Question

What would be the effect on equilibrium price when demand and supply increase by the same magnitude?

Answer 1

When demand and supply increase in the same proportion, equilibrium price remains the same.

The figure above illustrates this circumstance. DD represents the initial demand curve, and SS represents the initial supply curve. The initial equilibrium is at E; OP is the equilibrium price, and OQ is the equilibrium quantity. When demand rises, the demand curve shifts to D₁D₁, while the supply curve changes to S_lS_l due to supply growth. In this case, an increase in demand equals a rise in supply. Equilibrium moves to E₁, which is the intersection of the demand curve DP₁ and the supply curve S_lS_l. Equilibrium quantity rises from OQ to OQ₁, but price remains constant at OP.