Economics, 3rd Edition

A Shift in Both Supply and Demand (i)

Here we observe a simultaneous increase in demand and decrease in supply. Two outcomes are possible. In panel (a), the equilibrium 

price rises from P

1

 to P

2

, and the equilibrium quantity rises from Q

1

 to Q

2

. In panel (b), the equilibrium price again rises from P

1

 to P

2

, but 

the equilibrium quantity falls from Q

1

 to Q

2

.

A

S

S

hi

hi

f

ft

i

i

B

B

h

th

S

S

FIGURE 3.10

Price of milk

per litre (

€)

Price of milk

per litre (

€)

Quantity of milk

bought

and sold (litres)

Quantity of milk

bought

and sold (litres)

(a) Price rises, quantity rises

(b) Price rises, quantity falls

New

equilibrium

New

equilibrium

Initial equilibrium

Initial

equilibrium

0

0

P

2

P

1

P

2

P

1

Q

1

D

1

D

1

S

1

S

1

S

2

S

2

D

2

D

2

Q

2

Q

2

Q

1

Large

increase in

demand

Small

decrease

in supply

Large

decrease

in supply

Small

increase in

demand

Example: A Change in Both Supply and Demand (ii) 

We are now going to look at a slightly different 

scenario but with both supply and demand changing together. Assume that forecasters have predicted 

a heatwave for some weeks. We know that the hot weather is likely to increase demand for milk and so 

the demand curve will shift to the right. However, sellers’ expectations that sales of milk will increase as 

a result of the forecasts mean that they take steps to expand production of milk. This would lead to a shift 

of the supply curve to the right – more milk is now offered for sale at every price. To analyse this particular 

combination of events, we again follow our three steps:

1. 

We determine that both curves must shift. The hot weather affects the demand curve because it alters 

the amount of milk that consumers want to buy at any given price. At the same time, the expectations 

of producers alter the supply curve for milk because they change the amount that firms want to sell at 

any given price.

2. 

Both demand and supply curves shift to the right: Figure 3.11 illustrates these shifts.

3. 

As Figure 3.11 shows, there are three possible outcomes that might result, depending on the relative 

size of the demand and supply shifts. In panel (a), where demand increases substantially while supply 

rises just a little, the equilibrium price and quantity rises. By contrast, in panel (b), where supply rises 

substantially while demand rises just a little, the equilibrium price falls but the equilibrium quantity 

rises. In panel (c) the increases in demand and supply are identical and so equilibrium price does not 

change. Equilibrium quantity will increase, however. Thus, these events have different effects on the 

price of milk although the amount bought and sold in each case is higher. In this instance the effect on 

price is ambiguous.

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66  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK