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Simultaneous changes in demand and supply

So far, we have discussed the effect of changes, either in demand or supply, on the equilibrium price and quantity. Now, we move to a situation when both, demand and supply increase or decrease at the same time.
 
We can study this under six broad categories:
  • If demand and supply increase in the same proportion
  • ƒIf demand and supply decrease in the same proportion
  • ƒIf the increase in demand is more than the increase in supply
  • ƒIf the decrease in demand is more than the decrease in supply
  • ƒIf the increase in demand is lesser than the increase in supply
  • ƒthe decrease in demand is lesser than the decrease in supply

If demand and supply increase in the same proportion

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When the increase in demand is equal to the increase in supply, the equilibrium price remains the same but the quantity increases.

If demand and supply decrease in the same proportion

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When the decrease in demand is equal to the decrease in supply, the equilibrium price remains the same but the quantity decreases.

If the increase in demand is more than the increase in supply

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When the demand increases in a greater proportion in relation to the increase in supply, then the equilibrium price increases from OP to OP’ and the equilibrium quantity increases from OQ to OQ’. This is because, when supply does not increase in the same proportion with demand, then, there will be a short supply which will lead to an increase in price and due to the increase in price, the demand will fall to some extent and demand will reach a new equilibrium point at E’ where demand will be equal to supply.
 
Thus, the increase in quantity is more than the increase in price.

If the decrease in demand is more than the decrease in supply

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If the fall in demand is greater than the fall in supply, then the equilibrium price will decrease. This is because, when supply decreases in a greater proportion than demand, then there will be supply in excess of demand which will lead to a decrease in the price and due to the decrease in the price, demand will rise to some extent and demand reach a new equilibrium point at E’, where demand will be equal to supply.
 
Thus, the decrease in quantity is more than the decrease in the price.

If the increase in demand is lesser than the increase in supply

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When the supply increases in a greater proportion in relation to the increase in demand, then the equilibrium price decreases from OP to OP” and the equilibrium quantity increases from OQ to OQ”. This is because, when supply increases in a greater proportion than that of demand, then there will be a fall in price, due to which there will be an increase in demand and demand reaches a new equilibrium at E’, where demand will be equal to supply.
 
Therefore, the increase in quantity is more than the fall in price.

If decrease in demand is lesser than the decrease in supply

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If the supply decreases in a greater proportion in relation to the decrease in demand, the equilibrium price will increase. This is because, there will be a rise in price due to which there will be a decrease in demand and demand reaches a new equilibrium at E’, where demand will be equal to supply.
 
Thus, the increase in quantity is lesser than the fall in price.




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