Identify which outcome is certain and which depends on the relative effects of the shifts.
Work out each shift alone. If both push an outcome in the same direction, that direction is certain under the model. If they oppose each other, you need their relative effects to settle the result. For demand rising and supply falling, price rises but quantity is uncertain. Different possible quantities can be consistent with the same directions of shift.
- Work through each shift separately
- What would it do to price? What would it do to quantity?
- Effects agree
- That outcome moves in their shared direction.
- Effects oppose
- The result depends on their relative effects, including how the curves respond. Uncertain does not mean unchanged.
Deciding which outcome is certain
Consider each shift separately
First ask what the demand change would do with supply unchanged. Then ask what the supply change would do with demand unchanged. Compare their effects on price and on quantity separately.
Effects in the same direction
If both changes raise an outcome, it rises; if both lower it, it falls. For example, demand increasing and supply decreasing both raise equilibrium price.
Effects in opposite directions
The outcome may rise, fall or stay unchanged. You need enough information about the relative effects of the shifts and how buyers and sellers respond to price. Counting causes or comparing arbitrary distances on a sketch does not settle the result.
Uncertain does not mean unchanged
If demand and supply both increase, quantity rises, but price could move either way or remain the same. Draw alternative cases if the question asks you to explain why a single price conclusion cannot be made.
| Demand change | Supply change | Equilibrium price | Equilibrium quantity |
|---|---|---|---|
| Increases (right) | Increases (right) | Uncertain: may rise, fall or stay unchanged | Rises |
| Decreases (left) | Decreases (left) | Uncertain: may rise, fall or stay unchanged | Falls |
| Increases (right) | Decreases (left) | Rises | Uncertain: may rise, fall or stay unchanged |
| Decreases (left) | Increases (right) | Falls | Uncertain: may rise, fall or stay unchanged |
Worked example: A popular drink with a costly ingredient
A drink becomes more popular while an ingredient shortage raises its production cost. Initially 100 drinks sell at $5. Assume ordinary downward-sloping demand and upward-sloping supply.
- Greater popularity shifts demand right: considered alone, equilibrium price and quantity rise.
- Higher production cost shifts supply left: considered alone, equilibrium price rises and quantity falls.
- Both price effects point up. The quantity effects oppose each other, so quantity may rise, fall or remain unchanged.
- For illustration, 120 drinks at $6 gives $720 revenue, while 70 at $6 gives $420. Both are possible outcomes for different relative shifts; higher price alone does not settle revenue.
Watch out for this
Demand rises and supply falls, so price and quantity both rise.
The price conclusion works, but the quantity conclusion ignores the supply contraction. State what extra information about relative effects is needed.
Check your understanding
Demand and supply both increase. Their relative effects are not given. Which conclusion follows?
- Price and quantity definitely rise.
- Price definitely falls; quantity is uncertain.
- Quantity rises; price may rise, fall or stay unchanged.