1 3.Changes in Equilibrium Price and Quantity

2 Chapter 3 : main menu 3.1 Change in consumption decision Concept Explorer 3.1 Progress Checkpoint Change in production and sales decisions Progress Checkpoint Simultaneous change in demand and supply Theory in Life 3.1

3 Concept Explorer 3.1 Price and consumption decision Student X : When price is higher, consumers buy less. Student Y : When consumers buy less, price is lower. Who is correct? Can both be correct?

4 Concept Explorer 3.1 Student X is correct. When the price of a good increases from P1 to P2, quantity demanded decreases from Q1 to Q2. This is an upward movement along a single demand curve. Price ($) Quantity0Q2Q1 P1 P2 D

5 Concept Explorer 3.1 Student Y is also correct. When demand decreases from D1 to D2, ceteris paribus, the equilibruim price decreases from P1 to P2. This is a leftward shift of the whole demand curve. Price ($) Quantity0 S D2 D1 P2 P1 Q2Q1 E1 E2

6 Progress Checkpoint 1 A decrease in price will increase quantity demanded. A decrease in price will increase demand. Are the two statements correct?

7 Progress Checkpoint 1 The first statement is correct. A change in quantity demanded is caused by a change in the price of a good. The second statement is incorrect. On demand side, a change in price will only change the quantity demanded for a good. A change in demand is caused by other factors, such as income or consumers preference.

8 Progress Checkpoint 1 (a)How will the demand for CRT monitors change if the price of LCD monitors increases? (b)How will the demand for DVDs change if the price of DVD players increases?

9 Progress Checkpoint 1 (a)LCD and CRT monitors are subsitute goods. If the price of LCD monitors increases from P1 to P2, the demand for CRT monitors will increase from D1 to D2. Price ($) Quantity D P1 P2 Q1Q2 Price ($) Quantity D2D1

10 Progress Checkpoint 1 (b)DVDs and DVD players are complementary goods. If the price of DVD players increases from P1 to P2, the demand for DVDs will decrease from D1 to D2. Price ($) Quantity D1D2 Price ($) Quantity D P1 P2 Q1Q2

11 Progress Checkpoint 1 How will the demand for land change if the demand for housing decreases? As housing units need to be built on land, the demand for housing leads to a demand for land, i.e. the demand for land is a derived demand. If the demand for housing units decreases, the demand for land will also decrease.

12 Progress Checkpoint 2 (a) How will the supply of bread change if the price of cake decreases? (b) How will the supply of chicken wings change if the price of chicken legs decreases?

13 Progress Checkpoint 2 Cake and bread are in competitive supply. If the price of cake decreases from P1 to P2, the supply of bread will increase from S1 to S2. Price ($) Quantity S2S1 Price ($) Quantity S P2 P1 Q2Q1

14 Progress Checkpoint 2 Chicken legs and chicken wings are in joint supply. If the price of chicken legs decreases from P1 to P2, the supply of chicken wings will decrease from S1 to S2. Price ($) Quantity S P2 P1 Q2Q1 Price ($) Quantity S1S2

15 Progress Checkpoint 2 Which of the following refers to a change in the quantity supplied of furniture? Which refers to a change in supply of furniture? (a)More furniture is produced when the price of raw materials decrease. (b)More furniture is produced when more housing units are sold.

16 Progress Checkpoint 2 Statement (a) refers to a change in supply. This is because when the prices of raw materials decrease, the cost of producing furniture decreases. Statement (b) refers to a change in quantity supplied. Housing units and furniture are complementary goods. When more housing units are sold, the demand for furniture will increase. This will increase the price and quantity supplied of furniture.

17 Theory in Life 3.1 Change in demand and supply : Office rental and vegetables (a)The Asian financial turmoil and the completion of the construction work of commercial buildings decrease the number of office rental contracts signed. How to present this in a supply-demand diagram? (b)A recent doctor s report suggests that eating vegetables helps to prevent cancer. On the other hand, the coming of typhoons reduces the amount of vegetables imported from Shenzhen. Use a supply-demand diagram to explain why fewer vegetables are transacted.

18 Theory in Life 3.1 (a) The Asian financial turmoil reduces the profits of firms and leads to a decrease in the demand for the offices for rent, i.e. D1 shifts left to D2. The completion of construction work of commercial buildings leads to an increase in the supply of the offices for rent, i.e. S1 shifts right to S2. Quantity 0 P ($) D1 P1 Q1 S1 S2 D2

19 Theory in Life 3.1 (a) If the decrease in demand is greater than the increase in supply, as shown by a larger horizontal shift of the demand curve, the equilibrium price of the offices for rent will decrease from P1 to P2. The equilibrium quantity will decrease from Q1 to Q2. Quantity 0 P ($) D1 P1 Q1 S1 S2 D2 P2 Q2

20 Theory in Life 3.1 (b) The doctors report leads to an increase in the demand for vegetables, i.e. D1 shifts right to D2. The occurrence of typhoon leads to a decrease in the supply of vegetables, i.e. S1 shifts left to S2. Quantity 0 P ($) D1 P1 Q1 S1 D2 S2

21 Theory in Life 3.1 (b) If the increase in demand is less than the decrease in supply, as shown by a smaller horizontal shift of the demand curve, the equilibrium price of vegetables will increase from P1 to P2. The equilibrium quantity will decrease from Q1 to Q2. Quantity 0 P ($) D1 P1 Q1 S1 D2 S2 P2 Q2

22 End of Chapter 3