Question

13. How shifts in demand and supply affect equilibrium

Consider the market for pens. Suppose that increased medical concerns over lead pencils have led schools to steer away from pencil use in favor of pens. Moreover, the price of plastic, an important input in pen production, has increased considerably.

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

Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.

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, you can always determine the effect on price and quantity without knowing the magnitude of the shifts. 

• True 

• False
  

Answer 1

Increased medical concern over lead pencils and shift of preferences of school towards pens will lead to an INCREASE in demand and hence demand curve will shift of the RIGHT.

Price of plastic has increased hence the cost of producing a pen will rise and hence supply of pens will DECREASE and supply curve will shift to the LEFT.

Scenario 1: shift in supply curve is more than the shift in the demand curve.

Scenario 2: shift in demand curve is more than the shift in supply curve.

The magnitude of shift has to be given to be able to determine the effect on BOTH price and quantity after the change.

Let me know if you have any doubts :)