Interpreting Changes in Price and Quantity

We know that when demand and supply curves shift, prices adjust to maintain a balance between the quantity of a good demanded and the quantity supplied. However, if prices did not adjust to changes in demand and supply quantity, this balance could not be maintained.

Under the circumstances that shift the demand curve or the supply curve change, we can analyze what will happen to price and what will happen to quantity.

1. The decrease in demand = increase in supply

When the decrease in demand is equal to an increase in supply, although the demand and supply curves move in opposite directions, the size of their shifts is effectively the same. As a result, the equilibrium quantity remains the same but the equilibrium price falls.

• The decrease in demand > increase in supply

When the decrease in demand is greater than the increase in supply, the relative shift of the demand curve is proportionately more than the supply curve. Effectively, both the equilibrium quantity and price fall.

• The decrease in demand < decrease in supply

When the decrease in demand is less than the decrease in supply, in which the decrease in demand is smaller than the decrease in supply, the leftward shift of the demand curve is less than the leftward shift of the supply curve. Notably, there is a rise in equilibrium price accompanied by a fall in equilibrium quantity.

• The decrease in demand < increase in supply

A decrease in demand while increase in supply will cause the equilibrium price to fall;

• The increase in demand = increase in supply

If the increase in both demand and supply is exactly equal, there occurs a proportionate shift in the demand and supply curve. Consequently, the equilibrium price remains the same. However, the equilibrium quantity rises.

• Increase in demand < decrease in supply

If the increase in demand is less than the decrease in supply, the shift of the demand curve tends to be less than that of the supply curve. Effectively, the equilibrium quantity falls whereas the equilibrium price rises.

• The increase in demand > increase in supply

In such a case, where an increase in demand is greater than the increase in supply, the right shift of the demand curve is more relative to that of the supply curve. Effectively, both equilibrium price and quantity tend to increase.

Conclusion:

An increase in supply, all other things unchanged, will cause the equilibrium price to fall; the quantity demanded will increase. A decrease in supply will cause the equilibrium price to rise; the quantity demanded will decrease.

A decrease in demand will cause the equilibrium price to fall; the quantity supplied will decrease. An increase in supply, all other things unchanged, will cause the equilibrium price to fall; the quantity demanded will increase. A decrease in supply will cause the equilibrium price to rise; the quantity demanded will decrease.

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