5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

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

“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

Quantity

Price $

Oil S^2

60

P 2

D 1

Q 2

shortage

S 1

Q 1

Figure 6.11

• 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 wilderness

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 $

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

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