Which of the following will occur when there is a simultaneous increase in demand and an increase in supply?

Demand and Supply models are very easy to use, when there is a change in either demand or supply. However, in reality, there are number of situations which lead to simultaneous changes in both demand and supply.

(I) Both Demand and Supply decrease

(II) Both Demand and Supply increase

(III) Demand decreases and Supply increases

(IV) Demand increases and Supply decreases

Let’s relate this to ridesharing businesses — Uber, Lyft, Ola — where the simultaneous shifts are seen in action. In the case of ridesharing businesses, the demand is the number of riders (Q) and the supply is the number of drivers (S).

(I) Both Demand and Supply Decrease:

Original Equilibrium is determined at point E, when the original demand curve DD and the original supply curve SS intersect each other. OQ is the equilibrium quantity and OP is the equilibrium price. The effect of decrease in both demand and supply on equilibrium price and equilibrium quantity can be better analyzed under three different cases:

Case 1: Decrease in Demand = Decrease in Supply:

When decrease in demand is proportionately equal to decrease in supply, then leftward shift in demand curve from D to D¹ is proportionately equal to leftward shift in supply curve from SS to S¹S¹ . The new equilibrium is determined at E¹ As demand and supply decrease in the same pro­portion, equilibrium price remains same at OP, but equilibrium quantity falls from OQ to OQ¹.

Impact: No change in Price for Riders. No change in Earnings for Drivers

Case 2: Decrease in Demand > Decrease in Supply:

When decrease in demand is proportionately more than decrease in supply, then leftward shift in demand curve from D to D¹ is proportionately more than leftward shift in supply curve from S to S¹. The new equilibrium is determined at E¹, equilibrium price falls from OP to OP¹ and equilibrium quantity falls from OQ to OQ¹.

Impact: Drop in Price for Riders. Drop Earnings for Drivers

Case 3: Decrease in Demand < Decrease in Supply:

When decrease in demand is proportionately less than decrease in supply, then leftward shift in demand curve from D to D¹ is proportionately less than leftward shift in supply curve from S to S¹. The new equilibrium is determined at E¹ equilibrium price rises from OP to OP¹ whereas, equilibrium quantity falls from OQ to OQ¹.

Impact: Increase in Price for Riders. Increase in Earnings for Drivers

(II) Both Demand and Supply Increase:

Original Equilibrium is determined at point E, when the original demand curve DD and the original supply curve SS intersect each other. OQ is the equilibrium quantity and OP is the equilibrium price. The effect of increase in both demand and supply on equilibrium price and equilibrium quantity is discussed under three different cases:

Case 1: Increase in Demand = Increase in Supply:

When increase in demand is proportionately equal to increase in supply, then rightward shift in demand curve from D to D1 is proportionately equal to rightward shift in supply curve from S to S¹. The new equilibrium is determined at E¹. As both demand and supply increase in the same proportion, equilibrium price remains the same at OP, but equilibrium quantity rises from OQ to OQ¹.

Impact: No change in Price for Riders. No change in Earnings for Drivers

Case 2: Increase in Demand > Increase in Supply:

When increase in demand is proportionately more than increase in supply then rightward shift in demand curve from D to D¹ is proportionately more than rightward shift in supply curve from SS to S1S1. The new equilibrium is determined at E1equilibrium price rises from OP to OP¹ and equilibrium quantity rises from OQ to OQ¹.

Impact: Increase in Price for Riders. Increase in Earnings for Drivers

Case 3: Increase in Demand < Increase in Supply:

When increase in demand is proportionately less than increase in supply, then rightward shift in demand curve from D to D¹ is proportionately less than rightward shift in supply curve from S to S¹. The new equilibrium is determined at E¹ equilibrium price falls from OP to OP¹ whereas, equilibrium quantity rises from OQ to OQ¹.

Impact: Decrease in Price for Riders. Decrease in Earnings for Drivers

(III) Demand decreases and Supply increases:

The effect of simultaneous decrease in demand and increase in supply on equilibrium price and equilibrium quantity is analyzed in the following three cases:

Case 1: Decrease in Demand = Increase in Supply:

Impact: Decrease in Price for Riders. Decrease in Earnings for Drivers

Case 2: Decrease in Demand > Increase in Supply:

Impact: Greater decrease in Price for Riders. Greater decrease in Earnings for Drivers

(IV) Demand increases and Supply decreases:

The effect of increase in demand and decrease in supply on equilibrium price and equilibrium quantity is discussed in the following three cases:

Case 1: Increase in demand = Decrease in supply:

Impact: Increase in Price for Riders. Increase in Earnings for Drivers

Case 2: Increase in Demand > Decrease in Supply:

Impact: Greater increase in Price for Riders. Greater increase in Earnings for Drivers

Case 3: Increase in Demand < Decrease in Supply:

Impact: Increase in Price for Riders. Increase in Earnings for Drivers

In this article, we just looked at the different possibilities of changes in supply and demand, and the impact on the pricing and earnings. In the next article, we look at levers such as surge pricing and incentives, which act as levers to adjust both supply and demand.