Wednesday, September 13, 2017

Demand & Supply Equilibrium

Demand & Supply Equilibrium
Kezia from Colorado asks me to take a shot at explaining just what the AP exam is looking for when it comes to Equilibrium.

Demand and Supply equilibrium, is with given shifts in demand and supply we can then tell what has happened to the price and quantity of a specific good.

First what we know:

Demand Decreases or Increases - What happens to the price and quantity?

When the demand shifts left (decreases) then the Price & Quantity decreases.
When demand shifts right (increases) then Price & Quantity increases.

Ok so far?

Supply Increases or Decreases   - What happens to price and quantity?

When the supply shifts right (increases) then the Price decreases & Quantity increases.
When supply shifts left (decreases) then Price increases & Quantity decreases.

Demand Increases and then Supply Increases, not once , not twice, but three times.
(Work with me, I'm trying to make a point)

Demand & Supply curve are originally in equilibrium at Point E1
The original Equilibrium point is at (E1)
Price is at PE1 
Quantity is at QE1

Demand Increases to D2

Demand Shifts Right (increases) 
Find the new equilibrium point (E2)
Price has increased to PE2 and Quantity has increased to QE2.
at this point we can say for certain that
Price has increased
Quantity has increased

 But, now Supply Increases (shifts right) to S2

Supply Shifts Right (increases) to S2
Find the new equilibrium point (E3)
Price decreases to PE3
Quantity Increases to QE3
Price originally increased to PE2 
but now decreases to PE3, so price is (Uncertain)
Quantity has definitely increased to QE3

and finally, Supply Increases again to S3

Supply Shifts right (increases) to S3
New equilibrium point is at E4
Price decreases to PE4
Quantity Increases to QE4
Price is Uncertain 
Quantity Increased

From the Demand & Supply Cheat Sheet here

Understand that you can either memorise these demand and supply shifts (not suggested) as they will not change.
So, If Demand increases and supply increases, 
then Price will be uncertain and quantity will increase.
This happens no matter how you draw the curves, close or far apart.

I suggest drawing the graphs as you read the questions, then look for the equilibrium points.

How does the AP exam test these questions.

1995 AP Exam
Answer - E

2008 AP Exam
Answer - D
Government increases tax - supply decreases
People commute longer distances - demand for gas increases