Change in Equilibrium

1. Change in Equilibrium When a determinant of supply or demand change the market price and quantity traded typically change.

2. equilibrium again • Equilibrium is determined where the supply and demand curves cross. • The supply and demand curves are positioned in their current location because the determinants of supply and demand are fixed. • If a determinant(of S or D) changes, a curve will shift and the price and quantity traded will change.

3. Steps to Analysis 1) start out at initial equilibrium, 2) understand which determinant has changed, 3) shift the appropriate curve the appropriate direction, 4) at initial price note if surplus or shortage results, 5) move to the new equilibrium point, and 6) compare the new equilibrium with the initial equilibrium.

4. Change in equilibrium When the initial curves are S1 and D1 the price is P1 and the quantity traded is Q1. Say demand increases(you should be able to give a reason why). The demand shifts out to D2. Note at P1 how the Line between the two demand curves shows the amount of the shortage P S1 P2 P1 D2 D1 Q Q2 Q1 created due to the demand increase. This shortage is the force that causes the price to rise to P2. Note the quantity traded rises to Q2. (Trade did not rise by the rise in demand.)

5. Change in equilibrium P S1 P2 a P1 D2 D1 Q Q2 Q1

6. Change in equilibrium P S1 P2 P1 b D2 D1 Q Q2 Q1

7. Change in equilibrium P S1 c P2 P1 D2 D1 Q Q2 Q1

8. Change in equilibrium P Say demand falls. Why might this happen? Does a surplus or shortage occur at P1 when the demand falls? S1 P1 D1 Q Q1 Show the demand curve fall, show the shortage or surplus that initially results, and show the new price and quantity traded in the market.

9. Change in equilibrium P Say supply falls. Why might this happen? Does a surplus or shortage occur at P1 when the supply falls? S1 P1 D1 Q Q1 Show the supply curve fall, show the shortage or surplus that initially results, and show the new price and quantity traded in the market.

10. Change in equilibrium P Say supply rises. Why might this happen? Does a surplus or shortage occur at P1 when the supply rises? S1 P1 D1 Q Q1 Show the supply curve rise, show the shortage or surplus that initially results, and show the new price and quantity traded in the market.

11. Both supply and demand change It is possible that in the world that a determinant of demand and a determinant of supply will change at the same time. Our model can handle that, although it is a bit tricky. Here are the basic outcomes 1) If demand and supply move in the same direction the quantity traded will definitely change, but we need more information to know if the price will change. 2) If demand and supply move in opposite directions the price will definitely change, but we need more information to know if the quantity traded will change.

12. Both supply and demand increase P D1 D2 S1 S2 P1 Q

13. Both supply and demand change On the previous screen I have shown a situation where both supply and demand INCREASE, and in fact they increase by the same amount. You can see the price has not changed but the quantity traded has increased. Now, draw in a demand curve that shifted less than the one shown(a new D2). In this case demand shifts less than supply and thus the supply impact on the market is stronger than the demand impact. Thus the PRICE FALLS and the quantity traded rises.

14. Hint if supply and demand move in opposite directions: Show demand shift a little and supply shift a lot. And then do the opposite. Then shift them about the same amount (although in opposite directions.) Summary When (both S and D increases) P goes Q goes S and D increase the same amount nowhere up S increases more than D increases down up S increases less than D increases up up

15. When (S and D both decrease) P goes Q goes S and D decrease the same amount nowhere down S decreases more than D decreases up down S decreases less than D decreases down down When (S increases and D decreases) P goes Q goes S and D change the same amount down nowhere S increases more than D decreases down up S increases less than D decreases down down When (S decreases and D increases) P goes Q goes S and D change the same amount up nowhere S decreases more than D increases up down S decreases less than D increases up up

16. Wow, you are still with me after slides 11 and 12? They were a pain in the wazoo to type, but I wanted you have the whole story. Now, let’s see a shortcut to all this so you can get good at this. On the next slide I have a summary stable (made by Sara Petty in an econ class of mine in 2003 – and if you make a neat table or summary I will put it in my notes for the rest of my career!) where each line is what happens to P and Q if just supply or demand shifts. You see if demand rises, P and Q rise. Now if both S and D change put the arrows under P together. If the arrows are in the same direction, you know for sure that is the change. If the arrows are in opposite directions you can not be sure which way the change is until you know if S or D changed more. Then do the same for Q.

17. Price Quantity Demand Demand Supply Supply