University of Hawai‘i at Mānoa Department of Economics ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #5 Tuesday, January 27, 2004

ANNOUNCEMENTS REVIEW SESSION MID-TERM EXAMINATION #1 Tuesday, February 10, 2004, 4:30-5:30 PM BIL 152 MID-TERM EXAMINATION #1 Thursday, February 12, 2004, 12:00-1:15 PM BIL 152

LECTURE 5 Supply and Demand Analysis (continued) Introduction to Comparative Static Analysis

Market Equilibrium $/Q Supply Pe Demand Qe Q

$/Q Supply P0 Pe Demand QS QD Qe Q Economic Surplus Puts Downward Pressure On Price $/Q Supply P0 Pe Demand QS QD Qe Q

$/Q Supply Pe P1 Demand QD QS Qe Q An Economic Shortage Puts Upward Pressure On the Price. $/Q Supply Pe P1 Demand QD QS Qe Q

$/Q Supply PFLOOR Demand QS QD Q A Price Floor Above the Equilibrium Price Generates An Economic Surplus $/Q Supply PFLOOR Economic Surplus Demand QS QD Q

$/Q Supply PCEILING Demand QD QS Q A Price Ceiling Below the Equilibrium Price Generates An Economic Shortage $/Q Supply PCEILING Economic Shortage Demand QD QS Q

Equilibrium Analysis Endogenous Variables Exogenous Variables Price Quantity Exogenous Variables Income Tastes Costs Other prices Technology Comparative Static Analysis 8 cases

Case 1: An Increase in Demand $/Q S0 P1 P0 D1 D0 Q1 Q Q0

Case 2: A Decrease in Demand $/Q S0 P0 P1 D0 D1 Q1 Q0 Q

Comparative Static Analysis Case 1: An increase in demand, ceteris paribus, implies equilibrium price will rise and equilibrium quantity will rise. Case 2: A decrease in demand, ceteris paribus, implies equilibrium price will fall and equilibrium quantity will fall.

Case 3: An Increase in Supply $/Q S0 S1 P0 P1 D0 Q0 Q1 Q

Case 4: A Decrease in Supply $/Q S1 S0 P1 P0 D0 Q1 Q0 Q

Comparative Static Analysis Case 3: An increase in supply, ceteris paribus, implies equilibrium price will fall and equilibrium quantity will rise. Case 4: A decrease in supply, ceteris paribus, implies equilibrium price will rise and equilibrium quantity will fall.

$/Q S0 S1 P0 D1 D0 Q1 Q0 Q Case 5: An Increase in Supply and an Increase in Demand $/Q S0 S1 P0 D1 D0 Q1 Q0 Q

CASE 5: Demand Increases & Supply Increases An increase in demand accompanied by a simultaneous increase in supply will result in a definite increase in the equilibrium quantity. However, the impact on equilibrium price is ambiguous. Price may rise, fall or remain unchanged.

$/Q S1 S0 P0 D0 D1 Q1 Q0 Q Case 6: A Decrease in Demand and a Decrease in Supply $/Q S1 S0 P0 D0 D1 Q1 Q0 Q

CASE 6: Demand Decreases & Supply Decreases A decrease in demand accompanied by a simultaneous decrease in supply will result in a definite decrease in the equilibrium quantity. However, the impact on equilibrium price is ambiguous. Price may rise, fall or remain unchanged.

S1 $/Q S0 P1 P0 D1 D0 Q Q0 Case 7: An Increase in Demand and a Decrease in Supply S1 $/Q S0 P1 P0 D1 D0 Q0 Q

CASE 7: Demand Increases & Supply Decreases An increase in demand accompanied by a simultaneous decrease in supply will result in a definite increase in the equilibrium price. However, the impact on equilibrium quantity is ambiguous. Quantity may rise, fall or remain unchanged.

$/Q S0 S1 P0 P1 D0 D1 Q0 Q Case 8: A Decrease in Demand and an Increase in Supply $/Q S0 S1 P0 P1 D0 D1 Q0 Q

CASE 8: Demand Decreases & Supply Increases A decrease in demand accompanied by a simultaneous increase in supply will result in a definite decrease in the equilibrium price. However, the impact on equilibrium quantity is ambiguous. Quantity may rise, fall or remain unchanged.