10/25/11

What happens to equilibrium price and quantity when supply and demand change, a cheat sheet



This post gives some cheat sheet tables that show what will happen to equilibrium price and equilibrium quantity given changes in either demand or supply.  Click on these links to learn about what can shift supply, or what can shift demand in related posts.

The tables are structured with the title in the top left, and along the first column and row are the different scenarios for shifts in supply and demand.  Demand/Supply “increase” means that demand/supply increases or shifts to the right.  Demand/Supply “decrease” means that demand/supply decreases or shifts to the left.  Demand/Supply “same” means that no shift occurs, and we keep the original demand/supply curve.

Equilibrium Quantity
Demand Increase
Demand Decrease
Demand Same
Supply Increase
Higher
Unknown
Higher
Supply Decrease
Unknown
Lower
Lower
Supply Same
Higher
Lower
Same




Equilibrium Price
Demand Increase
Demand Decrease
Demand Same
Supply Increase
Unknown
Lower
Lower
Supply Decrease
Higher
Unknown
Higher
Supply Same
Higher
Lower
Same



EP (equilibrium price) &
EQ (equilibrium quantity)
Demand Increase
Demand Decrease
Demand Same
Supply Increase
EP Unknown
EQ Higher
EP Lower
EQ Unknown
EP Lower
EQ Higher
Supply Decrease
EP Higher
EQ Unknown
EP Unknown
EQ Lower
EP Higher
EQ Lower
Supply Same
EP Higher
EQ Higher
EP Lower
EQ Lower
EP Same
EQ Same

Typically an increase in demand tends to make both equilibrium quantity and equilibrium price go up.  This is because more people are willing to buy the product (hence an increase in demand).  More people buying a product means a higher quantity will be sold (an increase in equilibrium quantity) and because more people are buying it, the price can go up (higher equilibrium price).  A decrease in demand tends to make both equilibrium quantity and equilibrium quantity go down.  With less people interested in buying the good (a decrease in demand) we see equilibrium quantity drop.  In order to sell these goods, the price has to drop as well.

Typically an increase in supply will cause equilibrium price to fall, and equilibrium quantity to rise.  This is because more goods are being supplied to the market so we would expect quantity to rise, and the prices to fall.  With a decrease in supply, fewer goods are being supplied so we would expect equilibrium quantity to fall, and equilibrium price to rise (as fewer goods are in the market).

When we get contradicting conclusions for price, such as an increase in demand (prices increase), and an increase supply (prices decrease), then we don’t really know what will happen to equilibrium price.  More information is needed to find the solution.  However, generally the answer is “it depends”, “unknown”, or “more information needed”.  For more information about these types of problems check out this older post about shifts with ambiguous results.

The table in words:
If demand increases and supply increases then equilibrium quantity goes up, and equilibrium price could go up, down, or stay the same.

If demand increases and supply decreases then equilibrium quantity could go up, down, or stay the same, and equilibrium price will go up.

If demand increases and supply stays the same then equilibrium quantity goes up, and equilibrium price goes up.

If demand decreases and supply increases then equilibrium quantity could go up, down, or stay the same, and equilibrium price will go down.

If demand decreases and supply decreases then equilibrium quantity goes down, and equilibrium price could go up, down, or stay the same.

If demand decreases and supply stays the same then equilibrium quantity goes down, and equilibrium price goes down.

If demand stays the same and supply increases then equilibrium quantity goes up, and equilibrium price goes down.

If demand stays the same and supply decreases then equilibrium quantity goes down, and equilibrium price goes up.


If demand stays the same and supply decreases then equilibrium quantity stays the same, and equilibrium price stays the same.

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