an increase in demand will increase the equilibrium price and equilibrium quantity, while a decrease in demand will decrease the equilibrium price and equilibrium quantity.

We also know that an increase in supply will decrease the equilibrium price and increase the equilibrium quantity, while a decrease in supply will increase the equilibrium price and decrease the equilibrium quantity.

However, when demand and supply change simultaneously, things are not that straightforward, and to predict whether the equilibrium price and the equilibrium quantity rise or fall in such cases, we need to know the magnitude of changes in both demand and supply.

We will now discuss the following four possible scenarios:

• a decrease in demand and a decrease in supply
• a decrease in demand and an increase in supply
• an increase in demand and an increase in supply
• an increase in demand and a decrease in supply