A student asks…
Can something affect demand and supply at the same time?
What is demand?
Demand is the relationship between the price of a good and the quantity demanded of that good. Demand is illustrated as a demand schedule or a demand curve. The quantity demanded is a point on a demand curve—the quantity demanded at a particular price.
What is a change in demand?
When anything that influences buying plans changes other than the price of the good, there is a change in demand. When demand increases, the demand curve shifts rightward and the quantity demanded at each price is greater. Things that change the demand for a good include a change in the price of a substitute, income, or preferences.
What is supply?
Supply is the relationship between the price of a good and the quantity supplied of that good. Supply is illustrated as a supply schedule or a supply curve. The quantity supplied is a point on the supply curve—the quantity supplied at a particular price.
What is a change in supply?
When anything that influences selling plans other than the price of a good changes, there is a change in supply. When supply increases, the supply curve shifts rightward and the quantity supplied at each price is greater. Things that change the supply of a good include a change in the price of a factor of production, the number of suppliers, or technology.
Can a single event bring changes in demand and supply?
The answer is: yes.
Consider the market for bottled water during a brutally hot summer. The warm weather changes preferences and demand for bottled water increases. Meanwhile, the warm weather also dries up water springs and brings a drought. With weather this warm, water is harder to acquire. Water bottle production dries up and the supply of bottled water decreases.
What happens to the equilibrium price and quantity when demand and supply both change?
When demand and supply change in same direction, we know the direction of the change in the equilibrium quantity. If demand and supply both increase, the equilibrium quantity increases; and if demand and supply both decrease, the equilibrium quantity decreases. In either case, the equilibrium price could rise, fall, or stay the same, and we would need to know the relative sizes of the changes in demand and supply to determine the direction of the price change.
When demand and supply change in opposite directions, we know the direction of the change in the equilibrium price. If demand increases and supply decreases, the equilibrium price rises; and if demand decreases and supply increase, the equilibrium price falls. In either case, the equilibrium quantity could increase, decrease, or stay the same, and we would need to know the relative sizes of the changes in demand and supply to determine the direction of the quantity change.
In our example about a warm summer frying the market for bottled water, demand increases and supply decreases. The equilibrium quantity could increase, decrease, or stay the same, and the equilibrium price rises.
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Practice: Changes in Demand and Supply