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Lesson · Economics

When demand and supply both shift

Both curves move in the question, and you are unsure what you are allowed to say about price.

When demand and supply both shift, one of price and quantity is usually certain and the other depends on how big each shift is. A good answer states the certain result and explains why the other cannot be fixed from the information given.

This lesson belongs to price mechanism with more than one change. Start from distinguishing a movement along demand from a shift if the two terms still blur.

Which result is certain?

Work out the effect of each shift separately on price and on quantity. Where the two effects point the same way, the result is certain. Where they point in opposite ways, the result depends on the sizes of the shifts.

Shifts Price Quantity
Demand up, supply up Uncertain Rises
Demand up, supply down Rises Uncertain
Demand down, supply up Falls Uncertain
Demand down, supply down Uncertain Falls

Worked example: same directions, different answers

A fictional market for fresh mangoes has demand Qd = 120 − 10P and supply Qs = 20 + 10P, where P is in RM per kilogram and quantity is in tonnes. Setting Qd = Qs gives 120 − 10P = 20 + 10P, so P = 5 and Q = 70.

A festival raises demand by 30 tonnes at every price, so Qd = 150 − 10P. At the same time, a good harvest raises supply. The question does not say by how much, so take two cases.

Case 1: supply rises by 10. Qs = 30 + 10P.

Set 150 − 10P = 30 + 10P, so 20P = 120 and P = 6. Quantity is 150 − 60 = 90. Check in supply: 30 + 60 = 90.

Case 2: supply rises by 50. Qs = 70 + 10P.

Set 150 − 10P = 70 + 10P, so 20P = 80 and P = 4. Quantity is 150 − 40 = 110. Check in supply: 70 + 40 = 110.

In both cases demand and supply increased and quantity rose above 70. But price rose from RM5 to RM6 in Case 1 and fell to RM4 in Case 2. The directions of the shifts did not fix the price. Their sizes did.

What a full-mark sentence looks like

For the mango market, a careful answer reads: “Both demand and supply increase, so equilibrium quantity rises. The rise in demand raises price and the rise in supply lowers price. Without knowing which shift is larger, the change in price cannot be stated.”

This answer names the certain result, gives both opposing effects and explains why the last step is not possible. It is better than a confident guess that happens to be wrong for the question’s actual numbers.

The mistake that costs marks

The usual slip is to draw two shifts and read the new price from the diagram as if the shifts had sizes. The pencil lines happen to cross somewhere, and the student writes “price rises”.

The fix: if the question gives no sizes, draw the shifts roughly equal, then say in words that the result for the uncertain variable depends on the sizes. If the question does give figures, use them and verify both equations give the same quantity.

Check yourself

In the same mango market, a disease reduces supply by 30 tonnes at every price (Qs = −10 + 10P) while demand stays at the original Qd = 120 − 10P. Find the new equilibrium, then state what happens if demand also rises by 30 at the same time (Qd = 150 − 10P).

Answer

Only supply falls: 120 − 10P = −10 + 10P, so 20P = 130 and P = 6.5. Quantity is 120 − 65 = 55. Check in supply: −10 + 65 = 55. Price rises to RM6.50 and quantity falls to 55 tonnes.

With both shifts: 150 − 10P = −10 + 10P, so 20P = 160 and P = 8. Quantity is 150 − 80 = 70. Price rises to RM8, which is certain for demand up and supply down. Quantity is 70, the same as the original, but in general it would be uncertain without the figures.

What to study next

Practise reading the original diagram against a calculation in checking an equilibrium calculation against the original diagram. Use the supply-demand diagram reasoning explorer to test other pairs of shifts.

For a teacher to check your certain-versus-uncertain wording, see online one-to-one Economics tuition.

Common questions

Why can I not say what happens to price when demand and supply both increase?

Demand rising pushes price up, while supply rising pushes it down. The final price depends on which shift is larger, and the question may not give the sizes. Quantity, however, rises under both, so it is certain.

Is it wrong to write 'price is uncertain' in an answer?

No, if you explain why. State that the two effects on price work in opposite directions and that the result depends on the relative sizes of the shifts. That shows the reasoning the marker looks for.

What if the question gives the sizes of the shifts?

Then you can often decide. Use the sizes to work out the new equilibrium, as in the numbered example, or compare the shifts on the diagram. Always base the conclusion on what the question supplies.

Do I draw both shifts on one diagram?

Yes, on the same axes, with labelled old and new curves and both equilibrium points. Draw each shift in its own direction, then read price and quantity from the new intersection.

If you tend to state one firm answer where the diagram only supports a partial one, a one-to-one teacher can practise the careful wording with you until it becomes automatic.

  • Online one-to-one lessons for your child with an experienced teacher.
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