Question

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.

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.

Explain the simultaneous changes in the supply and demand on equilibrium price and quantity traded.

Answer 1

In figure 1, the case where both demand and supply shifts equally is represented. When the magnitude of shift of both the curves are same then price level remains unchanged.

In figure 2, the decrease in supply is lower than the decrease in demand. Hence, demand curve shifts more than the supply curve. This leads to a fall in the equilibrium price.

In figure 3, the decrease in demand is lower than the decrease in supply. Supply curve shifts more than the demand curve. Hence, equilibrium price increases.