What happens to price if both demand and supply increase at the same time? - FreeEconHelp.com, Learning Economics... Solved!

8/20/18

What happens to price if both demand and supply increase at the same time?

Example supply and demand market
This post was updated in August 2018 with more information and examples.

What happens to market equilibrium price if both the supply curve and the demand curve increase? This is a favorite question of teachers because the answer is "it depends"

How can an answer to a text question depend?  We have been taught all our lives that in school (not necessarily life) there is an answer to every question.  However, in economics the answer often depends on the context of the question and when both supply and demand shift right, or increase, then the answer of what happens to equilibrium price is unknown without more information.  To begin this discussion let's look at the market for hamburgers.  We will then shift both supply and demand to the right (increase them) for arbitrary reasons (maybe an increase in preference for hamburger, or it cures cancer or something, for the demand side and a decrease in input costs for the supply side).


However, before you look at the graph, you must consider how far we are going to shift each of the curves.  To give you an example, in the graph below I have shifted the demand curve right (once), but I have shifted the supply curve right three different times.  The reason I have done this is to show you that depending on the size (magnitude) of the shift, the resulting equilibrium price can be at three different levels.

The result of an increase in BOTH supply and demand is ambiguous.
It depends on the magnitude of the shifts.
First consider S1 (the smallest shift), this results in an equilibrium price that is greater then the original equilibrium price (Pu>P*).  If we shift out supply a little more to S2, then our equilibrium price will not change, it will still be P* (this happens if both supply and demand shift out the same amount).  Finally, the S3 curve shows us the largest shift, which results in an equilibrium price lower than the original (Pd<P*).  So the answer is "it depends" when both supply and demand increase and you want to know what happens to price.  In order to know for sure, we would need to know the magnitudes of both shifts.

What we do know is that quantity demanded will go up, and you can confirm this by looking at the three red equilibrium points, each of them are located to the right of the original equilibrium point, and quantity.

Why would curves shift out different amounts?  One example would be a $1 decrease in the price of inputs vs. a $10 decrease in the price of inputs.  You can conclude immediately that the $10 decrease would result in a much larger shift for the supply curve.  But keep in mind that this phenomena is not restricted to the supply curve, the demand curve could also shift by different amounts to come up with this ambiguous result.

Summary: Remember that it is possible for an answer to changes in market price and quantity to be ambiguous in economics. This ONLY happens if BOTH the supply and demand curves shift at the same time. If only one curve shifts then you can figure out what happens to market price and quantity. For a summary on the results of every possible shift, check out this supply and demand curve shifts cheat sheet.

If you want to help develop your intuition of what happens to equilibrium price and quantity when BOTH supply and demand increase you can check out the video below:

20 comments:

  1. Anonymous12 November

    hi there, what if you're given a situation that involves both a shift in demand and supply, but you don't know if the magnitude of one is greater than the other? this question is asking me what would happen to the exchange rate if BOTH imports and exports increase... I know supply and demand both shift outwards, but I don't know how far to shift them considering I could have three different outcomes.

    ReplyDelete
    Replies
    1. Student15 January

      Hi there. You can not determine what will happen to the exchange rate if they don't give you the magnitude of change in the imports and exports. Just like in the example above, if the question doesn't mention the amount of the change, you should indicate the three possible outcomes.

      Delete
  2. What about price when both demand and supply increases

    ReplyDelete
    Replies
    1. Student15 January

      If supply increases more than the demand, the price will go down. If the increase in demand is higher than the increase in supply, the price will go up. If demand and supply increase at the same amount, price will remain stable. Though, in all three outcomes the quantity will increase.

      Delete
  3. You have provided an nice article. I hope this will be useful for many people and i am waiting for your next post keep on updating these kinds of knowledgeable things.

    ReplyDelete
  4. I have read your blog its very attractive and impressive. I like it your blog.

    ReplyDelete
  5. 1. bawa modal seperlunya serta janganlah bawa modal yang sangat besar dalam permainan ini. di sini anda anggap saja cuma menginginkan hiburan atau kesenangan sepanjang bermain dalam permainan.. ini sebagian trick menang bermain AduQ, salah satunya yakni
    asikqq
    dewaqq
    sumoqq
    interqq
    pionpoker
    bandar ceme terpercaya
    hobiqq
    paito warna
    http://199.30.55.59/sumoqq78/
    data hk

    ReplyDelete
  6. Dial QuickBooks Support Phone Number 1-800-986-4607 now to meet your accounting needs at one place. QuickBooks is really an outstanding product that comes into existence to cater to the needs of small as well as medium scale business.

    ReplyDelete
  7. Nice Blog Facing troubles while using Quickbooks? Contact Quickbooks Desktop Support Phone Number 1-800-986-4607. Here, you can avail instant & effective solutions to the issues, you have come up with. The Quickbooks Support team constitutes of highly skilled & trained technicians who have years of experience in handling technical defects.

    ReplyDelete
  8. Avail instant & effective solutions from our Quickbooks Support Phone Number. Our support team constitutes of highly skilled & trained technicians who have years of experience in handling technical defects. It doesn’t matter how complex the issues would be. Get it resolved, from our Support team. As they are available for you, 24*7. Whenever you face any trouble, feel free to contact Quickbooks support Phone Number 800-901-6679.

    ReplyDelete
  9. Great post! Dial Quickbooks Support Phone Number Washington 800-901-6679 for the urgent solution. Our Proadvisor always available for you.

    ReplyDelete
  10. QuickBooks can be easily installed on your desktop as well as in the cloud. But if you feel any difficulty regarding this product as to how to install or how to use or to rectify errors, or any other concern, simply dial our Quickbooks Support Phone Number 1-800-986-4607.

    ReplyDelete

  11. QuickBooks Support +1-877-651-8034 QuickBooks is considered as the best accounting software which has the ability to integrate with other sorts of programs. This software is offering a lot of time in the matter of managing any type of complex business accounting process in less time. Quickbooks Billing Support Number Simply put, you can easily rely on its high productivity and automating accounting software. If you are one of those who are running their own business and using this QuickBooks accounting software, Quickbooks Enterprise Support Number you should know QuickBooks Technical Support Phone Number is available 24*7 or even on public holidays. When you will dial QuickBooks Technical Support Number, our technicians will coordinate you to discuss your problems and resolve them in lesser time. Quickbooks Error Support NumberWhen you will dial QuickBooks Technical Support Number to consult your problems, you will be able to get valuable and reliable solutions to your problems. Our team knows how to fix any sort of technical problem; be it complex or not. If you are dealing with some sorts of problems while using this QuickBooks accounting software, you are free to dial Quickbooks Online Support NumberQuickBooks Technical Support Phone Number which is mentioned on our website. This will be more convenient for you to reach easily at our QuickBooks Technical Support channel. It will definitely help you in answering your questions which are puzzling in your mind. QuickBooks Support +1-877-651-8034





    ReplyDelete
  12. This comment has been removed by a blog administrator.

    ReplyDelete
  13. This comment has been removed by a blog administrator.

    ReplyDelete
  14. This comment has been removed by a blog administrator.

    ReplyDelete
  15. basketball legends but you don't know if the magnitude of one is greater than the other? this question is asking me what would happen to the exchange rate if BOTH imports and exports increase... I know supply and demand both shift outwards, but I don't know how far to shift them considering I could have three different outcomes.

    ReplyDelete