Question

Consider the following events: a new study reveals that the consumption of oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees more productive. How will the demand and the supply curves shift as a result of these simultaneous changes? Draw three graphs (for different relative shifts in the demand and supply curves) to explain what effect these changes would have on the equilibrium price and quantity of oranges.

Answer 1

A new study reveals that consumption of oranges reduces the risk of diabetes. As such, the demand for oranges will increase and demand curve will shift to the right. As farmers use a new fertilizer that makes orange trees more productive, the supply of oranges will increase and supply curve will shift to the right.

As a result of simultaneous shift in demand and supply curves, the equilibrium price and equilibrium output will change. But, changes in equilibrium price and output depends upon relative changes in demand and supply.

Case 1: When demand and supply increase in the same proportion.

When demand and supply increase in the same proportion, the equilibrium price remains the same and equilibrium output increases.

In the above diagram, D and S are initial equilibrium demand and supply curves respectively. O is the initial equilibrium point where demand curve and supply curve intersect. P is the equilibrium price and Q is the equilibrium output. As demand and supply increase, demand curve shifts to the right to D1 and supply curve shifts to the right to S1. Here, increase in demand is equal to increase in supply. The new equilibrium point is A where D1 and S1 curves intersect. At this equilibrium point, the equilibrium price is P and equilibrium output is Q1. Here, equilibrium price has not changed. Only equilibrium output has increased.

Case 2: When relative increase in demand is more than increase in supply.

When relative increase in demand is more than increase in supply, equilibrium price and equilibrium output increases.

In the above diagram, D and S are initial demand and supply curves respectively. O is the initial equilibrium point where demand and supply curves intersect. The equilibrium price is P and equilibrium output is Q. As demand will increase, demand curve will shift to the right to D1. As supply will increase supply curve will shift to the right to S1. Here, both demand and supply increase, but demand increases by a larger proportion than increase in supply . Increase in demand is more than increase in supply. The new equilibrium point is A where D1 and S1 curves intersect. The equilibrium price has increased to P1 and equilibrium output has increased to Q1.

Case 3: When relative increase in demand is less than increase in supply.

When relative increase in demand is less than increase in supply, equilibrium price falls and equilibrium output increases.

In the above diagram, D and S are initial demand and supply curves respectively. O is the initial equilibrium point. P is the equilibrium price and Q is the equilibrium output. As demand will increase, demand curve will shift to the right to D1. As supply will increase supply curve will shift to the right to S1. Here, both demand and supply increase ,but supply increases by a larger proportion than increase in demand. Increase in demand is less than increase in supply .The new equilibrium point is A where D1 and S1 curves intersect. The equilibrium price has reduced to P1 and equilibrium output has increased to Q1.