Supply & Demand Together

Introduction

Both supply and demand curves are put drawn onto the same graph to find the Price P Equilibrium, which is known when P has reached the level where quantity supplied equals quantity demanded. See figure below
supply-demand-equilibrium supply-demand-equilibrium-2

Surplus

Excess of supply happens when quantity supplied is greater than quantity demanded.

Example

If P = $6 then Qd = 6 roses and Qs = 20 roses,
which leads to a surplus of 14 roses (see figure below).
surplus

Whenever a surplus occurs, sellers will attempt to increase sales through cutting the current price.
This makes Qd go up and Qs to go down which lead us to reduce the surplus (see figure below).

surplus-2

Note that prices will continue to fall until market reaches equilibrium.

Shortage

Shortage happens when quantity demanded is greater than quantity supplied.

Example

If P = $1 then Qd = 46 roses and Qs = 4 roses,
which leads to a shortage of 42 roses (see figure below).
shortage

Whenever a shortage occurs, sellers will attempt to increase the price.
This makes Qd go down and Qs to go up which leads to reduce the shortage(see figure below).

shortage-2

Note that prices continue to increase until market reaches equilibrium.

Steps required to Analyze Changes in Equilibrium

To determine the effects of any event,
  1. Pick whether event shifts S curve, curve, or both.
  2. Pick in which direction curve shifts.
  3. Use supply-demand diagram to see how the shift changes equilibrium P and Q.

Terms for Movement versus Shift Along Curve

Example: A Shift in Demand

Event to be analyzed: Increase in price of gas in the case of hybrid cars

  1. D curve shifts due to the price of gas
  2. D shifts right
  3. The shift leads to an increase in price and quantity of hybrid cars.
shift-demand
Note that when price of gas goes uo, car producers supply larger quantity of hybrids, where the S curve has not shifted.

Example: A Shift in Supply

Event to be analyzed: New technology reduces cost of producing hybrid cars.

  1. S curve shifts
  2. S shifts right
  3. The shift causes price to decrease and quantity to increase.
shift-supply

Example: A Shift in both Supply & Demand

Events to be analyzed: price of gas increases AND new technology reduces production costs

  1. Both curves shift.
  2. Both shift to the right.
  3. Q increases, but effect on P is unclear: If demand increases more than supply, P increases.
shift-demand-supply
However, if supply increases more than demand, then P decreases (see below).
shift-demand-supply-2

Exercises

Exercise on Shifts in Supply & Demand

Check your answers here: Solution to the Exercise on Shifts in Demand and Supply (Event A)

Solution to the Exercise on Shifts in Demand and Supply (Event B)

Solution to the Exercise on Shifts in Demand and Supply (Event C)


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Date of last modification: 2019