Supply and Demand Together: Both Shift - Online Tutor, Practice Problems & Exam Prep

When analyzing supply and demand shifts on a graph, one variable—price or quantity—will always be ambiguous when both curves shift. For instance, if both supply and demand shift right, equilibrium quantity increases, but price may either rise or fall. Conversely, if supply shifts left and demand shifts right, price increases while quantity remains ambiguous. Understanding these dynamics is crucial for grasping market behavior and equilibrium conditions, as they illustrate the complexities of economic interactions and the impact of aggregate demand and supply on market outcomes.

Both Shift - Warning!

Now we're going to study our most involved analysis of supply and demand where we're going to shift both supply and demand on the same graph. So this is going to be pretty exciting. We're going to be making 2 shifts on the same graph, and I want to make a quick note. Whenever we move both supply and demand on the same graph, we are always going to have one of our variables, price or quantity, ambiguous. So, one of them we're not going to be able to tell whether it goes up or down whenever we move both supply and demand, okay? And we're going to see why that is in a second, but first I want to show you the correct way to draw curves when you are shifting both because when you shift both, it does make a difference how far you shift each curve.

Alright. So let me show you this example here. I'm going to show you 2 incorrect ways to do it and show you why we get different answers when we do it each of these ways and then I'll show you the correct way, the way I like to do it so it's really hard to mess it up.

So here we go, let's do the first one. In all of these situations, we're going to be shifting supply to the right and demand also will shift to the right, okay. But whatever I'm doing here holds true for shifts to the left, mix shifts of right and left, so first I want to draw a situation where I'm going to shift the supply curve really far to the right and the demand curve just a little bit to the right. Okay. So I'm going to shift the supply curve way to the right, this exaggerated shift all the way over here. Okay. And I'm going to shift the demand curve to the right as well, but I'm only going to shift it just a little bit. So this tiny little shift comparatively, right?

So let's see what has happened to our equilibrium price and quantity in this situation. We started here where we had a price of p1 and a quantity of q1. Right, price axis, quantity axis, and now let's see where we are in our new situation and see how easy it is to see our new equilibrium even though we've got all these lines on the graph, it's going to be where these two red curves intersect, right? Those are the new lines that we drew our new situation. So let's see what's happened here. It appears that our equilibrium price has decreased and it appears that our equilibrium quantity has increased, right? P2, it looks like it's decreased, right? I'm going to put a question mark here because I don't want you to get confused later. That is not going to end up being correct and then we've got a quantity increase here, right?

So now let's see this next situation. I'm going to do something similar except this time I'm going to only shift supply a little bit and demand a lot in this one. So let's go ahead and start with demand and shift it a lot. I'm going to shift it way out here, right. I did a way, way big shift in demand and a tiny shift in supply, this little baby shift in supply. Cool, let's go ahead and analyze our points now. So this was our original equilibrium where we had this price and this quantity, and now let's look at our new equilibrium, and notice in both of these cases we have shifted both to the right, okay, but we're going to get a different answer in this case. Look what has happened to our equilibrium price. Our equilibrium price in this case looks like it has increased and equilibrium quantity, again, looks like it has increased. Okay. So something about equilibrium quantity seems like we're doing it right.

Let me get out of the way just so you see the whole thing. Right, but the big deal here is that our equilibrium price in one graph decreased and in the second graph it increased, so what is happening? We don't know. In the end, we're going to learn that this price variable is actually ambiguous and we can't make an actual conclusion about what has happened to price. So let me show you the correct way to put this on the graph and it'll help you not make this mistake.

So here let's go on to this last graph. I think there's space for me here. Alright, cool. So let's go ahead and in this one, whenever we have shifts in both, what I like to do is shift them both an equal amount, okay? So what I'm going to do is shift the demand and supply as equally as I can and then there's a good test to see if you did that right. So I'm going to shift this about this far to the right for our demand and about this far for our supply. Right? So I did approximately a good job here. What what can tell you that you did a good job is you're going to get this square. Right? You're going to get this square. Let me do it in a different color. I'll do it in green. This square, and you want it to be as even as possible.

Alright. You want this square to come out as even as possible, and you'll get a good answer. Okay, so in this situation, I didn't do it exactly perfect, but it's good enough for our analysis. So let's go ahead and label our original equilibrium and our new equilibrium right here. Cool? So the idea is that now the price looks just about the same as where it was, right? It's just about where it was, it kind of looks like it went up a little bit because of how I drew it, but the idea is by drawing it like this, I can tell that it didn't it definitely didn't change very much, and that's how I know it's going to be the ambiguous variable whereas our quantity clearly has increased. There's no way to be ambiguous about this. Quantity definitely went up from q1 to q2. The price is very close to each other, right? If I had drawn both prices they would have been something like that and that's how I know it's ambiguous.

The q is certain, right? We can totally tell that it's moved up, but the price it's very close to where it originally was, so I know that that is the ambiguous variable. And when I write this out, different teachers are going to have different notation, some might even write out the whole word ambiguous, but to save space and time, I'm going to do p question mark for when the price is ambiguous or q question mark for when it's ambiguous. I've seen teachers use this double-sided arrow for ambiguous, meaning I don't know which way it's going to go, left or right, so the same thing for quantity with that double-sided arrow, or something like they'll just write P ambiguous or unsure or not enough information, right? Same thing, q ambiguous.

So in this situation, what did we have? We had a situation where p was ambiguous and q increased. Cool? So that was our answer for this question if they were to ask us what had happened in this situation. Let's go ahead and analyze all the different combinations of shifts to the left and the right, and you'll see that there is kind of a pattern when we're doing the double shifts. Alright, let's do that now.

Results of Both Shifting

Now let's see what happens in all the different combinations of double shifting with supply and demand. So I've got our same steps listed here. Right, we're not really going to use them on this page, but this is kind of the same process that we've been following. But let's go ahead and start with this one here on the left. Supply is shifting to the left and demand is shifting to the left, right. I'm just going to shorten it here. Supply left, demand left as well. Alright. So let's go ahead and draw our new curves here. I will use red as usual. So, our new demand curve to the left, and remember our trick is to try and draw them as evenly in the shifts. To shift them both as evenly as possible, and you know you did that when you get a nice square shape in the middle. So I'm going to try and do that here. There we go. That was a really good one. You could see that this square came out really good in this one, and this is kind of what you're aiming for when you do this is to get this square to come out as even as possible because it's going to be really clear what is the ambiguous variable. So let's go ahead and mark our original equilibrium as the intersection of the blue lines, our new equilibrium is the intersection of the red lines, and let's go ahead and see which variable is ambiguous. So at our original price, and you can kind of already see which one's going to be ambiguous here, it seems that our price here is going to be along the same line, and let's look at our quantities. So quantity looks like it has clearly decreased where quantity 1 was there, quantity 2 was there, and price it kind of stayed on top of each other. So that ends up being the ambiguous variable. So in here I'm going to write p question mark q down, right. Quantity clearly decreased in this situation, but the price, it was ambiguous as to what happened. So let's go ahead and do the same thing here on the right, supply shifting to the right and demand shifting to the right. So same thing, we're going to draw the curves as evenly as we can in the shifts to try and get that square shape. So there's my new supply curve. Let me draw my new demand curve. Alright. We did a pretty good one here too. You can see we got a good square. So let's go ahead and analyze our original equilibrium and our new equilibrium. So let's start with price. It looks like the price again for both of them are along just about the same line, so we're going to know that that's going to be our ambiguous variable because they kind of stayed in the same place and we can expect the other variable to have changed our quantity variable and it looks like it has. Our q1 was here, q2 is here, quantity has clearly increased. So in this situation, we have the price being ambiguous again and quantity has definitely increased. Cool? Alright, let's go on to the bottom half of the page, and I think I can fit in here for the first graph. I get lonely when I'm not on the screen so, you know, let's go ahead and do this next one. So now we have a situation where supply is shifting to the left and demand is shifting to the right. So let's start with supply to the left, demand to the right, And again, we've got a pretty good square going here. So let's go ahead and mark our original equilibrium, our new equilibrium, and let's compare. So let's start with price again. Now we've got an original price here p₁ and a new price here p₂. So it looks like prices clearly increased. Right? They're not landing on top of each each other. Let's see what happened with quantity. We should expect something ambiguous with quantity which it does look like that's what we're getting, right. It looks like they're right on top of each other at this quantity that's going to end up being ambiguous. So we have a clear increase in our price, but an ambiguous what's going to happen with our quantity. We're not sure whether the quantity will go up or down, so let's go ahead and do this last one. One. Now supply is shifting to the right and demand is shifting to the left. So supply shifting to the right, Demand shifting to the left. Pretty good. That's okay, but we did get that square shape. And let's go ahead and mark our points. So there is our original equilibrium and our new equilibrium. So at our original equilibrium, we had this price right here, p₁ and what price did we have here at our new equilibrium p₂. So it looks pretty clear that the price has decreased, so quantity should be our ambiguous variable, which it looks like it is. Right? They're right on top of each other. Quantity is going to be ambiguous. So we have the price decreasing for sure and quantity is ambiguous. Alright. So notice what we've got in all these situations. Up here, when both move the same way, supply shifted to the left, demand shifted to the left, we've got an ambiguous price and since they both shifted to the left, it was a bad thing, quantity decreased, and in the other situation, they both shift to the right, price being ambiguous but now quantity increased with rightward shifts, And down here when they're doing opposite shifts, that's when we get an ambiguous quantity and then the price will either shift up or down. So we kind of have that going for us, but it is always going to be easier to just put it on the graph and analyze it for every problem. Alright? There's no way you get it wrong when you put it on the graph and you do the analysis. Cool? Alright. Let's go ahead and do some double shifting practice problems.

What happens in the market for cream cheese if (1) the price of butter, a substitute for cream cheese, falls and (2) the cost of milk, an input in cream cheese production, rises?

• A. Equilibrium price rises, equilibrium quantity falls
• B. Equilibrium price falls, equilibrium quantity falls
• C. Equilibrium price ambiguous, equilibrium quantity rises
• D. Equilibrium price ambiguous, equilibrium quantity falls

If the wages of bus drivers increases at the same time that the income of consumers decrease, what happens in the market for bus rides (assuming that bus rides are an inferior good)?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price rises, equilibrium quantity rises
• C. Equilibrium price falls, equilibrium quantity ambiguous
• D. Equilibrium price ambiguous, equilibrium quantity rises

If producers of garden hoses have discovered new technology to improve production, while the number of gardeners increases, what happens in the market for garden hoses?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price falls, equilibrium quantity falls
• C. Equilibrium price ambiguous, equilibrium quantity rises
• D. Equilibrium price ambiguous, equilibrium quantity falls

What happens in the market for tennis balls if (1) the price of tennis rackets, a complement for tennis balls, increases and (2) the price of baseballs, a substitute in production, decreases?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price ambiguous, equilibrium quantity falls
• C. Equilibrium price ambiguous, equilibrium quantity rises
• D. Equilibrium price falls, equilibrium quantity ambiguous

What happens in the market for wheat if (1) the cost of fertilizer, an input in production, increases and (2) tornadoes ravages the Midwest, where wheat is grown?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price rises, equilibrium quantity falls
• C. Equilibrium price falls, equilibrium quantity rises
• D. Equilibrium price ambiguous, equilibrium quantity falls

What happens in the market for online tutoring services if (1) the government decides to provide funding for online tutors and (2) the price of private tutoring, a substitute for online tutoring services, increases?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price ambiguous, equilibrium quantity falls
• C. Equilibrium price falls, equilibrium quantity ambiguous
• D. Equilibrium price ambiguous, equilibrium quantity rises

Here’s what students ask on this topic:

What happens to equilibrium price and quantity when both supply and demand shift to the right?

When both supply and demand shift to the right, the equilibrium quantity will definitely increase. However, the effect on the equilibrium price is ambiguous. This is because the increase in supply tends to lower the price, while the increase in demand tends to raise it. The net effect on price depends on the relative magnitudes of the shifts. If the demand shift is larger, the price may rise; if the supply shift is larger, the price may fall. Therefore, while we can be certain that the quantity increases, the price could either increase, decrease, or remain the same.

Why is one variable always ambiguous when both supply and demand curves shift?

One variable—either price or quantity—becomes ambiguous when both supply and demand curves shift because the shifts can have opposing effects on that variable. For example, if both curves shift to the right, the increase in supply tends to lower the price, while the increase in demand tends to raise it. The net effect on price depends on the relative magnitudes of the shifts. Similarly, if supply shifts left and demand shifts right, the price will definitely increase, but the effect on quantity will be ambiguous. This inherent ambiguity arises because the shifts can counteract each other, making it impossible to determine the exact change without additional information.

How do you correctly draw supply and demand curves when both are shifting?

To correctly draw supply and demand curves when both are shifting, you should aim to shift them by equal amounts. This helps in visualizing the changes more accurately. Start by drawing the original supply and demand curves and marking the initial equilibrium. Then, shift both curves to the right or left by approximately the same distance. The new equilibrium will be at the intersection of the new curves. This method helps in identifying which variable (price or quantity) is ambiguous and which one has a definite change. Ensuring the shifts are equal helps in maintaining clarity and avoiding errors in analysis.

What is the effect on equilibrium when supply shifts left and demand shifts right?

When supply shifts left (decreases) and demand shifts right (increases), the equilibrium price will definitely increase. This is because the decrease in supply tends to raise the price, and the increase in demand also tends to raise it. However, the effect on equilibrium quantity is ambiguous. The decrease in supply tends to lower the quantity, while the increase in demand tends to raise it. The net effect on quantity depends on the relative magnitudes of the shifts. Therefore, while the price will increase, the quantity could either increase, decrease, or remain the same.

How do you determine which variable is ambiguous when both supply and demand shift?

To determine which variable is ambiguous when both supply and demand shift, you need to analyze the relative shifts of the curves. Draw the original supply and demand curves and mark the initial equilibrium. Then, shift both curves by equal amounts and mark the new equilibrium. Compare the new equilibrium price and quantity with the original ones. If the new price is very close to the original price, then price is the ambiguous variable, and quantity has a definite change. Conversely, if the new quantity is very close to the original quantity, then quantity is the ambiguous variable, and price has a definite change. This method helps in identifying the ambiguous variable accurately.