Which of the following is certainly true if demand and supply increase at the same time?

After you have worked through this section of the learning unit, you should be able to:

• use a market diagram to illustrate and explain the likely impact of an increase in demand and an increase in supply on the equilibrium price and quantity

Work through the following activity to see what happens to the equilibrium price and equilibrium quantity if both the demand and supply increase:

Cape Town is a very popular tourist destination. If you look at the demand and supply for accommodation you will notice that both has increased over the years and that there were an increase in the price for accommodation as well as the quantity of accommodation.

Complete the following two statements by selecting all of the true options, more than one selection is possible.

An increase in demand for accommodation in Cape Town…

An increase in the demand for accommodation increases the price and the quantity. In terms of demand and supply curves the demand curve shifts to the right.

An increase in the supply for accommodation decreased the price and increases the quantity. In terms of demand and supply curves the supply curve shifts to the right.

Is the following statement true or false?

The increase in the quantity of accommodation available can be explained by the increase in both demand and supply.

An increase in both demand and supply definitely increases the quantity.

While an increase in demand and an increase in supply definitely increase the quantity of accommodation available in Cape Town the impact on price is however uncertain.

Given that the price for accommodation has increased in Cape Town we can conclude that:

For the price to decrease, the shift of the demand curve needs to be less than the shift of the supply curve, as indicated in the following diagram:

Using demand and supply analysis the explanation for the increase in price for accommodation and quantity of accommodation in Cape Town is that the increased in demand outstripped the increase in supply as indicated in the following diagram:

But what if the quantity of accommodation has increased but the price has stayed the same. For this to happen the demand curve must shift by the same magnitude as the supply curve as indicated in the following diagram:

But what if there were a decrease in the price of accommodation in Cape Town?

Which one of the following would bring about a decrease in the price of accommodation in Cape Town is both demand and supply increase?

For a simultaneous increase in demand and supply to increase the price it implies that the magnitude of the rightward shift the demand curve is greater than the rightward shift of the supply curve.

Watch the following video:

Activity

Do the following activity:

During the summer months, the demand for ice cream increases. What happens to the market for ice cream during the summer?

Correct.  The demand for ice cream increases and the demand curve shifts to the right.

Think again.  The demand increases.

Think again.  The demand increases.

Correct.  An increase in demand increases the equilibrium price.

Think again.  An increase in demand increases the equilibrium price.

Think again.  An increase in demand increases the equilibrium price.

Correct.  An increase in demand increases the equilibrium quantity.

Think again.   An increase in demand increases the equilibrium quantity.

Think again.  An increase in demand increases the equilibrium quantity.

Owing to the opening of a new ice cream factory, the supply of ice cream increases. What happens to the market for ice cream during the summer given the new ice cream factory? For some questions, more than one choice may be correct.

1. There is a(n) (decrease in demand; increase in demand; increase in supply; decrease in supply).
2. The supply curve shifts to the (right; left).
3. The demand curve shifts to the (right; left).
4. The equilibrium quantity (increases; decreases).
5. The equilibrium price (increases; decreases) if the demand curve shifts more than the supply curve.
6. The equilibrium price (increases; decreases) if the demand curve shifts less than the supply curve.

a. There is an increase in demand and an increase in supply.
b. The supply curve shifts to the right.
c. The demand curve shifts to the right.
d. The equilibrium quantity increases.
e. The equilibrium price increases if the demand curve shifts more than the supply curve.

f. The equilibrium price decreases if the demand curve shifts less than the supply curve.