Question 1

If both demand and supply shift, can't both price and quantity be indeterminate?

Accepted Answer

No. In any simultaneous shift scenario, the effect on one variable (either price or quantity) will be certain, while the effect on the other will be indeterminate. This is because for one variable, both shifts will be pushing it in the same direction (e.g., both an increase in demand and an increase in supply put upward pressure on quantity). The ambiguity only arises for the variable that is being pushed in opposite directions by the two shifts.

Question 2

Does the market always return to equilibrium automatically?

Accepted Answer

In a theoretical free market, the price mechanism creates powerful tendencies for the market to move towards equilibrium. However, in reality, this process can be slow due to factors like imperfect information or 'sticky' prices. Furthermore, government intervention (e.g., imposing price ceilings or floors) can explicitly prevent the market from reaching its equilibrium. The market is also constantly adjusting to new shifts, so it is often chasing a moving equilibrium target.

Question 3

When analysing a simultaneous shift in an exam, do I have to draw three diagrams?

Accepted Answer

For a comprehensive analysis, especially in higher-mark essay questions, it is best practice to explain the indeterminate outcome by discussing the relative magnitudes of the shifts. The most effective way to do this is to draw a diagram for each possibility. For example, for an increase in both demand and supply, you would illustrate: 1) Demand shift > Supply shift (price rises), 2) Supply shift > Demand shift (price falls), and potentially 3) Demand shift = Supply shift (price is unchanged). This clearly demonstrates a full understanding of indeterminacy.

The interaction of demand and supply

What you need to know

The interaction of demand and supply