Question
When will $(a)$ simultaneous increase and $(b)$ simultaneous decrease in both demand and supply, not affect the equilibrium price? Explain with the help of diagrams.
✓
Answer
Case I: (When both demand and supply of a commodity simultaneously increase) When both demand and supply of a commodity increase in equal proportion, then there is no change in equilibrium price but the equilibrium quantity will increase.
In the diagram, supply increases, so, the supply curve shifts from $SS$ to $S_1S_1$ and demand increases, so, the demand curve shifts from $DD$ to $D_1D_1$ Both demand and supply increase in equal proportion, therefore equilibrium price remains unchanged at $OP$ but equilibrium quantity increases from $OQ$ to $OQ_1$. Case II: (When both demand and supply of a commodity simultaneously decrease). When both demand and supply of a commodity decrease in equal proportion, then there is no change in equilibrium price but the equilibrium quantity will decrease.
In the diagram, supply decreases, so, the supply curve shifts from $SS$ to $S_0S_0$ and demand decreases, so, the demand curve shifts from $DD$ to $D_0D_0$. Both demand and supply decrease in equal proportion, therefore, the equilibrium price remains unchanged at $OP$ but the equilibrium quantity decreases from $OQ$ to $OQ_0$.
In the diagram, supply increases, so, the supply curve shifts from $SS$ to $S_1S_1$ and demand increases, so, the demand curve shifts from $DD$ to $D_1D_1$ Both demand and supply increase in equal proportion, therefore equilibrium price remains unchanged at $OP$ but equilibrium quantity increases from $OQ$ to $OQ_1$. Case II: (When both demand and supply of a commodity simultaneously decrease). When both demand and supply of a commodity decrease in equal proportion, then there is no change in equilibrium price but the equilibrium quantity will decrease.
In the diagram, supply decreases, so, the supply curve shifts from $SS$ to $S_0S_0$ and demand decreases, so, the demand curve shifts from $DD$ to $D_0D_0$. Both demand and supply decrease in equal proportion, therefore, the equilibrium price remains unchanged at $OP$ but the equilibrium quantity decreases from $OQ$ to $OQ_0$.
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