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Determination of Prices

Simultaneous Changes in Demand and Supply

Usually, in an open and competitive market, the interaction between demand and supply determines the price and quality of commodities. However, things like income, tastes, and preferences, population, etc. also cause changes in the demand and supply of goods. We have already studied the effect of a change in demand or supply on the equilibrium price and the quantity sold or purchased. In this article, we will look at the effects of simultaneous changes in demand and supply.

Simultaneous Changes in Demand and Supply

There are times when both demand and supply change at the same time. For example, during a war, shortage of goods decreases supply, while high employment levels and total wage payments increase the demand too. The following figure shows various scenarios of the effect of simultaneous changes in demand and supply on the equilibrium price.

simultaneous changes in demand and supply

In the figure above, DD is the original demand curve and SS is the supply curve. The point E, where both these curves meet refers to OP – the equilibrium price and OQ – the quantity bought and sold.

Refer to Fig. 1 (a)

Fig. 1 (a) shows a scenario where the increase in demand is equal to the increase in supply. Therefore, the new demand curve, D1D1, and the new supply curve, S1S1, meet at the new equilibrium point E1. Also, the new equilibrium price is equal to the old equilibrium price = OP.

Refer to Fig. 1 (b)

Fig. 1 (b) shows a scenario where the increase in demand is more than the increase in supply. Therefore, the new demand curve, D1D1, and the new supply curve, S1S1, meet at the new equilibrium point E1. However, in this case, the new equilibrium price, OP1, is higher than the old equilibrium price, OP.

On the other hand, if there is a fall in the demand and supply and the fall in demand is more than the fall in supply, then the new equilibrium price will become lower than the old equilibrium price.

Refer to Fig. 1 (c)

Fig. 1 (c) shows a scenario where the increase in supply is more than the increase in demand. Therefore, the new demand curve, D1D1, and the new supply curve, S1S1, meet at the new equilibrium point E1. However, the new equilibrium price, OP1, is less than the original equilibrium price, OP.

Conversely, if there is a fall in the demand and supply and the fall in supply is more than the fall in demand, then the new equilibrium price will become higher than the old equilibrium price.

Solved Question on Simultaneous Changes in Demand and Supply

Q: Assume that in the market for good Z there is a simultaneous increase in demand and the quantity supplied. Also, the increase in demand is more than the increase in supply. The result will be :

  1. The new equilibrium price higher than the original equilibrium price.
  2. The new equilibrium price lower than the original equilibrium price.
  3. The original and new equilibrium price equal.
  4. No effect on the equilibrium price.

Answer: In case of simultaneous changes in demand and supply, if the increase in demand is more than the increase in supply, then as we have seen in Fig. 1(b) above, the new equilibrium price becomes higher than the original equilibrium price.

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