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1 Both supply and demand change It is possible that in the world that a determinant of demand and a determinant of supply will change at the same time.

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Presentation on theme: "1 Both supply and demand change It is possible that in the world that a determinant of demand and a determinant of supply will change at the same time."— Presentation transcript:

1 1 Both supply and demand change It is possible that in the world that a determinant of demand and a determinant of supply will change at the same time. Our model can handle that, although it is a bit tricky. Here are the basic outcomes 1) If demand and supply move in the same direction the quantity traded will definitely change, but we need more information to know if the price will change. 2) If demand and supply move in opposite directions the price will definitely change, but we need more information to know if the quantity traded will change.

2 2 Both supply and demand increase P D1 D2 S1 S2 P1 Q

3 3 Both supply and demand change On the previous screen I have shown a situation where both supply and demand INCREASE, and in fact they increase by the same amount. You can see the price has not changed but the quantity traded has increased. Now, draw in a demand curve that shifted less than the one shown(a new D2). In this case demand shifts less than supply and thus the supply impact on the market is stronger than the demand impact. Thus the PRICE FALLS and the quantity traded rises.

4 4 Hint if supply and demand move in opposite directions: Show demand shift a little and supply shift a lot. And then do the opposite. Then shift them about the same amount (although in opposite directions.) Summary When (both S and D increases) P goesQ goes S and D increase the same amountnowhereup S increases more than D increasesdownup S increases less than D increasesupup

5 5 When (S and D both decrease) P goesQ goes S and D decrease the same amountnowheredown S decreases more than D decreasesupdown S decreases less than D decreasesdowndown When (S increases and D decreases) P goesQ goes S and D change the same amountdown nowhere S increases more than D decreasesdownup S increases less than D decreasesdowndown When (S decreases and D increases) P goesQ goes S and D change the same amountup nowhere S decreases more than D increasesupdown S decreases less than D increasesupup

6 6 Wow, you are still with me after these few slides? They were a pain in the wazoo to type, but I wanted you have the whole story. Now, let’s see a shortcut to all this so you can get good at this. On the next slide I have a summary stable (made by Sara Petty in an econ class of mine in 2003 – and if you make a neat table or summary I will put it in my notes for the rest of my career!) where each line is what happens to P and Q if just supply or demand shifts. You see if demand rises, P and Q rise. Now if both S and D change put the arrows under P together. If the arrows are in the same direction, you know for sure that is the change. If the arrows are in opposite directions you can not be sure which way the change is until you know if S or D changed more. Then do the same for Q.

7 7 Price Quantity D emand Supply So, if demand falls and supply rises the price surely falls, but we need to know more about the size of each shift before we can make a statement about the quantity traded in the market.


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