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ECONOMICS
SECOND EDITION in MODULES
Paul Krugman | Robin Wells
with Margaret Ray and David Anderson
MODULE 7
Supply and Demand: Changes in Equilibrium
Krugman/Wells
• How equilibrium price and
quantity are affected when
there is a change in either
supply or demand
• How equilibrium price and
quantity are affected when
there is a simultaneous
change in both supply and
demand
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Equilibrium and Shifts of
the Demand Curve
Price of
coffee beans
An increase in
demand…
E
P2
Price
rises
E
P1
Supply
… leads to a movement
along the supply curve due
to a higher equilibrium
price and higher
equilibrium quantity.
2
1
D
2
D1
Q
1
Q2
Quantity of coffee beans
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Equilibrium and Shifts of
the Supply Curve
Price of
coffee beans
P
S
S
2
1
E
2
2
… leads to a movement
along the demand
curve due to a higher
equilibrium price and
lower equilibrium
quantity.
Price
rises
P
A decrease
in supply…
E1
1
Demand
Q
2
Q
1
Quantity falls
Quantity of
coffee beans
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Simultaneous Shifts of Supply and
Demand Curves
(a) One possible outcome: Price Rises, Quantity Rises
Price of coffee
Small decrease
in supply
E
2
P2
E
P1
S
2
S
1
Two
opposingin
The increase
forces
demand
determiningthe
the
dominates
equilibrium
decrease in
quantity.
supply.
1
D
D
Q
1
1
Q2
2
Large increase
in demand
Quantity of coffee
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Simultaneous Shifts of Supply and
Demand Curves
(b) Another Possibility Outcome: Price Rises, Quantity Falls
Price of coffee
Large decrease
in supply
S
Two opposing forces
determining the
equilibrium quantity.
2
S
E
P
2
2
E
P
1
1
1
Small increase
in demand
D
D
Q
Q
2
1
Quantity of coffee
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The Great Tortilla Crises
• There was a sharp rise in the price of tortillas in early
2007, a staple food of Mexico’s poor, going from 25
cents a pound to between 35 and 45 cents a pound in
just a few months.
• Much of Mexico’s corn is imported from the United
States.
• U.S. corn prices were rising rapidly thanks to surging
demand in a new market: the market for ethanol.
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Simultaneous
Shifts of Supply
and Demand
Supply Increases
Supply Decreases
Demand
Increases
Price: ambiguous
Quantity: up
Price: up
Quantity: ambiguous
Demand
Decreases
Price: down
Quantity: ambiguous
Price: ambiguous
Quantity: down
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