pg-15
Demand Out, Supply Back leads to Price increase, Quantity indeterminate

Suppose that due to the increasing popularity of DVD players, the demand for digital video cameras that record directly to DVD increases (shifts out). We know that an increase in demand causes equilibrium price and quantity to rise. At the same time, suppose that DVD burning hardware becomes more expensive, causing the supply curve for these video cameras to shift back. We know that a shift back in supply causes equilibrium price to rise and quantity to fall. These two shifts both cause price to rise, but they have opposite effect of one another on quantity so we know that price will increase, though the effect on quantity is indeterminate.

On the graph to the right we show demand shifting out due to the increasing popularity of DVD recording video cameras, while at the same time supply is shifting back due to the rising cost of inputs into the manufacture of these cameras. Equilibrium price increases from to . This large increase in price is what we expected. In this instance, equilibrium quantity does not change noticeably.

The new equilibrium quantity , and the original quantity, , are nearly equal, to remind us that the change in equilibrium quantity is indeterminate.

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