Q. What will happen when both of the demand and supply curves are shifted/changed?
Ans. When
both of the demand and supply curves are shifted/changed there will be four
exclusive situations considering negatively sloped demand curve and positively
sloped supply curve in the Walrasian equilibrium framework:
(a) Supply increases and demand increases.
(b) Supply decreases and demand decreases.
(c) Supply increases and demand decreases.
(d) Supply decreases and demand increases.
(a) Increase of supply and demand: Increase of supply leads to decrease of
equilibrium price and increase of equilibrium quantity. Again increase of
demand leads to increase of equilibrium price and quantity.
So in this case equilibrium quantity will increase. But equilibrium price can increase/remain constant/decrease according as change in demand (∆D/D) >=< change in supply (∆S/S) demand .
So in this case equilibrium quantity will increase. But equilibrium price can increase/remain constant/decrease according as change in demand (∆D/D) >=< change in supply (∆S/S) demand .
(b) Decrease of Supply and Demand: Decrease of supply leads to increase of
equilibrium price and decrease of equilibrium quantity. Again decrease of
demand leads to decrease of equilibrium price and quantity.
So in this case equilibrium quantity will decrease. But equilibrium price can increase/remain constant/decrease according as absolute change in demand (∆D/D) >=< absolute change in supply (∆S/S) demand.
So in this case equilibrium quantity will decrease. But equilibrium price can increase/remain constant/decrease according as absolute change in demand (∆D/D) >=< absolute change in supply (∆S/S) demand.
(c) Increase of Supply and Decrease of
Demand: Increase of
supply leads to decrease of equilibrium price and increase of equilibrium
quantity. Again decrease of demand leads to decrease of equilibrium price and
quantity.
So in this case equilibrium price will decrease. But equilibrium quantity can increase/remain constant/decrease according as absolute change in demand (∆D/D) >=< change in supply (∆S/S) demand.
So in this case equilibrium price will decrease. But equilibrium quantity can increase/remain constant/decrease according as absolute change in demand (∆D/D) >=< change in supply (∆S/S) demand.
(d) Decrease of Supply and Increase of
Demand: Decrease of
supply leads to increase of equilibrium price and decrease of equilibrium
quantity. Again decrease of demand leads to increase of equilibrium price and
quantity.
So in this case equilibrium price will increase. But equilibrium quantity can increase/remain constant/decrease according as change in demand (∆D/D) >=< absolute change in supply (∆S/S) demand.
So in this case equilibrium price will increase. But equilibrium quantity can increase/remain constant/decrease according as change in demand (∆D/D) >=< absolute change in supply (∆S/S) demand.
Four Types of Diagram:
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