Market Equilibrium Analysis

1
Lecture 8

• Market Equilibrium Analysis

2
Market Equilibrium

• Price Adjustments
• A shortage forces the price up.
• A surplus forces the price down.
• Such price changes are mutually beneficial to
  both buyers and sellers.

3
Predicting Changes inPrice and Quantity

• The theory we have just studies provides us with
  a powerful way of analyzing influences on prices
  and the quantities bought and sold.
• A change in price must be caused by either a
  change in demand or a change in supply.

4
A Change in Demand

• An increase in demand shifts the demand curve up
  and to the right.
• The new equilibrium price and quantity are
  higher.
• You have been practicing this in EIA
• illustrations

5

6
A Change in Supply

• An increase in supply shifts the supply curve to
  the right.
• The new equilibrium price is lower, but the
  equilibrium quantity is higher.

7

8
A Change in BothDemand and Supply

• Both curves shift.
• The direction in which price and quantity change
  will depend on how each curve shifts.

9
Demand and Supply Change in the Same Direction

• If demand and supply increase, both the demand
  and supply curves shift out.
• The new equilibrium quantity will be higher.
• The new equilibrium price may be higher, lower,
  or it may remain the same.

10

11
Demand and Supply Change in Opposite Directions

• Suppose supply increases but demand decreases.
• Price falls.
• The direction in which quantity changes will
  depend on the magnitude of the shifts in the two
  curves.

12
The Effects of an Increase in Both Demand and
Supply
Supply of tapes (old technology)
6
5
Price (dollar per tape)
4
3
2
1
Demand for tapes (Walkman 200)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
13
The Effects of an Increase in Both Demand and
Supply
Supply of tapes (old technology)
6
5
Price (dollar per tape)
4
3
2
Demand for tapes (Walkman 50)
1
Demand for tapes (Walkman 200)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
14
The Effects of an Increase in Both Demand and
Supply
Supply of tapes (old technology)
Supply of tapes (new technology)
6
5
Price (dollar per tape)
4
3
2
Demand for tapes (Walkman 50)
1
Demand for tapes (Walkman 200)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
15
A Change in Both Demand and Supply

• Prediction
• When both demand and supply increase, the
  quantity increases and the price decreases, or
  remains constant.
• When both demand and supply decreases, the
  quantity decreases and the price increases,
  decreases, or remains constant.

16
The Effects of an Decrease in Demand and an
Increase in Supply

• Original Quantities New Quantities
• (millions of tapes per week)
  (millions of tapes per week)
• Price Quantity Quantity Quantity
  Quantity
• (dollars demanded supplied demanded
  supplied
• per tape ) CD player old CD
  player new
• 400 technology 200
  technology
• 1 13 0
• 2 10 3
• 3 8 4
• 4 7 5
• 5 6 6

17
The Effects of an Decrease in Demand and an
Increase in Supply

• Original Quantities New Quantities
• (millions of tapes per week)
  (millions of tapes per week)
• Price Quantity Quantity Quantity
  Quantity
• (dollars demanded supplied demanded
  supplied
• per tape ) CD player old CD
  player new
• 400 technology 200
  technology
• 1 13 0 9 3
• 2 10 3 6 6
• 3 8 4 4 8
• 4 7 5 3 10
• 5 6 6 2 12

18
The Effects of an Decrease in Demand and an
Increase in Supply
Supply of tapes (old technology)
6
5
Price (dollar per tape)
4
3
Demand for tapes (CD player 400)
2
1
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
19
The Effects of an Decrease in Demand and an
Increase in Supply
Supply of tapes (old technology)
6
5
Price (dollar per tape)
4
3
Demand for tapes (CD player 400)
2
1
Demand for tapes (CD player 400)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
20
The Effects of an Decrease in Demand and an
Increase in Supply
Supply of tapes (old technology)
6
5
Price (dollar per tape)
Supply of tapes (new technology)
4
3
Demand for tapes (CD player 400)
2
1
Demand for tapes (CD player 400)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
21
The Effects of an Decrease in Demand and an
Increase in Supply

• Prediction
• When demand decreases and supply increases, the
  price falls and the quantity increases,
  decreases, or remains constant.
• When demand increases and supply decreases, the
  price rises and the quantity increases,
  decreases, or remains constant.

22
CD Players, Health Care, and Bananas

• A Price Slide CD Players
• A Price Rocket Health Care
• A Price Roller Coaster Bananas
• The Invisible Hand
• Adam Smith
• each buyer an seller in a market is led by an
  invisible hand to promote an end which was no
  part of his intention

23
Price Slide, Rocket, and Roller Coaster
24
Price Slide, Rocket, and Roller Coaster
25
Price Slide, Rocket, and Roller Coaster