Simultaneous Shocks

• First, on the demand side, suppose that a horrific plague kills half of the residents of the Shady Valley. This is clearly a devastating event if for no other reason than it reduces the number of buyers in the market for Hot Momma Fudge Bananarama Ice Cream Sundaes. This activates the number of buyers demand determinant, decreases demand, and shifts the demand curve leftward.


• Second, on the supply side, suppose that Professor Magnaminious, the leading expert on hot fudge sundae preparation, develops a breakthrough hot fudge sundae preparation process utilizing the Professor Magnaminious Triple-Dip Hot Fudge Wonder Machine. This is the sort of technological advance that increases the supply of Hot Momma Fudge Bananarama Ice Cream Sundaes. This activates the production technology supply determinant, increases supply, and shifts the supply curve rightward.

One Shift at a Time

Demand and Supply

• A decrease in the number of buyers causes a decrease in demand and a leftward shift of the demand curve. This creates a temporary surplus. The surplus causes the price to decrease. The lower price eliminates the surplus and the resulting equilibrium quantity decreases. By itself, a decrease in demand leads to a lower price and a smaller quantity. Click the [Demand Decrease] button to illustrate.

• An advance in production technology causes an increase in supply and a rightward shift of the supply curve. This creates a temporary surplus. This surplus causes the price to decrease. The lower price eliminates the surplus and the resulting equilibrium quantity increases. By itself, an increase in supply leads to a lower price and a larger quantity. Click the [Supply Increase] button to illustrate.

Both at Once

But what about quantity? The demand shift results in a smaller quantity, and the supply shift leads to a larger quantity. Does quantity end up more or less? Who knows? No one does, not with the available information. The quantity is indeterminant.

Doing Both

Consider both shifts using the diagram to the right. Once again the initial equilibrium price is Po and the initial equilibrium quantity is Qo.

Click the [Both Curves] button to see how the market is affected by a decrease in demand and an increase in supply. The demand curve shifts to the left and the supply curve shifts to the right. The resulting equilibrium can be identified by clicking the [New Equilibrium] button. The equilibrium price is now Pe, which as expected is a decrease over the original equilibrium price. Buyers are willing to pay less and sellers charge less. The price decreases.

What about quantity? In this little illustration, the new equilibrium quantity happens to be unchanged at Qo, the original equilibrium quantity. Maintaining the same equilibrium quantity, however, is merely coincidence, happenstance, quite literally the luck of the draw.

In particular, the new demand and supply curves are drawn in such a way that they shift by the same amount. These two curves could have been drawn such that they shifted by different amounts. And if so, the quantity would have ended up greater or less than the original. Quantity is indeterminant.

The reason for the indeterminant quantity is that the relative shift of each curve is unknown. If demand shifts relatively more than supply, then the demand-induced smaller quantity outweighs the supply-induced larger quantity, and the quantity is less. A larger quantity results if the supply shift is relatively more than the demand shift. Because the extent of each shift is not known, quantity is indeterminant. Whenever the demand and supply curves both shift, either quantity or price is indeterminant.

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