When demand and supply shift together, one of price or quantity is usually certain and the other depends on the size of the shifts. A careful answer says which is which, instead of pretending to know both.
This is the fourth lesson in supply and equilibrium. It builds on explaining a shortage and the shift rules from the first lesson.
How do you trace two shifts, step by step?
- Write down each shift separately, with its direction and its cause.
- Work out the effect of each shift alone on price and quantity.
- Compare the two effects. Where both push in the same direction, that variable is certain. Where they push in opposite directions, it is uncertain.
- Say what would decide the uncertain one, which is the relative size of the shifts.
- Give a conclusion that only claims what the reasoning supports.
For example, a rise in demand alone pushes price up and quantity up. A fall in supply alone pushes price up and quantity down.
Price is pushed up by both, so price rises for certain. Quantity is pushed up by one and down by the other, so it is uncertain.
Worked example
Start with the Port Merah lunch box market. Quantity demanded is 120 − 3P and quantity supplied is 4P − 20, where P is the price in RM. Equilibrium is RM20 and 60 boxes.
A health campaign raises demand, and the price of plastic rises, reducing supply.
Case 1. Demand rises by 14 at every price: Qd = 134 − 3P. Supply falls by 14 at every price: Qs = 4P − 34.
Set them equal: 134 − 3P = 4P − 34, so 7P = 168 and P = RM24. Quantity is 134 − 72 = 62. Check supply: 96 − 34 = 62.
Case 2. Demand rises by only 7: Qd = 127 − 3P. Supply falls by 21: Qs = 4P − 41.
Then 127 − 3P = 4P − 41, so 7P = 168 and P = RM24 again. Quantity is 127 − 72 = 55. Check supply: 96 − 41 = 55.
In both cases the price rises from RM20 to RM24. Quantity rises to 62 in Case 1 but falls to 55 in Case 2. So with only the directions of the shifts, the price rise is certain and the change in quantity is not.
A cautious written answer: “Price will rise, because both the increase in demand and the decrease in supply push it up. The effect on quantity depends on which shift is larger.”
What mistake do students make?
Mistaken answer: “Demand rises and supply falls, so price rises and quantity rises.”
The student let the demand shift decide quantity and ignored the supply shift. Supply falling pushes quantity down, so the two effects pull against each other. The statement about quantity has no support from the information given.
The correction is to make a two-column note, one column for each variable, and write the push from each shift before concluding.
Check yourself
1. Demand falls and supply falls. What is certain, and what is uncertain?
Show answer
Quantity falls for certain, since both shifts reduce it. Price is uncertain: the fall in demand pushes it down, and the fall in supply pushes it up. The relative size of the shifts decides.
2. Demand rises and supply rises. Which is certain?
Show answer
Quantity rises for certain. Price is uncertain. If demand rises more it goes up, if supply rises more it goes down, and if the shifts are equal it stays the same.
3. Using Qd = 120 − 3P and Qs = 4P − 20, demand rises by 14 and supply rises by 14. Find the new price and quantity, and describe the result.
Show answer
Qd = 134 − 3P and Qs = 4P − 6. Setting equal: 7P = 140, so P = RM20. Quantity is 134 − 60 = 74. Check: 80 − 6 = 74. Price is unchanged and quantity rises from 60 to 74, which fits the rule for equal shifts.
Where this leads next
Next, learn how to state an assumption behind the model so your conclusions are properly qualified. Try the supply and equilibrium practice set afterwards.
If double-shift questions are where your answers stall, online one-to-one Economics tuition lets you practise the reasoning with a teacher who responds to your wording.