Question

Changes in both demand and supply of a commodity may or may not affect its equilibrium price. Explain.

Answer 1

• When both demand and supply of a commodity change at the same time, their combined effect on equilibrium price depends on the magnitude and direction of each change. This means that while the equilibrium quantity will always be affected, the equilibrium price may or may not change. 
• If demand and supply increase by the same proportion, the equilibrium price remains constant, but the equilibrium quantity rises. However, if demand increases more than supply, the result is a rise in price. Conversely, if supply increases more than demand, the price falls.
• Similarly, when both demand and supply decrease, and the decrease is equal, price stays the same, but the equilibrium quantity falls.
• If demand falls more than supply, the price decreases, but if supply falls more than demand, the price increases.
• In some cases, demand and supply move in opposite directions.
• For example, if demand increases and supply decreases, both changes push the price upward. On the other hand, if demand decreases and supply increases, both lead to a fall in price. In these cases, the change in quantity depends on the relative strength of the shifts.

Thus, we conclude that while equilibrium quantity always changes, the equilibrium price may remain constant, increase, or decrease depending on the relative changes in demand and supply.