Changes in Equilibrium with Multiple Curve Shifts

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Analyzing Changes in Market Equilibrium

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While analyzing changes in a supply and demand equilibrium is fairly straightforward when there is only a single shock to either supply or demand, it is often the case that multiple factors affect markets at the same time. Therefore, it's important to think about how market equilibrium changes in response to multiple shifts in supply and demand as well.

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Shifts of the Same Curve in the Same Direction

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When multiple changes in an environment only affect either supply or demand, analyzing changes in equilibrium requires almost no modification to the basic procedure. For example, multiple factors that all serve to increase supply can be thought of as a single (larger) increase in supply, and multiple factors that all serve to decrease supply can be thought of as a single (larger) decrease in supply.  Therefore, multiple supply increases will decrease the equilibrium price in a market and increase the equilibrium quantity, and multiple supply decreases will increase the equilibrium price in a market and decrease the equilibrium quantity.

03
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Shifts of the Same Curve in the Same Direction

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Similarly, multiple factors that all serve to increase demand can be thought of as a single (larger) increase in demand, and multiple factors that all serve to decrease demand can be thought of as a single (larger) decrease in demand. Therefore, multiple demand increases will increase the equilibrium price in a market and increase the equilibrium quantity, and multiple demand decreases will decrease the equilibrium price in a market and decrease the equilibrium quantity.

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Shifts of the Same Curve in Opposite Directions

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When shifts of a curve work in opposite directions, the overall effect depends on which of the shifts is larger.  For example, a larger supply increase coupled with a smaller supply decrease will look like an overall increase in supply, as shown in the diagram on the left.  This will result in a decrease in equilibrium price and an increase in equilibrium quantity.  On the other hand, a smaller supply increase coupled with a larger supply decrease will look like an overall decrease in supply, as shown in the diagram on the right.  This will result in an increase in equilibrium price and a decrease in equilibrium quantity.

05
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Shifts of the Same Curve in Opposite Directions

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Similarly, a larger demand increase coupled with a smaller demand decrease will look like an overall increase in demand, as shown in the diagram on the left.  This will result in an increase in equilibrium price and an increase in equilibrium quantity.  On the other hand, a smaller demand increase coupled with a larger demand decrease will look like an overall decrease in demand, as shown in the diagram on the right.  This will result in a decrease in equilibrium price and a decrease in equilibrium quantity.

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An Increase in Demand and an Increase in Supply

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The overall effect on equilibrium price and quantity also depends on which shift is bigger when changes in a market environment affect both supply and demand. Consider, as a first case, an increase in supply and an increase in demand. The overall effect on equilibrium price and quantity can be thought of as the sum of the effects of the individual curve shifts:

  • Supply increase: price down, quantity up
  • Demand increase: price up, quantity up

Clearly, the sum of two increases in equilibrium quantity results in an overall increase in equilibrium quantity. The effect on equilibrium price, however, is ambiguous, since the overall effect of a decrease plus an increase depends on which of the changes is larger. If the supply increase is bigger than the demand increase (left diagram), there will be an overall decrease in equilibrium price, but if the demand increase is bigger than the supply increase (right diagram), an overall increase in equilibrium price will result.

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An Increase in Demand and a Decrease in Supply

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Now consider an increase in supply and a decrease in demand. The overall effect on equilibrium price and quantity can be thought of as the sum of the effects of the individual curve shifts:

  • Supply increase: price down, quantity up
  • Demand decrease: price down, quantity down

Clearly, the sum of two decreases in equilibrium price results in an overall decrease in equilibrium price. The effect on equilibrium quantity, however, is ambiguous, since the overall effect of an increase plus a decrease depends on which of the changes is larger. If the supply increase is bigger than the demand decrease (left diagram), there will be an overall increase in equilibrium quantity, but if the demand decrease is bigger than the supply increase (right diagram), an overall decrease in equilibrium quantity will result.

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A Decrease in Demand and an Increase in Supply

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Now consider a decrease in supply and an increase in demand. The overall effect on equilibrium price and quantity can be thought of as the sum of the effects of the individual curve shifts:

  • Supply decrease: price up, quantity down
  • Demand increase: price up, quantity up

Clearly, the sum of two increases in equilibrium price results in an overall increase in equilibrium price. The effect on equilibrium quantity, however, is ambiguous, since the overall effect of a decrease plus an increase depends on which of the changes is larger. If the supply decrease is bigger than the demand increase (left diagram), there will be an overall decrease in equilibrium quantity, but if the demand increase is bigger than the supply decrease (right diagram), an overall increase in equilibrium quantity will result.

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A Decrease in Demand and a Decrease in Supply

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Now consider a decrease in supply and a decrease in demand. The overall effect on equilibrium price and quantity can be thought of as the sum of the effects of the individual curve shifts:

  • Supply decrease: price up, quantity down
  • Demand decrease: price down, quantity down

Clearly, the sum of two decreases in equilibrium quantity results in an overall decrease in equilibrium quantity. The effect on equilibrium price, however, is ambiguous, since the overall effect of an increase plus a decrease depends on which of the changes is larger. If the supply decrease is bigger than the demand decrease (left diagram), there will be an overall increase in equilibrium price, but if the demand decrease is bigger than the supply decrease (right diagram), an overall decrease in equilibrium price will result.

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Changes in Equilibrium with Multiple Curve Shifts

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The impact of changes in both supply and demand are summarized in the table above. As before, it's not necessary to memorize these effects, since it's fairly simple to draw diagrams like the ones previously shown when needed. It is, however, necessary to remember that the effect on either price or quantity (or both, when there are multiple shifts of the same curve) can be ambiguous when multiple shifts of the supply and demand curves are present.

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Your Citation
Beggs, Jodi. "Changes in Equilibrium with Multiple Curve Shifts." ThoughtCo, Mar. 28, 2017, thoughtco.com/changes-in-equilibrium-with-multiple-curve-shifts-1146930. Beggs, Jodi. (2017, March 28). Changes in Equilibrium with Multiple Curve Shifts. Retrieved from https://www.thoughtco.com/changes-in-equilibrium-with-multiple-curve-shifts-1146930 Beggs, Jodi. "Changes in Equilibrium with Multiple Curve Shifts." ThoughtCo. https://www.thoughtco.com/changes-in-equilibrium-with-multiple-curve-shifts-1146930 (accessed May 23, 2018).