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40 CHAPTER 2 DEMAND AND SUPPLY ANALYSIS

Shifts in Both Supply and Demand
So far, we have focused on what happens when either the supply curve or the de-
mand curve shifts. But sometimes we can better understand the dynamics of prices
and quantities in markets by exploring what happens when both supply and demand
shift.
We return to the example of the U.S. corn market in the 2000s to illustrate this
point. Figure 2.12 shows the difference between the equilibrium in the corn market
in 2006, when the price was around $2 per bushel (point A) and in 2008, when the
price had risen to $5 per bushel (point B). As we discussed in the Introduction, the
change in the price of corn over this period can be attributed to an increase in de-
mand (driven, in particular, by the growth in the market for corn-based ethanol in
the United States) and a decrease in supply (due, in particular, to heavy rains and
flooding in the U.S. Corn Belt in 2008). The combined impact of both shifts was to
increase the equilibrium price. By contrast, the effect of these changes on equilib-
rium quantity is not clear. The increase in demand tends to push the equilibrium
quantity upward, while the increase in supply tends to push the equilibrium quantity
downward. The net impact on the equilibrium quantity would depend on the mag-
nitude of those shifts, as well as the shapes of the demand and supply curves themselves.

S S
2008 2006

Price (dollars per bushel) $5 A B

$2

D D 2008
2006
10 12
Quantity (billions of bushels per year)

FIGURE 2.12 The U.S. Corn Market, 2006–2008
The increase in price can be explained by the combined effect of a shift in supply and a
shift in demand. In particular, the demand curve shifted rightward from D 2006 to D 2008 ,
while the supply curve shifted leftward from S 2006 to S 2008 , moving the equilibrium from
point A to point B. The result was an increase in the equilibrium price from $2 per bushel
to $5 per bushel.