Supply and Demand Together: One-sided Shifts - Online Tutor, Practice Problems & Exam Prep

Shifts in demand and supply significantly impact equilibrium price and quantity. An increase in demand, such as from rising consumer preferences, shifts the demand curve right, leading to higher equilibrium price (P₂) and quantity (Q₂). Conversely, a decrease in demand shifts it left, resulting in lower prices and quantities. For supply, an increase, like improved technology, shifts the supply curve right, decreasing price and increasing quantity. A leftward shift, due to rising input costs, raises prices and lowers quantity. Understanding these dynamics is crucial for analyzing market behavior.

Demand Shifts

So now we can see how shifts in demand or supply are going to affect our equilibrium price and quantity. Alright, so we're going to start with demand here, but we're also going to see how supply shifts are going to affect equilibrium price, and then we are also going to see how shifts in both, we're actually going to shift demand and supply on the same graph. So that'll be pretty interesting, but these are the steps that we're usually going to follow here on the right. These are the steps we're going to follow when we're doing these analyses. So step 1 is you know the problem is going to give you some sort of information about the situation, right? They could say that consumer income is increasing or a natural disaster occurred, right? So your first job is to take this information and say, is this going to affect demand or supply or sometimes the event could affect both.

Then we are going to decide which direction to shift, right. If we've decided that it affects demand, was it a good thing for demand or a bad thing for demand, right? Are we going to shift to the right or the left? Then what we're going to do is use this notation, remember the p2q2 and p1q1 so we're going to find this new price and quantity these are going to be our new equilibrium price and quantity and we're going to compare it to the original price and quantity p1q1. So let's go ahead to the graph here and do an example so you can see how these steps work, in action. The first thing I want to know about this graph is that now I'm only using one color for demand and supply, right.

I'm just going to use blue and the reason here is that by now you guys should feel pretty comfortable that demand is going to be the downward line, right. We've got demand downward, the double D's, you guys can't forget that, right. Supply is just the other one. So what I want to do, the reason I'm doing one color is because it's a lot easier to analyze the change. If you see, okay, blue is my original lines and I'm going to use red for my new lines and then it's a lot easier to say, oh, this is the new supply because it can get hairy once we're drawing a lot of lines on the same graph. So let's go ahead and label our axes here. We've got our price, our quantity, our demand line, and our supply line. Right?

What I want to do first is I'm going to label our original equilibrium right here. I'm going to put a circle and we're going to have notation for our original equilibrium versus our new equilibrium to help us distinguish one from the other as well. This was our original equilibrium and I'm going to use P1 and Q1 to notate that on the graph here. So we've got Q1 here and P1 over here right? And now let's say something caused demand to shift to the right, say consumer preferences for the product, increased, right? So we're going to shift our demand curve to the right and I'm going to use red for my new demand curve so that we can see different from the original situation. I'm going to move my demand curve out here and I'm going to label it D2. So we should call them D1 and D2, that also helps us distinguish one from the other, right?

I'm going to always use 1 for the original situation and 2 for the new situation after the changes. Cool, so we've got our new demand line there in red. So let's go ahead and find our new equilibrium, and what I like to do for the old equilibrium we're going to use a circle, and for the new equilibrium we'll use a square. I'm going to go ahead and at this point I'm going to draw a square around it and this helps me see the difference, right, now I can easily pinpoint the original one and the new one, the circle and the square. You can use any system you like but this works for me so I'm going to go ahead and at this point I'm going to find my new quantity and my new price. So our new equilibrium quantity we can see here is at Q2 and our new equilibrium price is at P2. So a lot of times what a question will ask you is okay whatever demand shifted to the right, what happened to equilibrium price and quantity? Usually don't have numbers to deal with it, you're just going to say something like equilibrium price has gone up and equilibrium quantity has gone up, right? And we know that from our analysis here on the graph that we've got this new quantity and this new price. Cool.

Let's do the same thing with a shift to the left down here. We're going to follow the same steps. Let's go ahead and label our axes PQ in alphabetical order left to right, downward demand, upward supply, cool, and let's go ahead and put our original equilibrium price and our original equilibrium quantity here on the side. Yep. And let's say that demand is shifting to the left now, right. So let's say that the price of a complementary good has increased, right, so if a complementary good's price has increased, demand for this product is going to shift to the left. So let's go ahead and put that in here. We've got our D1 and our S1, right? So let's put our D2 in here which is going to be a line let's say over here and we'll call that D2, and it's pretty clear where our new equilibrium is right here where the new line crosses the old line. Right. Cool. So let's go ahead and find our new equilibrium quantity and our new equilibrium price and we're going to see that the price has decreased and quantity has also decreased, right. So we'll see in situations where everything is held constant except demand shifts to the left, we're going to see that price decreases and quantity decreases as well, and that's going to be consistent for all problems where this graph occurs. Cool. So let's go ahead and do the same thing with supply shifts.

Supply Shifts

Okay. Let's do the same thing here with supply. So now we'll hold the demand line constant, and we're going to move the supply line to the right or the left. Right? So let's go ahead on the graph. We'll label our axes p and q. We've got our downward demand and our upward supply. Right? This will be d1 and s1, and let's go ahead and use red, to make our new supply line shifting to the right. So this could be some situation, let's say technology increased in the industry, so we've decided that the supply line is going to shift to the right. So let's go ahead and draw this on the graph and then we'll find our prices and quantities. So I'll draw my new supply line over here, S2. I'm going to do my square here for my new spot and my circle for my original. Now let's go ahead and find our original initial price and quantity and our new price and quantity. So supply has shifted to the right, our original price and our original quantity here P1q1, and now let's go to the square, our new equilibrium, which is somewhere around here at p2q2. What has happened in this situation? When supply shifted to the right, we had our equilibrium price decrease and our equilibrium quantity increase, and that almost seems a little logical to me. I guess the supply shifting to the right; it's more efficient, they're able to make it at a better price, and they're able to bring more to market. I don't know, there's some logic there that kind of sits in the back of my head, but it's just always easier to just see it on the graph, and you can't get it wrong, right. If you look at it on the graph, we are going to get it right every time. Let's do the same thing with the supply shift to the left over here. Alright, cool. Let's go ahead and label our axes. We've got price and quantity. Notice I do this every time because I'm trying to drill it in. We've got our downward demand, d1, upward supply, s1. Cool. Alright. And let's go ahead and say that in this situation, our input prices increase, right? The price of gasoline increased, and we use gasoline to run our machines. So we are going to shift our supply line to the left and find our new equilibrium price and quantity. So I'm going to draw the shift to the left here. Something like that. That'll be S2, and let's mark our old equilibrium and our new equilibrium. Right here was the old one where the blue lines cross and here's the new one with the new line right there. Cool? Let's compare our equilibriums. Here was our original equilibrium quantity and our original equilibrium price, and let's see what happened to the new equilibrium. We've got an equilibrium price here and equilibrium quantity here. So what happened in this case? We're going to see that the price has increased and the quantity has decreased. Cool? Alright, these are all the different one-sided shifts that we can do. Let's do some practice problems before we move on to 2 sided shifts. Alright, let's do it.

If the economy booms and incomes rise, what happens in the markets for inferior goods?

• A. Prices and quantities both rise
• B. Prices and quantities both fall
• C. Prices rise and quantities fall
• D. Prices rise and quantities rise

A change in which of the following will NOT shift the demand curve for ice cream?

• A. The price of frozen yogurt
• B. The price of ice cream
• C. The price of ice cream cones
• D. The income of ice cream consumers

A decrease in _________ will cause a movement along a given supply curve, which is called a change in __________.

• A. supply, demand
• B. demand, supply
• C. demand, quantity supplied
• D. supply, quantity demanded

Gum and mints are substitutes. If the price of gum increases, what happens in the market for mints?

• A. The supply curve shifts to the left
• B. The supply curve shifts to the right
• C. The demand curve shifts to the left
• D. The demand curve shifts to the right

Which of the following situations would lead to an increase in the equilibrium price of carrots and a decrease in the equilibrium quantity of carrots sold?

• A. An increase in the price of hummus, a complement to carrots
• B. An increase in the price of celery, a substitute for carrots
• C. An increase in the price of fertilizer, an input for carrots
• D. An increase in consumers' incomes, assuming carrots are a normal good

The discovery of a new fertilizer will shift the ___________ curve for carrots, leading to a ___________ equilibrium price.

• A. demand, higher
• B. demand, lower
• C. supply, higher
• D. supply, lower

Here’s what students ask on this topic:

What happens to equilibrium price and quantity when demand increases?

When demand increases, the demand curve shifts to the right. This shift results in a higher equilibrium price (P2) and a higher equilibrium quantity (Q2). The increase in demand could be due to factors such as rising consumer preferences, higher income, or favorable changes in consumer tastes. The new equilibrium is found where the new demand curve intersects the original supply curve. This intersection indicates the new market-clearing price and quantity, reflecting the increased willingness of consumers to purchase the good at higher prices and in greater quantities.

How does a decrease in supply affect equilibrium price and quantity?

A decrease in supply shifts the supply curve to the left. This shift leads to a higher equilibrium price (P2) and a lower equilibrium quantity (Q2). The decrease in supply could be caused by factors such as rising input costs, natural disasters, or other disruptions in production. The new equilibrium is determined where the new supply curve intersects the original demand curve. This intersection shows the new market-clearing price and quantity, indicating that fewer goods are available at higher prices due to the reduced supply.

What are the effects of an increase in supply on equilibrium price and quantity?

An increase in supply shifts the supply curve to the right. This shift results in a lower equilibrium price (P2) and a higher equilibrium quantity (Q2). Factors such as technological advancements, reductions in production costs, or improvements in production efficiency can cause this increase in supply. The new equilibrium is found where the new supply curve intersects the original demand curve. This intersection indicates the new market-clearing price and quantity, reflecting the increased availability of goods at lower prices and in greater quantities.

How does a decrease in demand impact equilibrium price and quantity?

A decrease in demand shifts the demand curve to the left. This shift leads to a lower equilibrium price (P2) and a lower equilibrium quantity (Q2). Factors such as declining consumer preferences, lower income, or unfavorable changes in consumer tastes can cause this decrease in demand. The new equilibrium is determined where the new demand curve intersects the original supply curve. This intersection shows the new market-clearing price and quantity, indicating that consumers are willing to purchase fewer goods at lower prices due to the reduced demand.

What are the steps to analyze shifts in supply and demand on a graph?

To analyze shifts in supply and demand on a graph, follow these steps: 1) Identify whether the event affects demand or supply. 2) Determine the direction of the shift (right for increase, left for decrease). 3) Use different colors or notations to distinguish between the original and new curves. 4) Label the axes with price (P) and quantity (Q). 5) Mark the original equilibrium with P1 and Q1. 6) Draw the new curve and find the new equilibrium, marking it with P2 and Q2. 7) Compare the new equilibrium price and quantity to the original ones to understand the impact of the shift.