Equilibrium price and quantity from changes in both supply and demand

• [Instructor] Now in these bottom four, let's think about the situation where both of the curves might move. So let's first imagine a scenario where supply goes up and demand goes down. So once again, maybe a major producer is entering into the market. Supply goes up and that study comes out that ice cream is less healthy than suspected, so demand goes down. What is going to happen to your equilibrium price and quantity? Pause this video and try to figure it out.

Well, if the supply goes up, the supply curve is going to shift to the right just like we saw up here. So our supply curve is going to shift like this; so this would be S2, it's going to shift to the right and down. And so, our demand, if it goes down for a given price, people would demand less quantity. So we're shifting to the left and down. This is D2 right over here, shifted to the left and down. And so, what is our new equilibrium point, at least how we've drawn it right over here?

So, our new equilibrium point looks like this. It's clear that our price went down, so price has gone down. But what about quantity? Well, this is actually an interesting thing. Depending on how I draw it, if we don't know the exact numbers here, I could have drawn it so that the quantity might have stayed the same. I could have drawn it here, it looks like the quantity went up a little bit. But if I drew my new demand curve like this, my quantity would have gone down a little bit. So actually in this situation, price for sure is going to go down. You have more competition amongst the suppliers and there's less demand.

But it's unclear what happens to quantity, so quantity in this situation is indeterminate, we could say. Now let's go the other way around. Let's assume that supply goes down, supply goes down and demand goes up. So what would happen in that case? Pause the video and try to figure it out.

Or, if supply goes down, our supply curve is going to shift to the left and up. At a given price, we will supply less. And so, this would be S2 right over here. We're gonna shift to the left and up and our demand has gone up. At a given price, we would demand more, or at a given quantity, we would be willing to pay more. So we would shift our demand curve now, D2; we would shift to the right and up.

And our new equilibrium point, the way that I've drawn it is right over here and so, here we have P2. And then here, at least the way I've drawn it, I have Q2. My graph is getting a little bit messy, but what happened? Well, the price unambiguously goes up. It makes sense. Our supply has gone down and more people want to buy the ice cream. But what about quantity?

Well, once again, depending on how you draw it, I could make the quantity go up a little bit, I could make it stay neutral, I could make it go down. So you would actually have to know the specifics of those curves, exactly their shapes, in order to figure out what happens to quantity. You can't make a judgment just based on these general upward and downward sloping curves.

Now let's go and make both of them increase. So, let's say that both supply goes up and demand goes up. So supply going up, the curve would shift to the right and down, so that's supply two. And then demand going up, demand at a given quantity, people would be willing to pay a higher price, or at a given price, people would be willing to take on a higher quantity. So demand has gone over here, so we've shifted to the right and up.

And our new equilibrium point looks like right over there. So it's clear; it's unambiguous that our new equilibrium quantity Q2 has gone up. Q, quantity has gone up but price now is ambiguous. Depending on how I drew these curves, I could make it look like the price is the same, I could make it look like it's gone up or I could make it look like it's gone down. And so, the price here is ambiguous.

And last but not least, let's imagine a situation where they both go down, where supply goes down and demand goes down. So, supply going down will shift to the left and up. Once again, one way to think about it, at a given price, you would be willing to supply less. So that's S2 right over here. And demand, I'll do demand in a different color. It's nice to do it in a different color. If my demand has gone down, if my demand goes down, at a given price, people will demand less.

So my demand has gone down, something like that. Or at a given quantity, people would be willing to pay less. And so, my equilibrium point right over here, my equilibrium quantity Q2 has clearly gone down. That makes sense; they're supplying less and people want it less, so quantity clearly went down. Quantity goes down; but price once again is ambiguous depending on how I draw it.

I could make it look like it stays the same, I could make it go up, I can make it go down. It would depend on the particulars of those curves to actually determine what would happen to price in that situation. And of course, let's not forget to label our curves here. That was D2 in the previous example and this is D2 in that last example. The only reason why I'm making sure we do that is one, it makes it clearer.

And also, when you need to do this on something like an AP exam, it's really important that you label all of the things; the title of your chart, your equilibrium prices and quantities. You label the curves, you say the vertical axis is P, the horizontal axis is Q, and that when you have a shift, that you show that shift. And actually here, I forgot to draw that shift as well, so that you have arrows that show your shift in supply or demand.

So all of these components, make sure that you're able to draw it when you see it on say an AP exam.