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ECO 120 - Global Macroeconomics TAGGERT J. BROOKS Module 07 SUPPLY AND DEMAND CHANGES IN EQUILIBRIUM 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 Equilibrium and Shifts of the Supply Curve Price of coffee beans P S E 2 S 2 A decrease in supply… 2 … leads to a movement along the demand curve due to a higher equilibrium price and lower equilibrium quantity. Price rises P 1 E1 1 Demand Q 2 Q 1 Quantity falls Quantity of coffee beans Simultaneous Shifts of Supply and Demand Curves (a) One possible outcome: Price Rises, Quantity Rises Price of coffee Small decrease in supply E P 2 E P 1 2 S Two opposing forces 1 determining the equilibrium quantity. 2 The increase in demand dominates the decrease in supply. 1 D Q S 1 D 1 2 Large increase in demand Q2 Quantity of coffee Simultaneous Shifts of Supply and Demand Curves (b) Another Possibility Outcome: Price Rises, Quantity Falls Price of coffee Large decrease in supply E P S Two opposing forces S 1 determining the equilibrium quantity. 2 2 E P 2 1 1 Small increase in demand D D Q Q 2 1 Quantity of coffee