ECO 1002 - Effect of Change(s) in Demand and/or Supply on Market Equilibrium (Practice Flashcards)

Shifts in the Demand Curve (Change in Demand)

• Changes in demand cause the entire demand curve to shift.

  • Increase in Demand (Rightward Shift):

    • Creates a temporary shortage at the original price.

    • Leads to an increase in both equilibrium price and quantity: P^* \uparrow, \quad Q^* \uparrow.

  • Decrease in Demand (Leftward Shift):

    • Creates a temporary surplus at the original price.

    • Leads to a decrease in both equilibrium price and quantity: P^* \downarrow, \quad Q^* \downarrow.

Shifts in the Supply Curve (Change in Supply)

• Changes in supply cause the entire supply curve to shift.

  • Increase in Supply (Rightward Shift):

    • Creates a temporary surplus at the original price.

    • Leads to a decrease in equilibrium price and an increase in equilibrium quantity: P^* \downarrow, \quad Q^* \uparrow.

  • Decrease in Supply (Leftward Shift):

    • Creates a temporary shortage at the original price.

    • Leads to an increase in equilibrium price and a decrease in equilibrium quantity: P^* \uparrow, \quad Q^* \downarrow.

Simultaneously Shifts in Both Demand and Supply Curves

• When both curves shift, the effect on equilibrium price (P^*) or quantity (Q^*) can be indeterminate unless one shift is significantly larger.

  • Increase in Demand & Increase in Supply:

    • Equilibrium quantity rises (Q^* \uparrow).

    • Equilibrium price is indeterminate (P^* \uparrow\downarrow).

  • Decrease in Demand & Decrease in Supply:

    • Equilibrium quantity falls (Q^* \downarrow).

    • Equilibrium price is indeterminate (P^* \downarrow\uparrow).

  • Increase in Demand & Decrease in Supply:

    • Equilibrium price rises (P^* \uparrow).

    • Equilibrium quantity is indeterminate (Q^* \uparrow\downarrow).

  • Decrease in Demand & Increase in Supply:

    • Equilibrium price falls (P^* \downarrow).

    • Equilibrium quantity is indeterminate (Q^* \downarrow\uparrow).