Simultaneous Shocks

• First, on the demand side, suppose that the Shady Valley economy begins to boom, meaning more people have more jobs and higher incomes. Without question, Hot Momma Fudge Bananarama Ice Cream Sundaes are a normal good. As such people demand more Hot Momma Fudge Bananarama Ice Cream Sundaes. The buyers' income demand determinant increases demand and shifts the demand curve rightward.


• Second, on the supply side, suppose that not one, but three new Hot Momma Fudge Bananarama Ice Cream Shoppes begin operation in Shady Valley. As such the number of Hot Momma Fudge Bananarama Ice Cream Shoppes willing and able to sell Hot Momma Fudge Bananarama Ice Cream Sundaes is more. The number of sellers supply determinant increases supply and shifts the supply curve rightward.

One Shift at a Time

Demand and Supply

• An increase in buyers' income causes an increase in demand and a rightward shift of the demand curve. This creates a temporary shortage. The shortage causes the price to increase. The higher price eliminates the shortage and the resulting equilibrium quantity increases. By itself, an increase in demand leads to a higher price and a larger quantity. Click the [Demand Increase] button to illustrate.

• An increase in the number of sellers 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 price? The demand shift results in a higher price, and the supply shift leads to a lower price. Does price end up higher or lower? Who knows? No one does, not with the available information. The price 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 an increase in both demand and supply. Both curves shift to the right. The resulting equilibrium can be identified by clicking the [New Equilibrium] button. The equilibrium quantity is now Qe, which as expected is an increase over the original equilibrium quantity. Buyers want to buy more and sellers want to sell more. The quantity increases.

What about price? In this little illustration, the new equilibrium price happens to be unchanged at Po, the original equilibrium price. Maintaining the same equilibrium price, 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 price would have ended up higher or lower than the original. Price is indeterminant.

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

One of Eight