What happens to equilibrium price and quantity when there is a simultaneous decrease in demand and increase in supply?

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Chapter 3 Outline
II. THE EFFECTS OF CHANGES IN DEMAND AND SUPPLY ON EQUILIBRIUM PRICE AND QUANTITY
A. Change in Demand
1. A change in demand will cause equilibrium price and output to change in thesame direction.
a. A decrease in demand will cause a reduction in the equilibrium price and quantity of a good.
1. The decrease in demand causes excess supply to develop at the initial price.
a. Excess supply will cause price to fall, and as price falls producers are willing to supply less of the good, thereby decreasing output.
b. An increase in demand will cause an increase in the equilibrium price and quantity of a good.
1. The increase in demand causes excess demand to develop at the initial price.
a. Excess demand will cause the price to rise, and as price rises producers are willing to sell more, thereby increasing output.
B. Change in Supply
1. A change in supply will cause equilibrium price and output to change inopposite directions.
a. An increase in supply will cause a reduction in the equilibrium price and an inase in the equilibrium quantity of a good.
1. The increase in supply creates an excess supply at the initial price.
a. Excess supply causes the price to fall and quantity demanded to increase.
b. An dcrease in supply will cause an increase in the equilibrium price and a decrease in the equilibrium quantity of a good.
1. The decrease in supply creates an excess demand at the initial price.
a. Excess demand causes the price to rise and quantity demanded to decrease.
C. Changes in Demand and Supply
1. If demand and supply change in opposite directions, then the change in theequilibrium price can be determined, but the change in the equilibrium. output cannot.
a. A decrease in demand and an increase in supply will cause a fall in equilibrium price, but the effect on equilibrium quantity cannot be determined.
1. For any quantity, consumers now place a lower value on the good, and producers are willing to accept a lower price; therefore, price will fall. The effect on output will depend on the relative size of the two changes.
b. An increase in demand and a decrease in supply will cause an increase in equilibrium price, but the effect on equilibrium quantity cannot be detennined.
1. For any quantity, consumers now place a higher value on the good,and producers must have a higher price in order to supply the good; therefore, price will increase. The effect on output will depend on the relative size of the two changes.
2. If demand and supply change in the same direction, the change in the equilibrium output can be determined, but the change in the equilibrium price cannot.
a. If both demand and supply increase, there will be an increase in the equilibrium output, but the effect on price cannot be determined.
1. If both demand and supply increase, consumers wish to buy more and firms wish to supply more so output will increase. However, since consumers place a higher value on each unit, but producers are willing to supply each unit at a lower price, the effect on price will depend on the relative size of the two changes.
b. If both demand and supply decrease, there will be a decrease in the equilibrium output, but the effect on price cannot be determined.
1. If both demand and supply decrease, consumers wish to buy less andfirms wish to supply less, so output will fall. However, since consumers place a lower value on each unit, but producers are willing to supply each unit only at higher prices, the effect on price will depend on the relative size of the two changes.

Read this section to learn how demand and supply interact with one another to determine prices and quantities that may or may not be optimal. Attempt the "Try It" problem. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter.

The Determination of Price and Quantity

Simultaneous Shifts

As we have seen, when either the demand or the supply curve shifts, the results are unambiguous; that is, we know what will happen to both equilibrium price and equilibrium quantity, so long as we know whether demand or supply increased or decreased. However, in practice, several events may occur at around the same time that cause both the demand and supply curves to shift. To figure out what happens to equilibrium price and equilibrium quantity, we must know not only in which direction the demand and supply curves have shifted but also the relative amount by which each curve shifts. Of course, the demand and supply curves could shift in the same direction or in opposite directions, depending on the specific events causing them to shift.

For example, all three panels of Figure 3.11 "Simultaneous Decreases in Demand and Supply" show a decrease in demand for coffee (caused perhaps by a decrease in the price of a substitute good, such as tea) and a simultaneous decrease in the supply of coffee (caused perhaps by bad weather). Since reductions in demand and supply, considered separately, each cause the equilibrium quantity to fall, the impact of both curves shifting simultaneously to the left means that the new equilibrium quantity of coffee is less than the old equilibrium quantity. The effect on the equilibrium price, though, is ambiguous. Whether the equilibrium price is higher, lower, or unchanged depends on the extent to which each curve shifts.

Figure 3.11 Simultaneous Decreases in Demand and Supply

What happens to equilibrium price and quantity when there is a simultaneous decrease in demand and increase in supply?

Both the demand and the supply of coffee decrease. Since decreases in demand and supply, considered separately, each cause equilibrium quantity to fall, the impact of both decreasing simultaneously means that a new equilibrium quantity of coffee must be less than the old equilibrium quantity. In Panel (a), the demand curve shifts farther to the left than does the supply curve, so equilibrium price falls. In Panel (b), the supply curve shifts farther to the left than does the demand curve, so the equilibrium price rises. In Panel (c), both curves shift to the left by the same amount, so equilibrium price stays the same.

If the demand curve shifts farther to the left than does the supply curve, as shown in Panel (a) of Figure 3.11 "Simultaneous Decreases in Demand and Supply", then the equilibrium price will be lower than it was before the curves shifted. In this case the new equilibrium price falls from $6 per pound to $5 per pound. If the shift to the left of the supply curve is greater than that of the demand curve, the equilibrium price will be higher than it was before, as shown in Panel (b). In this case, the new equilibrium price rises to $7 per pound. In Panel (c), since both curves shift to the left by the same amount, equilibrium price does not change; it remains $6 per pound.

Regardless of the scenario, changes in equilibrium price and equilibrium quantity resulting from two different events need to be considered separately. If both events cause equilibrium price or quantity to move in the same direction, then clearly price or quantity can be expected to move in that direction. If one event causes price or quantity to rise while the other causes it to fall, the extent by which each curve shifts is critical to figuring out what happens. Figure 3.12 "Simultaneous Shifts in Demand and Supply" summarizes what may happen to equilibrium price and quantity when demand and supply both shift.

Figure 3.12 Simultaneous Shifts in Demand and Supply

What happens to equilibrium price and quantity when there is a simultaneous decrease in demand and increase in supply?

If simultaneous shifts in demand and supply cause equilibrium price or quantity to move in the same direction, then equilibrium price or quantity clearly moves in that direction. If the shift in one of the curves causes equilibrium price or quantity to rise while the shift in the other curve causes equilibrium price or quantity to fall, then the relative amount by which each curve shifts is critical to figuring out what happens to that variable.

As demand and supply curves shift, prices adjust to maintain a balance between the quantity of a good demanded and the quantity supplied. If prices did not adjust, this balance could not be maintained.

Notice that the demand and supply curves that we have examined in this chapter have all been drawn as linear. This simplification of the real world makes the graphs a bit easier to read without sacrificing the essential point: whether the curves are linear or nonlinear, demand curves are downward sloping and supply curves are generally upward sloping. As circumstances that shift the demand curve or the supply curve change, we can analyze what will happen to price and what will happen to quantity.

What happens to equilibrium price and quantity when there is a simultaneous decrease in demand and decrease in supply group of answer choices?

A decrease in demand will cause the equilibrium price to fall; quantity supplied will decrease. An increase in supply, all other things unchanged, will cause the equilibrium price to fall; quantity demanded will increase. A decrease in supply will cause the equilibrium price to rise; quantity demanded will decrease.

What happens to equilibrium price and quantity when demand increases and supply decreases?

An increase in demand and a decrease in supply will cause an increase in equilibrium price, but the effect on equilibrium quantity cannot be detennined. 1. For any quantity, consumers now place a higher value on the good,and producers must have a higher price in order to supply the good; therefore, price will increase.

What happens to equilibrium price and quantity when there is a simultaneous increase in demand and increase in supply?

If simultaneous shifts in demand and supply cause equilibrium price or quantity to move in the same direction, then equilibrium price or quantity clearly moves in that direction.

What happens to equilibrium price and quantity when there is a simultaneous decrease in demand and increase in supply quizlet?

b) A simultaneous decrease in demand and increase in supply will result in an increase in equilibrium price and uncertain effect on quantity.