A Summary of how Demand and Supply Changes Affect Prices and Quantities

The following summarizes the important relationships between changes in demand and supply and their corresponding equilibrium prices and equilibrium quantities changes. These are changes that take place in the short-term (usually within several months). Long run price changes are discussed in more detail in a later section in this unit. When we refer to “equilibrium price” it represents the  price or market price, meaning the price that the grocery store, department store, gas station, etc. charges in a free market. When we mention “equilibrium quantity”, it represents the quantity or the amount of a certain product bought and sold in a store or where ever goods and services are sold.

When Demand Increases ==> Price Increases and Quantity Increases
When Demand Decreases ==> Price Decreases and Quantity Decreases
When Supply Increases ==> Price Decreases and Quantity Increases
When Supply Decreases ==> Price Increases and Quantity Decreases

A Simultaneous Increase in Demand and Supply

So we know that an increase in demand increases equilibrium price and quantity (and vice versa), and an increase in supply decreases equilibrium price and increases quantity (and vice versa). What happens if both demand and supply change at the same time?

Let’s analyze the following examples.

Example 1
Problem: Suppose that consumers’ incomes have gone up, and that an advance in technology has lowered the cost of making computers. Assuming that a computer is a normal good, what will happen to the equilibrium price and quantity of computers as a result of these two simultaneous changes?
Solution: An increase in consumers’ incomes increases the demand for computers. This increases the equilibrium price and equilibrium quantity. An advance in technology increases the supply. This decreases the equilibrium price and increases the equilibrium quantity. Combining these two effects, the equilibrium quantity increases because the equilibrium quantity increases in both instances. The equilibrium price increased and then decreased, so on balance, it will either increase, decrease, or stay the same, depending on the size of the shifts in the curves. If demand increases more than supply, then the price increases, and vice versa. If we don’t know the magnitude of the shifts, we say that the price is indeterminate.

In summary:
Consumer Incomes ↑     ⇒Demand ↑ ⇒ Price ↑ and Quantity ↑
Advance in Technology ⇒ Supply ↑   ⇒ Price ↓ and Quantity ↑
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Combined Effect  =  Price change unknown (indeterminate) and Quantity increases. The price change is unknown because the arrows move in opposite directions and we don’t know the magnitude of the change. The quantity increases because both arrows with the quantity change move up.

Example 2
Problem: Buyers expect prices of jewelry to increase in the near future, and at the same time, the government decides to tax the production of jewelry. What effect does this have on the market price and output of jewelry?

Solution: Current demand for jewelry increases because buyers expect the price to increase in the future. This increases the equilibrium price and the equilibrium quantity. Supply of jewelry decreases because the increased tax makes it less attractive for firms to supply the product. This increases the price of jewelry and decreases the quantity bought/sold. The combined effect is that the price of jewelry increases, and the equilibrium quantity change is indeterminate. Note that when both demand and supply shift, one variable (price or quantity) experiences a definite change, and the other is indeterminate (unless you know the magnitude of the shifts). When only one curve shifts, both equilibrium price and quantity experience a definite change.

In summary:
Expected Future Price ↑ ⇒  Demand ↑ ⇒ Price ↑ and Quantity ↑
Production tax ↑               ⇒  Supply ↓   ⇒ Price ↑ and Quantity ↓
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Combined Effect  =  Price increases and Quantity change unknown (indeterminate)

Video Explanations
For video explanations of how changes in both demand and supply affect the equilibrium price and quantity of a product, please watch the following:

The labor market is a special case of supply and demand. The demand for labor is the businesses’ willingness and ability to hire workers. The supply of labor is the workers’ willingness and ability to work at certain wage rates.

For a labor market application of supply and demand changes and their effects on the equilibrium price of labor (the wage rate) and the equilibrium quantity (the number of workers hired), watch: