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Lecture 8 Market Equilibrium Analysis MACRO HAPPENS ECON 111 H OFFMAN

Lecture 8 Market Equilibrium Analysis. Market Equilibrium Price Adjustments –A shortage forces the price up. –A surplus forces the price down. Such price

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Lecture 8

Market Equilibrium Analysis

MACRO HAPPENS

ECON 111HOFFMAN

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.

MACRO HAPPENS

ECON 111HOFFMAN

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.

MACRO HAPPENS

ECON 111HOFFMAN

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

MACRO HAPPENS

ECON 111HOFFMAN

MACRO HAPPENS

ECON 111HOFFMAN

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.

MACRO HAPPENS

ECON 111HOFFMAN

MACRO HAPPENS

ECON 111HOFFMAN

A Change in BothDemand and Supply

• Both curves shift.

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

MACRO HAPPENS

ECON 111HOFFMAN

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.

MACRO HAPPENS

ECON 111HOFFMAN

MACRO HAPPENS

ECON 111HOFFMAN

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.

MACRO HAPPENS

ECON 111HOFFMAN

The Effects of an Increase in Both Demand and Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes(Walkman $200)

MACRO HAPPENS

ECON 111HOFFMAN

The Effects of an Increase in Both Demand and Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes(Walkman $200)

Demand for tapes(Walkman $50)

MACRO HAPPENS

ECON 111HOFFMAN

The Effects of an Increase in Both Demand and Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes(Walkman $200)

Demand for tapes(Walkman $50)

Supply of tapes(new technology)

MACRO HAPPENS

ECON 111HOFFMAN

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.

MACRO HAPPENS

ECON 111HOFFMAN

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 suppliedper 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

MACRO HAPPENS

ECON 111HOFFMAN

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 suppliedper 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

MACRO HAPPENS

ECON 111HOFFMAN

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

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6

Pri

ce (

doll

ar p

er ta

pe)

Supply of tapes(old technology)

Demand for tapes(CD player $400)

MACRO HAPPENS

ECON 111HOFFMAN

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

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes(CD player $400)

Demand for tapes(CD player $400)

MACRO HAPPENS

ECON 111HOFFMAN

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

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes(CD player $400)

Demand for tapes(CD player $400)

Supply of tapes(new technology)

MACRO HAPPENS

ECON 111HOFFMAN

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.

MACRO HAPPENS

ECON 111HOFFMAN

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”

MACRO HAPPENS

ECON 111HOFFMAN

Price Slide, Rocket, and Roller Coaster

MACRO HAPPENS

ECON 111HOFFMAN

Price Slide, Rocket, and Roller Coaster

MACRO HAPPENS

ECON 111HOFFMAN

Price Slide, Rocket, and Roller Coaster

MACRO HAPPENS

ECON 111HOFFMAN