Question

Explain the effect of a simultaneous increase in both demand and supply on equilibrium price and quantity.

Answer 1

• When both demand and supply increase simultaneously, the equilibrium quantity in the market will definitely increase, but the effect on equilibrium price depends on the relative magnitude of the increase in demand and supply.
• If demand and supply increase by the same proportion, the increase in demand is exactly matched by the increase in supply. As a result, the equilibrium price remains unchanged, but the equilibrium quantity increases.
• However, if the increase in demand is greater than the increase in supply, there will be excess demand at the original price, pushing the price upward and increasing the equilibrium quantity.
• On the other hand, if the increase in supply is greater than the increase in demand, it leads to excess supply at the original price, which causes the price to fall, though the equilibrium quantity still increases.
• Thus, when both demand and supply increase, the equilibrium quantity always rises, but the equilibrium price may rise, fall, or remain unchanged, depending on which force is stronger.