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Economics 111.3 Winter 14
January 20th & 22nd , 2014
Lecture 6 & 7
Ch. 3
A Change in the Quantity Supplied Versus
a Change in Supply: a recap
Supply Shifters are
changes in:
• technology
• taxes and subsidies
• prices of other goods
• price expectations
• number of sellers
A recap:
Changes in Supply
Changes in prices of other goods:
• higher prices of substitutes in production
will reduce supply and vice versa
PA
S
QA
Changes in Supply
Changes in price expectations:
• of the future price of a product
• difficult to generalize
Changes in number of sellers:
• as the number of sellers increases, so does
supply
Equilibrium As The Marriage of
Supply and Demand
• Supply and demand come together to
determine equilibrium quantity and
equilibrium price.
Equilibrium, cont’d
• When quantity demanded equals quantity
supplied, prices have no tendency to change.
• Equilibrium is a concept in which opposing
dynamic forces cancel each other out.
• Equilibrium isn’t a state of the world—it's a
characteristic of the model used to look at the
world.
• Equilibrium isn’t inherently good or bad—but
simply a state in which dynamic pressures offset
each other.
The Law of Supply and Demand
• Conventional (free market)
Economics claims that the price of
any good adjusts to bring the
supply and demand for that good
into balance.
• Excess supply – a situation in
which quantity supplied is greater
than quantity demanded. The
same as “surplus”
• Excess demand – a situation in
which quantity demanded is
greater than quantity supplied.
The same as “shortage”
Excess supply
Excess demand
The Law of Supply and Demand, cont’d
• The larger the difference
between quantity
demanded and quantity
supplied, the greater the
pressure for prices to
rise (if there is excess
demand) or fall (if there
is excess supply).
Market Equilibrium
Demand Schedule
Supply Schedule
Market Equilibrium
Price Quantity
(dollars
per tape)
Quantity
demanded supplied
Shortage (-)
or surplus (+)
(millions of tapes per week)
1
2
3
9
6
4
0
3
4
-9
-3
0
4
3
5
+2
5
2
6
+4
Comparative Statics:
The derivation of
predictions by
analyzing the effect
of a change on some
exogenous
variable(s) on the
equilibrium
Rules:
1. Decide whether the event
shifts the supply or demand
curve (or both).
2. Decide whether the curve(s)
shift(s) to the left or to the
right.
3. Use the supply-and-demand
diagram to see how the shift
affects equilibrium price and
quantity.
Increase in Demand
P D1
D2
S
p1
Q
q1
q3
• An increase in demand will cause:
• a shortage at the original price p1
Increase in Demand
P D1
D2
S
p2
p1
q1 q2 q3
• Consumers will bid price up to p2
• QS will increase
• new equilibrium reached at p2, q2
Q
Decrease in Demand
D1
P D2
S
p1
q3
q1
Q
• A decrease in demand will cause:
• a surplus at the original price p1
Decrease in Demand
P D2
D1
S
p1
p2
q3 q2 q1
Q
• Producers will drop price to p2
• QS will decrease
• new equilibrium will be reached at p2, q2
Increase in Supply
P
S1
D
S2
p1
q1
q3
Q
• An increase in supply will cause:
• a surplus at the original price p1
Increase in Supply
P
D
S1
S2
p1
p2
q1 q2 q3
Q
• Producers will drop price to p2
• QD will increase
• a new equilibrium will be reached at p2, q2
Decrease in Supply
P
D
S2
S1
p1
q3 q1
Q
• A decrease in supply will cause:
• a shortage at the original price p1
Decrease in Supply
P
D
S2
S1
p2
p1
q3 q2 q1
Q
• Consumers will bid price up to p2
• a new equilibrium will be reached at p2, q2
Study Question
A.
B.
C.
D.
Explain how each of the changes below are explained
by changes in either supply or demand. Use diagrams
to substantiate your answers.
The price of guitars falls, but the quantity traded
increases;
The price and quantity traded of saxophones
decrease;
The price of trombones increases, while the quantity
traded falls;
The price and quantity traded of clarinets increases.
Study question
• The market for coffee is initially in equilibrium
with supply and demand curves of the usual
shape. Pepsi is a substitute for coffee; cream
is a complement for coffee. Consider the
market for coffee. Assume that all ceteris
paribus assumptions continue to hold except
for the event(s) listed.
Study question
An increase in the price of Pepsi, a substitute
for coffee will
A) decrease the price of cream.
B) decrease the price of coffee.
C) increase the price of cream
D) increase the price of coffee.
E) cause none of the above.
Study question
• Farm land can be used to produce either
cattle or corn. If the demand for cattle
increases, then the
A) demand for corn decreases.
B) demand for corn increases.
C) supply of corn increases.
D) supply of corn decreases.
E) both B and C.
Study question
If A and B are complements in production
and the price of A falls, the supply of B
A) decreases and the price of B rises.
B) increases and the price of B falls.
C) increases and the price of B rises.
D) decreases and the price of B falls.
E) does not change.
Study question
• If A and B are complements and the cost of a
factor of production used in the production of A
decreases, then the price of
A) both A and B will fall.
B) A will fall and the price of B will rise.
C) both A and B will rise.
D) A will rise and the price of B will fall.
E) A will fall and the price of B will remain
unchanged.
Study question
• When the price of good A rises, the supply curve
of good B shifts rightward. Which of the
following statements are true?
A) A and B are substitutes in consumption.
B) A is a factor used in the production of B.
C) A and B are substitutes in production.
D) A and B are complements in consumption.
E) A and B are complements in production.
Comparative statics:
Complex Cases
• When both supply and demand change,
the effect is a combination of the
individual effects
• If both demand and supply shift, one of
either price or quantity cannot be
predicted–-the result is indeterminate
Complex Cases
Change in
supply
Change in
demand
Effect on
equilibrium price
Effect on
equilibrium
quantity
Increase
Decrease
Decrease
Indeterminate
Decrease
Increase
Increase
Indeterminate
Increase
Increase
Indeterminate
Increase
Decrease
Decrease
Indeterminate
Decrease
Study question
Which one of the following will definitely decrease the
equilibrium quantity?
A) an increase in both demand and supply
B) a decrease in demand combined with an increase in
supply
C) a decrease in both demand and supply
D) an increase in demand combined with a decrease in
supply
E) none of the above
Study question
• Which of the following will definitely result in an
increase in the equilibrium price?
A) an increase in supply combined with a
decrease in demand
B) an increase in both demand and supply
C) an increase in demand combined with a
decrease in supply
D) a decrease in both demand and supply
E) a decrease in demand combined with an
increase in supply
Study question
Draw supply and demand curves to illustrate
the following market disturbances and explain
your diagrams briefly:
A. The equilibrium price in the market for beef
falls because the price of cattle feed grain has
fallen, even though the prices of pork, poultry,
and fish have increased because US imports of
these products have been reduced by
Government regulation;
Study question
B. Equilibrium price in the market for
wheat falls because the harvest has
been unexpectedly good;
C. There is an increase in quantity of
butter supplied in Winnipeg after
the population has gone up.
Test 1
•
•
•
•
Friday, January 24th, 2014
8:30 – 9:20 Room 200 STM
Chapters to be tested: 1 – 3
Format: Multiple-Choice Questions (MCQ):
35 questions – 100% of Test mark
Time – 50 minutes