Page 116 - Krugmans Economics for AP Text Book_Neat

figure 7.3 Simultaneous Shifts of the Demand and Supply Curves

(a) One Possible Outcome: (b) Another Possible Outcome:
Price Rises, Quantity Rises Price Rises, Quantity Falls
Price Price
of Small of Large decrease S
coffee decrease S 2 S 1 coffee in supply 2
in supply
S 1
E 2 E 2
P 2 P 2

Small
E 1 increase
E 1 P in demand
P 1 1

D 2
D 1 D
Large increase 2
in demand D 1

Q 1 Q 2 Quantity of coffee Q 2 Q 1 Quantity of coffee

In panel (a) there is a simultaneous rightward shift of the demand simultaneous rightward shift of the demand curve and leftward
curve and leftward shift of the supply curve. Here the increase in shift of the supply curve. Here the decrease in supply is larger than
demand is larger than the decrease in supply, so the equilibrium the increase in demand, so the equilibrium price rises and the
price and equilibrium quantity both rise. In panel (b) there is also a equilibrium quantity falls.

and the equilibrium quantity rises as a result. In panel (b), the decrease in supply is large
relative to the increase in demand, and the equilibrium quantity falls as a result. That is,
when demand increases and supply decreases, the actual quantity bought and sold can
go either way, depending on how much the demand and supply curves have shifted.
In general, when supply and demand shift in opposite directions, we can’t predict
what the ultimate effect will be on the quantity bought and sold. What we can say is
that a curve that shifts a disproportionately greater distance than the other curve will
have a disproportionately greater effect on the quantity bought and sold. That said, we
can make the following prediction about the outcome when the supply and demand
curves shift in opposite directions:
■ When demand increases and supply decreases, the equilibrium price rises but the
change in the equilibrium quantity is ambiguous.
■ When demand decreases and supply increases, the equilibrium price falls but the
change in the equilibrium quantity is ambiguous.
But suppose that the demand and supply curves shift in the same direction. This
was the case in the global market for coffee beans, in which both supply and demand
increased over the past decade. Can we safely make any predictions about the changes
in price and quantity? In this situation, the change in quantity bought and sold can be
predicted but the change in price is ambiguous. The two possible outcomes when the
supply and demand curves shift in the same direction (which you should check for
yourself) are as follows:
■ When both demand and supply increase, the equilibrium quantity increases but the
change in equilibrium price is ambiguous.
■ When both demand and supply decrease, the equilibrium quantity decreases but the
change in equilibrium price is ambiguous.

74 section 2 Supply and Demand