Supply and Demand Together: Both Shift: Videos & Practice Problems

When analyzing supply and demand shifts on a graph, one variable—price or quantity—will always be ambiguous when both curves shift. For instance, if both supply and demand shift right, equilibrium quantity increases, but price may either rise or fall. Conversely, if supply shifts left and demand shifts right, price increases while quantity remains ambiguous. Understanding these dynamics is crucial for grasping market behavior and equilibrium conditions, as they illustrate the complexities of economic interactions and the impact of aggregate demand and supply on market outcomes.

Both Shift - Warning!

In analyzing supply and demand, it's essential to understand how simultaneous shifts in both curves affect equilibrium price and quantity. When both supply and demand curves shift on the same graph, one of the variables—either price or quantity—will always remain ambiguous. This ambiguity arises because the direction of the shifts can lead to different outcomes for equilibrium price, while the equilibrium quantity may be more straightforward to determine.

To illustrate this, consider a scenario where both the supply and demand curves shift to the right. If the supply curve shifts significantly more than the demand curve, the equilibrium price may decrease while the equilibrium quantity increases. Conversely, if the demand curve shifts significantly more than the supply curve, the equilibrium price may increase, again with an increase in equilibrium quantity. This inconsistency in price outcomes highlights the ambiguity when both curves are shifted simultaneously.

To accurately represent these shifts on a graph, it is advisable to shift both curves by approximately equal amounts. This method helps to create a more balanced visual representation, allowing for clearer analysis of the changes. When the shifts are equal, the resulting equilibrium price will likely remain close to its original level, indicating that it is the ambiguous variable, while the equilibrium quantity will clearly show an increase.

In summary, when analyzing shifts in supply and demand, remember that:

• Shifting both curves can lead to ambiguous outcomes for price.
• Equilibrium quantity will typically show a clear increase if both curves shift to the right.
• Using notation such as P? for ambiguous price and Q? for ambiguous quantity can help clarify your analysis.

Understanding these dynamics is crucial for effectively interpreting market changes and predicting outcomes in various economic scenarios.

Results of Both Shifting

Understanding the dynamics of supply and demand is crucial in economics, particularly when analyzing how shifts in these curves affect equilibrium price and quantity. When both supply and demand shift in the same direction, the outcome for quantity is clear, while the price remains ambiguous. For instance, if both supply and demand shift to the left, the quantity decreases, but the price may either increase or decrease, leading to uncertainty. Conversely, if both curves shift to the right, the quantity increases, but again, the price remains ambiguous.

In scenarios where supply and demand shift in opposite directions, the effects are distinct. For example, if supply shifts left while demand shifts right, the price will clearly increase, but the quantity becomes ambiguous, as the two curves may overlap at the new equilibrium. On the other hand, if supply shifts right and demand shifts left, the price will decrease, while the quantity remains ambiguous due to the overlapping curves.

To summarize, when both supply and demand shift in the same direction, the quantity is affected predictably, while the price is uncertain. In contrast, when they shift in opposite directions, the price changes clearly, but the quantity remains ambiguous. This framework allows for a systematic approach to analyzing market changes, emphasizing the importance of graphing these shifts to visualize the outcomes effectively.

What happens in the market for cream cheese if (1) the price of butter, a substitute for cream cheese, falls and (2) the cost of milk, an input in cream cheese production, rises?

• A. Equilibrium price rises, equilibrium quantity falls
• B. Equilibrium price falls, equilibrium quantity falls
• C. Equilibrium price ambiguous, equilibrium quantity rises
• D. Equilibrium price ambiguous, equilibrium quantity falls

Answer: (D)

If the wages of bus drivers increases at the same time that the income of consumers decrease, what happens in the market for bus rides (assuming that bus rides are an inferior good)?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price rises, equilibrium quantity rises
• C. Equilibrium price falls, equilibrium quantity ambiguous
• D. Equilibrium price ambiguous, equilibrium quantity rises

Answer: (A)

If producers of garden hoses have discovered new technology to improve production, while the number of gardeners increases, what happens in the market for garden hoses?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price falls, equilibrium quantity falls
• C. Equilibrium price ambiguous, equilibrium quantity rises
• D. Equilibrium price ambiguous, equilibrium quantity falls

Answer: (C)

What happens in the market for tennis balls if (1) the price of tennis rackets, a complement for tennis balls, increases and (2) the price of baseballs, a substitute in production, decreases?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price ambiguous, equilibrium quantity falls
• C. Equilibrium price ambiguous, equilibrium quantity rises
• D. Equilibrium price falls, equilibrium quantity ambiguous

Answer: (D)

What happens in the market for wheat if (1) the cost of fertilizer, an input in production, increases and (2) tornadoes ravages the Midwest, where wheat is grown?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price rises, equilibrium quantity falls
• C. Equilibrium price falls, equilibrium quantity rises
• D. Equilibrium price ambiguous, equilibrium quantity falls

Answer: (B)

What happens in the market for online tutoring services if (1) the government decides to provide funding for online tutors and (2) the price of private tutoring, a substitute for online tutoring services, increases?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price ambiguous, equilibrium quantity falls
• C. Equilibrium price falls, equilibrium quantity ambiguous
• D. Equilibrium price ambiguous, equilibrium quantity rises

Answer: (D)

Here’s what students ask on this topic:

What happens to equilibrium price and quantity when both supply and demand shift to the right?

When both supply and demand shift to the right, the equilibrium quantity will definitely increase. However, the effect on the equilibrium price is ambiguous. This is because the increase in supply tends to lower the price, while the increase in demand tends to raise it. The net effect on price depends on the relative magnitudes of the shifts. If the demand shift is larger, the price may rise; if the supply shift is larger, the price may fall. Therefore, while we can be certain that the quantity increases, the price could either increase, decrease, or remain the same.

Why is one variable always ambiguous when both supply and demand curves shift?

One variable—either price or quantity—becomes ambiguous when both supply and demand curves shift because the shifts can have opposing effects on that variable. For example, if both curves shift to the right, the increase in supply tends to lower the price, while the increase in demand tends to raise it. The net effect on price depends on the relative magnitudes of the shifts. Similarly, if supply shifts left and demand shifts right, the price will definitely increase, but the effect on quantity will be ambiguous. This inherent ambiguity arises because the shifts can counteract each other, making it impossible to determine the exact change without additional information.

How do you correctly draw supply and demand curves when both are shifting?

To correctly draw supply and demand curves when both are shifting, you should aim to shift them by equal amounts. This helps in visualizing the changes more accurately. Start by drawing the original supply and demand curves and marking the initial equilibrium. Then, shift both curves to the right or left by approximately the same distance. The new equilibrium will be at the intersection of the new curves. This method helps in identifying which variable (price or quantity) is ambiguous and which one has a definite change. Ensuring the shifts are equal helps in maintaining clarity and avoiding errors in analysis.

What is the effect on equilibrium when supply shifts left and demand shifts right?

When supply shifts left (decreases) and demand shifts right (increases), the equilibrium price will definitely increase. This is because the decrease in supply tends to raise the price, and the increase in demand also tends to raise it. However, the effect on equilibrium quantity is ambiguous. The decrease in supply tends to lower the quantity, while the increase in demand tends to raise it. The net effect on quantity depends on the relative magnitudes of the shifts. Therefore, while the price will increase, the quantity could either increase, decrease, or remain the same.

How do you determine which variable is ambiguous when both supply and demand shift?

To determine which variable is ambiguous when both supply and demand shift, you need to analyze the relative shifts of the curves. Draw the original supply and demand curves and mark the initial equilibrium. Then, shift both curves by equal amounts and mark the new equilibrium. Compare the new equilibrium price and quantity with the original ones. If the new price is very close to the original price, then price is the ambiguous variable, and quantity has a definite change. Conversely, if the new quantity is very close to the original quantity, then quantity is the ambiguous variable, and price has a definite change. This method helps in identifying the ambiguous variable accurately.