EC 1000 Microeconomics Lecture Slides 3 PDF

EC 1000 Microeconomics Lecture Slides 3: Competitive Equilibrium, Comparative statics  Figure 7 The Equilibrium of Supply and Demand Price of Ice-Cream Cone Supply Equilibriu...

EC 1000 Microeconomics Lecture Slides 3: Competitive Equilibrium, Comparative statics  Figure 7 The Equilibrium of Supply and Demand Price of Ice-Cream Cone Supply Equilibrium price Equilibrium $2.00 Equilibrium Demand quantity 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning Supply and Demand together Equilibrium Price The price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity The quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect. Equilibrium Law of supply and demand The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance Comparative Statics The law of supply and demand very useful to determine how the market responds to a change in the underlying conditions This is the subject of comparative statics analysis In this type of analysis, we compare the equilibrium before and after any given change in the underlying conditions We do not address the issue of the dynamic path that is followed to reach the new equilibrium But of course, we must assume that the dynamic process eventually converges to the new equilibrium Methodology Main steps: Determine Step 1: What condition has changed Step 2: Whether change affects demand, supply, or both Step 3: Direction in which demand or supply changes. Very Important: Distinguish between Movement along a curve (endogenous) Shift of the curve (exogenous) Demand Changes Movement along the demand curve. Caused by a change in the price of the product. A shift in the demand curve, either to the left or right. Caused by any change that alters the quantity demanded at every price. So due to change of any variable other than price.  Figure 1 Shifts in the Demand Curve Price Increase in demand Decrease in demand Demand curve, D2 Demand curve, D1 Demand curve,D3 0 Quantity Copyright©2003 Southwestern/Thomson Learning Shifts in the Demand Curve Consumer Income As income increases the demand for a good normally will increase (but later we will look into this in more detail). Prices of Related Goods When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. When a fall in the price of one good increases the demand for another good, the two goods are called complements. Table 1 Variables That Influence Buyers Copyright©2004 South-Western Shifts in the supply curve A shift in the supply curve, either to the left or right. Caused by a change in a determinant/variable other than price. Input prices Technology Expectations Number of sellers  Figure 2 Shifts in the Supply Curve Price Supply curve, S 3 Supply curve, S 1 Supply Decrease curve, S 2 in supply Increase in supply 0 Quantity Copyright©2003 Southwestern/Thomson Learning Table 2 Variables That Influence Sellers Copyright©2004 South-Western Three steps to analyzing changes in equilibrium Decide whether the event shifts the supply or demand curve (or both). Decide whether the curve(s) shift(s) to the left or to the right. Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.  Figure 3 How an Increase in Demand Affects the Equilibrium Price of Ice-Cream 1. Hot weather increases Cone the demand for ice cream... Supply $2.50 New equilibrium 2.00 2.... resulting Initial in a higher equilibrium price... D D 0 7 10 Quantity of 3.... and a higher Ice-Cream Cones quantity sold. Copyright©2003 Southwestern/Thomson Learning Three Steps to Analyzing Changes in Equilibrium Shifts in Curves versus Movements along Curves A shift in the supply curve is called a change in supply. A movement along a fixed supply curve is called a change in quantity supplied. A shift in the demand curve is called a change in demand. A movement along a fixed demand curve is called a change in quantity demanded.  Figure 4 How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream 1. An increase in the Cone price of sugar reduces the supply of ice cream... S2 S1 New $2.50 equilibrium 2.00 Initial equilibrium 2.... resulting in a higher price of ice cream... Demand 0 4 7 Quantity of 3.... and a lower Ice-Cream Cones quantity sold. Copyright©2003 Southwestern/Thomson Learning Table 3 What Happens to Price and Quantity When Supply or Demand Shifts? Copyright©2004 South-Western ELASTICITY So far, we have analyzed the sign of changes in price and quantity caused by a shift in demand and supply To understand also the magnitude of these changes, we need the concept of elasticity of demand and supply General, useful concept, can be used in many other contexts. For example, will making cars safer – say better breaks – lead to fewer accidents?