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ABSTRACTION: Simplifying the complexities of the real world by ignoring (hopefully) unimportant details while doing economic analysis. Abstraction is often criticized because it's, well, it's JUST NOT REALISTIC. However, when done correctly (ignoring things that JUST DON'T MATTER), then the pursuit of knowledge is greatly enhanced by abstraction. For example, when travelling cross country along a high-speed interstate highway, a paper road map is a handy tool. It shows towns and cities along the way, the major intersections, rest stop locations, and other important points of interest. However, it ignores unimportant details. It doesn't realistically show the location of every tree, bush, or blade of grass. Why bother? This information won't enhance your road trip.

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DEMAND DECREASE AND SUPPLY INCREASE:

A simultaneous decrease in the willingness and ability of buyers to purchase a good at the existing price, illustrated by a leftward shift of the demand curve, and an increase in the willingness and ability of sellers to sell a good at the existing price, illustrated by a rightward shift of the supply curve. When combined, both shifts result in an indeterminant change in equilibrium quantity and a decrease in equilibrium price.
A demand decrease results from a change in any of the five demand determinants. A supply increase results from a change in any of the five supply determinants. By itself, a demand decrease results in a decrease in equilibrium quantity and a decrease in equilibrium price. By itself a supply increase results in An increase in equilibrium quantity and a decrease in equilibrium price. A simultaneous decrease in demand and increase in supply unquestionably generates a decrease in the price. However, the change in the quantity is indeterminant. It might decrease or increase depending on the magnitude of the demand and supply changes.

Simultaneous Shocks

To see how a decrease in demand and an increase in supply affects market equilibrium, consider the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes.

  • 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

What do these shifts do to the hot fudge sundae market? Consider the shift of each curve separately. The diagram at the right presents the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. The initial equilibrium price is Po and the initial equilibrium quantity is Qo. This market equilibrium, of course, persists until and unless a determinant changes, which is the nature of equilibrium.
  • 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

Now consider simultaneous shifts of Both Curves. Combining both shifts generates an obvious change in price, but a questionable change in quantity. If a decrease in demand decreases equilibrium price and an increase in supply decreases equilibrium price, then both together MUST decrease equilibrium price. The market price of Hot Momma Fudge Bananarama Ice Cream Sundaes in Shady Valley is lower.

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.

One of Eight

A demand decrease and supply increase is one of eight market disruptions--four involving a change in either demand or supply and four involving changes in both demand and supply. The four single shift disruptions are demand increase, demand decrease, supply increase, and supply decrease. The other three double shifts are demand and supply increase, demand and supply decrease, and demand increase and supply decrease.

<= DEMAND DECREASEDEMAND DEPOSITS =>


Recommended Citation:

DEMAND DECREASE AND SUPPLY INCREASE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 22, 2018].


Check Out These Related Terms...

     | demand and supply increase | demand and supply decrease | demand increase and supply decrease | demand decrease | supply decrease | demand shock | supply shock |


Or For A Little Background...

     | demand decrease | supply increase | demand determinants | supply determinants | demand curve | supply curve | comparative statics | ceteris paribus | economic analysis | graphical analysis | market equilibrium | change in demand | change in supply |


And For Further Study...

     | price ceiling | price floor | market equilibrium, graphical analysis | aggregate market shocks |


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