Supply-Demand Shock Simulator

The shape of these two lines determines who absorbs a shock, and it's visible directly in the algebra: a pure demand shift moves the new equilibrium along the supply line, and a pure supply shift moves it along the demand line. Differentiating P* = (a−c)/(b+d) shows a demand shock's quantity response divided by its price response, ΔQ/ΔP, works out to exactly d — the supply curve's own slope coefficient. A large d means quantity absorbs most of the shock while price barely moves, since supply flexes readily to meet new demand; a small d forces almost all the adjustment onto price instead — the algebraic reason inelastic markets like housing or oil see demand shocks slam mostly into price rather than quantity.

Equilibrium is simply where the supply and demand lines cross — the one price at which the quantity people want to buy equals the quantity producers offer. Shift a curve and that crossing slides to a new price and quantity. The handy rule: a rise in demand pushes both price and quantity up, while a rise in supply pushes quantity up but price down.

Here is the twist that founded econometrics: if you plot real-world price and quantity points, you recover neither the supply nor the demand curve. Because both shift at once, the scatter traces a blend of the two. Elmer Working spelled this out in 1927 — untangling them needs an instrumental variable that moves only one curve, like weather that shifts supply alone.