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Lecture 8
Market Equilibrium Analysis
ECON
111
HOFFMAN
MACRO HAPPENS
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.
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HOFFMAN
MACRO HAPPENS
Predicting Changes in
Price 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.
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HOFFMAN
MACRO HAPPENS
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
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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.
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A Change in Both
Demand and Supply
• Both curves shift.
• The direction in which price and quantity
change will depend on how each curve
shifts.
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HOFFMAN
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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.
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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.
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Price (dollar per tape)
The Effects of an Increase in Both
Demand and Supply
Supply of tapes
(old technology)
6
5
4
3
2
1
Demand for tapes
(Walkman $200)
0
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
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HOFFMAN
MACRO HAPPENS
Price (dollar per tape)
The Effects of an Increase in Both
Demand and Supply
Supply of tapes
(old technology)
6
5
4
3
Demand for tapes
(Walkman $50)
2
1
Demand for tapes
(Walkman $200)
0
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
ECON
111
HOFFMAN
MACRO HAPPENS
Price (dollar per tape)
The Effects of an Increase in Both
Demand and Supply
Supply of tapes
(old technology)
6
Supply of tapes
(new technology)
5
4
3
Demand for tapes
(Walkman $50)
2
1
Demand for tapes
(Walkman $200)
0
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
ECON
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HOFFMAN
MACRO HAPPENS
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.
ECON
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HOFFMAN
MACRO HAPPENS
The Effects of an Decrease in Demand
and an Increase in Supply
Original Quantities New Quantities
(millions of tapes per week)
Price
(dollars
per tape )
Quantity
demanded
Quantity
supplied
Quantity
demanded
Quantity
supplied
CD player
$400
old
technology
CD player
$200
new
technology
1
2
13
10
0
3
3
8
4
4
5
(millions of tapes per week)
7
6
5
6
ECON
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HOFFMAN
MACRO HAPPENS
The Effects of an Decrease in Demand
and an Increase in Supply
Original Quantities New Quantities
(millions of tapes per week)
Price
(dollars
per tape )
(millions of tapes per week)
Quantity
demanded
Quantity
supplied
Quantity
demanded
Quantity
supplied
CD player
$400
old
technology
CD player
$200
new
technology
1
2
13
10
0
3
9
6
3
6
3
8
4
4
8
4
7
5
3
10
5
6
6
2
12
ECON
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HOFFMAN
MACRO HAPPENS
Price (dollar per tape)
The Effects of an Decrease in
Demand and an Increase in Supply
Supply of tapes
(old technology)
6
5
4
3
Demand for tapes
(CD player $400)
2
1
ECON
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HOFFMAN
0
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
MACRO HAPPENS
Price (dollar per tape)
The Effects of an Decrease in
Demand and an Increase in Supply
Supply of tapes
(old technology)
6
5
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)
ECON
111
HOFFMAN
MACRO HAPPENS
Price (dollar per tape)
The Effects of an Decrease in
Demand and an Increase in Supply
Supply of tapes
(old technology)
6
5
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)
ECON
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HOFFMAN
MACRO HAPPENS
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.
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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”
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Price Slide, Rocket,
and Roller Coaster
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Price Slide, Rocket,
and Roller Coaster
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Price Slide, Rocket,
and Roller Coaster
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