Market Analysis: Changes in Equilibrium

Dr. Katherine Sauer Principles of Microeconomics ECO 2020

I. Some important terminology: A. change in quantity demanded vs change in demand A change in quantity demanded is caused by a change in the price of the good or service. It is depicted by a movement along a given demand curve.
P

P1

P2 Demand Qd1 Qd2 Q

A change in demand can be caused by a change in ~ number or type of buyers ~ income (normal goods vs inferior goods) ~ tastes/preferences ~ price of related goods (substitutes vs complements) ~ expectations about the future It is depicted by a shift in the demand curve.
P

right shift = increase in D left shift = decrease in D

D2 D1 Q

B. change in quantity supplied vs change in supply

A change in quantity supplied is caused by a change in the price of the good or service. It is depicted by a movement along a given supply curve.
P Supply

P1

P2

Qs2

Qs1

A change in supply can be caused by a change in ~ number of sellers ~ production technology ~ input prices ~ expectations about the future It is depicted by a shift in the supply curve.
S2 P S1

right shift = increase in S left shift = decrease in S

II. How to analyze a change in equilibrium

1. Decide if the event shifts supply, demand, both, or neither.

2. Decide the direction of the shift. 3. Graph the change to see what happens to equilibrium. - one curve shifting = one graph - two curves shifting = two graphs

When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country. supply decreases / supply shifts left - input
S2 Price S1

Equilibrium price rises and quantity falls.

P2 P1

D1 Quantity

{Initially when supply shifts left, the price is still P1. At P1, Qd>Qs and there is a shortage. The price rises to clear the shortage.}

Q2

Q1

When the weather turns warm in North America every summer, the price of hotel rooms in Caribbean resorts plummets. demand decreases / demand shifts left - tastes/preferences Equilibrium price falls and quantity falls.

Price S1

P1 P2

D2 Q2 Q1

D1 Quantity

When many couples have more than 2 children, the price of minivans rises. demand increases / demand shifts right - number of buyers Equilibrium price rises and quantity rises.

Price S1

P2 P1 D2

D1 Quantity

Q1

Q2

When engineers develop faster computer chips, the price of computers falls. supply increases / supply shifts right - technology Equilibrium price falls and quantity rises.
S2

Price S1

P1 P2

D1 Q1 Q2 Quantity

When a war breaks out in the Middle East, the price of oil rises. In China, the middle class is growing and can afford to buy cars. What happens in the market for gasoline? supply of gasoline decreases / shifts left demand for gasoline increases / shifts right
S2 P S1 P2 P1 P2 P1 D2 D1 Q2 Q1 Q Q1 Q2 D1 Q P S1

P rises, Q falls

P rises, Q ?

P rises, Q rises

III. Equilibrium Analysis using Algebra

Market research has revealed the following information about the market for chocolate bars: The demand can be represented by the equation QD = 1,600 300P. The supply can be represented by the equation QS = 1,400 + 700P.
a) Solve for equilibrium price and quantity. b) Illustrate on a graph.

a) Solve for equilibrium price and quantity. b) Illustrate graphically. In equilibrium Qd = Qs = Q*. 1600 300P = 1400 + 700P 200 = 1000P 0.20 = P* Q* = 1600 300(0.2) = 1540 Q* = 1400 + 700(0.2) = 1540 Demand P intercept: 1600 300P = 0 1600 = 300P 5.33 = P Supply P intercept: 1400 + 700P = 0 1400 = -700P -2= P Supply Q intercept: Q = 1400 + 700(0) Q = 1400

Price 5.33 S

0.20

1400

1540

Quantity

c) Now suppose that scientists announce that chocolate can cure cancer. The demand increases to QD = 3,000 300P. Solve for the new equilibrium price and quantity. Then show your results on your original graph.
3000 300P = 1400 + 700P 1600 = 1000P 1.6= P* Q* = 3000 300(1.6) = 2520 Q* = 1400 + 700(1.6) = 2520 Demand P intercept: 3000 300P = 0 3000 = 300P 10= P

10

Price
5.33 S

1.60

0.20

D2

D 1400 1540 2520 Quantity

IV. Alfred Marshall Marshal was an economist in the ??????. He believed in making economics as simple as possible to understand. He came up with the supply and demand diagram.