Sometimes two things happen at once: a new technology arrives just as incomes rise. Each shift alone has a clear effect (When One Curve Shifts). Together, one result is certain and the other is not.
Key idea
When both curves shift, one of price or quantity changes in a definite direction and the other is ambiguous: it depends on which shift is larger. Demand and supply both up: $Q$ rises, $P$ ambiguous. Both down: $Q$ falls, $P$ ambiguous. Demand up and supply down: $P$ rises, $Q$ ambiguous. Demand down and supply up: $P$ falls, $Q$ ambiguous.
Why it works
Work each shift alone, then combine. A demand increase pushes $P$ up and $Q$ up. A supply increase pushes $P$ down and $Q$ up. On quantity they agree, so $Q$ surely rises. On price they disagree, so the result depends on the sizes: a big demand shift and a small supply shift raise $P$; the reverse lowers it; equal-sized pushes can leave it unchanged. A quick way: make a two-row table of arrows and look for the column where the arrows agree.
| Event | Effect on P | Effect on Q |
|---|---|---|
| Demand increases | ↑ | ↑ |
| Supply increases | ↓ | ↑ |
| Both together | ? | ↑ |
Worked example: Smartphones
Incomes rise (smartphones are a normal good) while a cheaper chip lowers production costs. What happens to the price and quantity of smartphones?
- Higher income: demand increases, which on its own raises both the price and the quantity.
- Cheaper chip: supply increases, which on its own lowers the price and raises the quantity.
- Quantity: both push it up, so it rises. Price: one pushes up and one down, so it is ambiguous.
Answer: Quantity rises; the price change is ambiguous.
Worked example: With numbers, the ambiguity resolves
$Q_d = 20 - 2P$ and $Q_s = -4 + 2P$. Demand increases by 6 and supply increases by 2. Find the new price and quantity.
- New curves: $Q_d = 26 - 2P$ and $Q_s = -2 + 2P$.
- $26 - 2P = -2 + 2P$, so $P = 7$, up from \$6.
- $Q = 26 - 14 = 12$, up from 8.
- Here demand's shift was larger, so the price rose. With a supply shift of 10 instead, the price would have fallen.
Answer: $P = \$7$, $Q = 12$.
Common mistake
Giving a definite answer for the ambiguous variable, such as "the price rises" in the smartphone case. Without the sizes of the shifts, you can't tell. Check: write the arrows for each shift separately; if they disagree, the honest answer is "it depends on which shift is larger."