Complex Cases

When both supply and demand change, the effect is a combination of the individual effects.

1. Supply Increase; Demand Decrease What effect will a supply increase and a demand decrease have on equilibrium price? Both changes decrease price, so the net result is a price drop greater than that resulting from either change alone.

What about equilibrium quantity? Here the effects of the changes in supply and demand are opposed: The increase in supply increases equilibrium quantity, but the decrease in demand reduces it. The direction of the change in quantity depends on the relative sizes of the changes in supply and demand. If the increase in supply is larger than the decrease in demand, the equilibrium quantity will increase. But if the decrease in demand is greater than the increase in supply, the equilibrium quantity will decrease.

2. Supply Decrease; Demand Increase A decrease in supply and an increase in demand both increase price. Their combined effect is an increase in equilibrium price greater than that caused by either change separately. But their effect on equilibrium quantity is again indeterminate, depending on the relative sizes of the changes in supply and demand. If the decrease in supply is larger than the increase in demand, the equilibrium quantity will decrease. In contrast, if the increase in demand is greater than the decrease in supply, the equilibrium quantity will increase.

PArt One • An INtroDuctioN to Economics and the Economy

FIGURE 3-6 A CHANGES IN DEMAND AND SUPPLY AND THE ' EFFECTS ON PRICE AND QUANTITY

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