Exogenous Shocks on Both Sides of the Market

© 1999-2020, Douglas A.Ruby (05-20-2020)

It is possible and common to have exogenous shocks on both sides of the market. Examples would include and increase in consumer income combined with a technological improvement. Is this case, we would expect an outward shift in demand and an outward shift in supply. We would expect an increase in both quantity demanded and quantity supplied and thus an increase in the quantity of the good being traded. However, because there is not a clear indication of whether a surplus or shortage is being created, we are uncertain about the impact on market price.

We can experiment with combined shocks of different magnitudes using the interactive diagram below. Referring to the shocks listed above, do the following:

  1. Click on the 'D++' button and the 'S++' button and press the 'New Equilibrium' button. You will notice that the equilibrium quantity has increased but there is no change to the equilibrium price. Press 'Reset'.
  2. Click on the 'D+' button and the S++' button and press 'New Equilibrium'. In this case you should observe that equilibrium quantity has increased but equilibrium price has been reduced. Press 'Reset'
  3. Click on the 'D++' button and the 'S+' button and press 'New Equilibirum'. Now, you will observe that while equilibrium quantity still has increased, the equilibrium price has also increased. Press 'Reset'

The net result of these combined shocks in a definite increase in quantity but we are uncertain about the change in equilibrium price.

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You can experiment with the following set of shocks using this interactive graph:

Market Shock(s) Button(s)
Oranges An unexpected freeze wipes out the Florida orange crop S- / S--
Automobiles An increase in gasoline prices and a decrease in the cost of capital D- / D-- and S+ / S++
First Class Postage A reduction in Internet connection fees D- / D--
Beer An increase in excise taxes and a decline in consumer preferences for alcoholic beverages. S- / S-- and D- / D--
Housing in Silicon Valley The "Dot.com" collapse and a decrease in building construction worker wages. S+ / S++ and D- / D--
Tourism (Hotels and Resorts An negotiated increase in worker wages than leads to an increase in (consumer) incomes. S- / S-- and D+ / D++

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© 1999-2020, Douglas A.Ruby (05-20-2020)