5 Steps to a 5 AP Macroeconomics 2019

68 ❯ Step 4. Review the Knowledge You Need to Score High

•    When   supply  increases,  equilibrium price   decreases   and quantity    increases.

•    When   supply  decreases,  equilibrium price   increases   and quantity    decreases.

Simultaneous Changes in Demand and Supply

When both demand and supply change at the same time, predicting changes in price and

quantity becomes a little more complicated. An example should illustrate how you need to

be careful.

An extremely cold winter results in a higher demand for energy such as natural gas. At

the same time, environmental safeguards and restrictions on drilling in protected wilder-

ness areas have limited the supply of natural gas. An increase in demand, by itself, creates

an increase in both price and quantity. However, a decrease in supply, by itself, creates

an increase in price and a decrease in quantity. When these forces are combined, we see a

double-whammy on higher prices. But when trying to predict the change in equilibrium

quantity, the outcome is uncertain and depends upon which of the two effects is larger.

One possible outcome is shown in Figure 6.12, where the initial equilibrium outcome

is labeled E 1. A relatively large increase in demand with a fairly small decrease in supply

results in more natural gas being consumed. The new equilibrium outcome is labeled E 2.

The other possibility is that the increase in demand is relatively smaller than the

decrease in supply. This is seen in Figure 6.13, and, while the price is going to increase

again, the equilibrium quantity is lower than before.

Quantity

Price $

Oil S^2

60

P 2

D 1

Q 2

shortage

S 1

Q 1

Figure 6.11

TIP

Quantity

Price $

Natural

Gas

S 2

P 1

P 2

D 1

Q 2

S 1

Q 1

E^1

D 2

E 2

Figure 6.12

“Use different-

colored pens

when drawing

multiple curves

on a single graph.

This helps keep

things clear

when you shift

many curves at a

time.” —Jake,

AP Student