Changes in Market Equilibrium
Post on 26-Oct-2014
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FACTORS:
NON-PRICE DETERMINANTS OF DEMAND
NON-PRICE DETERMINANTS OF SUPPLY
SHIFTS IN DEMAND
COMPLEMENTARY GOODS:What will happen to the equilibrium price
and quantity of tennis balls if court rental fees decline?
When the price of a complement falls, demand shifts right, causing equilibrium price and quantity to rise.
S
DD’
40 58
Pric
e ($
/bal
l)
0
Quantity (millions of ball/month)
1.40
1.00
SUBSTITUTE GOODS:What will happen to the equilibrium price
and quantity of overnight letter delivery service as the price of internet access falls?
When the price of a substitute falls, demand shifts left, causing equilibrium price and quantity to fall.
S
D’D
Q’ Q
Pric
e ($
/lett
er)
0
Quantity (letters/month)
P
P’
INCOME:
What will happen to the equilibrium price and quantity of ground meat with high-fat content as income increases?
Ground meat with high fat content is an inferior good.
For health reasons, most people prefer grades of meat with low fat content, and when they do buy high-fat meat, it is usually a sign of budgetary pressure. When people in this situation receive higher incomes, they usually switch quickly to leaner grades of meat.
S
D’D
Q’ Q
Pric
e ($
/kilo
)
0
Quantity (kilos of ground meat)
P
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An increase in income would cause the demand for inferior goods to shift leftward and vice-versa.
The demand curves for normal goods shift rightward when income goes up and vice-versa.
PREFERENCES/TASTESEx. The release of the Jurassic
Park film shifted the demand for toy dinosaurs sharply to the right. The demand for toys with horse and other present-day animals designs shifted sharply to the left.
EXPECTATIONS ABOUT THE FUTUREEx. Apple Macintosh
If users of Apple Macintosh hear a credible rumor that cheaper or significantly upgraded model will be introduced next month, the demand for the current model is likely to shift leftward.
SHIFTS IN THE SUPPLY CURVE What will happen to the equilibrium price
and quantity of skateboards if the price fiberglass, a substance used for making skateboards, rises?
When input prices rise, supply shifts left, causing equilibrium price to rise and equilibrium quantity to fall.
S’
D
800 1,000
Pric
e ($
/ska
tebo
ard)
0
Quantity (skateboards/month)
80
60
S
The effects of equilibrium price and quantity run in opposite direction whenever marginal cost of production decline.
Examples:
What will happen to the equilibrium price and quantity of new houses if the wage rate of carpenters fall?
When input prices fall, supply shifts right, causing equilibrium price to fall and equilibrium quantity to rise.
S
D
40 50
Pric
e ($
1,00
0s/h
ouse
)
0
Quantity (skateboards/month)
120
90
S’
What is the effect of technical change on the market for term-paper revisions?
When a new technology reduces the cost of production, supply shifts right causing equilibrium price to fall and equilibrium quantity to rise.
S
D
12 36
Pric
e ($
/rev
isio
n)
0
Quantity (millions of revisions/year)
55
7.5
S’
SIMULTANEOUS SHIFTS IN DEMAND AND SUPPLY When demand shifts left and supply shift
right, equilibrium price falls, but equilibrium quantity may either rise or fall.
Example:
Figure A S
D’
Q’ Q
Pric
e ($
/bag
)
0
Quantity (millions of bags/month)
P
P’
S’
D
Figure B S
D’
Q Q’
Pric
e ($
/bag
)
0
Quantity (millions of bags/month)
P
P’
S’
D
The net effect of the two shifts depends on which of the individual effects is larger.
In figure A, the demand shift dominates, so the equilibrium quantity declines. In figure B, the supply shift dominates, so equilibrium quantity goes up.
SUMMARY OF CHANGES IN DEMAND, SUPPLY, & EQUILIBRIUM CHANGE IN DEMAND:
An increase in demand raises both equilibrium price and equilibrium quantity.
A decrease in demand reduces both equilibrium price and quantity.
CHANGE IN SUPPLY:An increase in supply reduces
equilibrium price, but increases equilibrium quantity.
An decrease in supply raises equilibrium price, but decreases equilibrium quantity.
SUPPLY INCREASE, DEMAND INCREASE
Price drop is even greater than if there was only one change.
Increase in supply > decrease in demand results in equilibrium quantity increase
Increase in supply < decrease in demand results in equilibrium quantity decrease
SUPPLY DECREASE, DEMAND INCREASE Price rise is even greater than if there
wads only one change Decrease in supply is > increase in
demand results in equilibrium quantity decrease
Decrease in supply is < increase in demand results in equilibrium quantity increase
BOTH DEMAND AND SUPPLY INCREASE Increase in supply > increase in
demand results in equilibrium price decrease
Increase in supply < increase in demand results in equilibrium price increase
Raise in equilibrium quantity is greater than caused by either change alone
BOTH DEMAND AND SUPPLY INCREASE Decrease in supply > increase in
demand results in rise of equilibrium price
Decrease in supply < increase in demand results in fall of equilibrium price
Fall in equilibrium quantity is greater than caused by either change alone
SUMMARY OF CHANGES IN DEMAND, SUPPLY, & EQUILIBRIUM
CHANGE IN SUPPLY
CHANGE IN DEMAND
EFFECT ON EQUILIRBIUM PRICE
EFFECT ON EQUILIBRIUM QUANTITY
1. INCREASE DECREASE DECREASE UNCERTAIN
2. DECREASE INCREASE INCREASE UNCERTAIN
3. INCREASE INCREASE UNCERTAIN INCREASE
4. DECREASE DECREASE UNCERTAIN DECREASE
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