Question

13. How shifts in demand and supply affect equilibrium

Consider the market for pens. Suppose that a new educational study has proven that the practice of writing, erasing, and rewriting improves students' ability to process information, leading parents to steer away from pen use in favor of pencils. Moreover, the price of ink, an important input in pen production, has dropped considerably.

On the following graph, labeled Scenario 1, indicate the effect these two events have on the demand for and supply of pens.

Next, complete the following graph, labeled Scenario 2, by shifting the supply and demand curves in the same way that you did on the Scenario 1 graph.

Compare both the Scenario 1 and Scenario 2 graphs. Notice that after completing both graphs, you can now see a difference between them that wasn't apparent before the shifts because each graph indicates different magnitudes for the supply and demand shifts in the market for pens.

Use the results of your answers on both the Scenario 1 and Scenario 2 graphs to complete the following table. Begin by indicating the overall change in the equilibrium price and quantity after the shift in demand or supply for each shift-magnitude scenario. Then, in the final column, indicate the resulting change in the equilibrium price and quantity when supply and demand shift in the direction you previously indicated on both graphs. If you cannot determine the answer without knowing the magnitude of the shifts, choose Cannot determine.

True or False: When both the demand and supply curves shift, the curve that shifts by the larger magnitude determines the effect on the undetermined equilibrium object.

Answer 1

Decrease in price of ink increases supply of pens as cost of production of firm decreases. This shifts supply curve rightwards.

Demand of pens decreases when study shows erasing and writing is good for student. This shifts demand curve leftwards.

True.

Equilibrium quantity is determined by the larger shift of curve.