1. Changes in Equilibrium
Module 7
Changes in Equilibrium

2. Duffka School of Economics
11/16/2018
Main Ideas
How equilibrium price and quantity are affected when there is a change in either supply or demand. How equilibrium price and quantity are affected when there is a simultaneous change in both supply and demand.

3. Key Economic Concepts
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11/16/2018
When demand shifts, price and quantity change in the same direction as the shift.

4. Key Economic Concepts
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When supply shifts, the quantity changes in the same direction as the shift, while price changes in the opposite direction.

5. I. Changes in Supply and Demand: Lesson Overview
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A. What Happens When the Demand Curve Shifts B. What Happens When the Supply Curve Shifts C. Simultaneous Shifts of Supply and Demand Curves

6. Increase in Demand?
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7. I. Changes in Supply and Demand
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Why do prices change? What prices do you quickly notice changing?

8. C. Simultaneous Shifts of Supply and Demand Curves
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C. Simultaneous Shifts of Supply and Demand Curves

9. C. Simultaneous Shifts of Supply and Demand Curves
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The relative magnitudes of change in supply and demand determine the outcome of market equilibrium.

10. C. Simultaneous Shifts of Supply and Demand Curves Increases in Demand and Supply
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Higher demand leads to higher equilibrium price and higher equilibrium quantity.
Higher supply leads to lower equilibrium price and higher equilibrium quantity.

11. Relative Magnitudes of Change
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When supply and demand both increase, quantity will increase, but price may go up or down.

12. Duffka School of Economics
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Main Ideas-Review
How equilibrium price and quantity are affected when there is a change in either supply or demand. How equilibrium price and quantity are affected when there is a simultaneous change in both supply and demand.

13. APE U2 L3 A14 Equilibrium Price & Equilibrium Quantity
.55
.50
.45
.40
.35
.30
.25
.20
.15
.10
.05
Figure 14.1: Demand for and Supply of Greebes
Figure 14.2 D & S of Greebes
Price ($ per Greebe)
Quantity Demanded
Quantity Supplied
.15
300
100
.20
250
150
.25
200
.30
.35
PRICE PER GREEBE S1 S E1 E2 E D D1
QUANTITY
Competitive market forces would tend to establish an equilibrium price of _________ per Greebe and an equilibrium quantity of _________ million Greebes.
2. If the P in the market is .30 buyers would want to buy _______ million Greebes and sellers would want to sell _______ million Greebes. There would be a (shortage/surplus) of ______ million Greebes. Market forces would tend to cause the price to (increase/decrease) to a price of _______ per Greebe.
At this new new P buyers would now want to buy ______ million Greebes, and sellers now want to sell ______ million Greebes. B/c of this change in (price/underlying conditions) the (demand/qty demanded) changed by ____ million Greebes, and the (supply/qty supplied) changed by _______ million Greebes.
.25
200
150
250
100
.25
200
200
11/16/2018
Duffka School of Economics 50 50

14. APE U2 L3 A14 Equilibrium Price & Equilibrium Quantity
Duffka School of Economics
11/16/2018
3. If the price is $.20 per Greebe, buyers would want to buy ____ million Greebes, and sellers would want to sell ______ million. There would be a (shortage/surplus) of ____ million. Market forces would tend to cause the price to (increase/decrease) to a price of ____ per Greebe. At this new price, buyers would want to buy _____ million Greebes, and sellers now want to sell _____ million. B/c of this change in (price/underlying conditions), (demand/qty demanded) change by 50 million Greebes and the (supply/qty supplied) changed by _____ million Greebes.
250
150
100
$.25
200
200 50 P S
.35
.20
SHORTAGE D
QS < QD Q

15. APE U2 L3 A14 Equilibrium Price & Equilibrium Quantity
Duffka School of Economics
11/16/2018
4. Area of CS and PS:
A. If the government sets the P at $.35 and qty is 100 million what will happen to the size of combined CS and PS?
IT WILL DECREASE
B. What does this say about the market system?
It results in the maximum CS & PS. P S
Government Price Floor
SURPLUS
.35
.25 D
QD < QS Q

16. APE U2 L3 A14 Equilibrium Price & Equilibrium Quantity
Duffka School of Economics
11/16/2018
Figure New Supply of Greebes…a mysterious blight
Under these conditions, market forces would tend to establish an equilibrium price of _______ per Greebe and an equilibrium quantity of ______ million.
Compared with the equilibrium price in question 1, we say that b/c of this change in (price/underlying conditions), the (supply/qty supplied) changed; and both the eq price and the eq quantity changed. The eq price (increased/decreased), and the eq quantity (increased/decreased).
Compared with the CS & PS in question 4, consumer surplus has (increased/decreased), and PS has (increased/decreased)
$.30
150

17. APE U2 L3 A14 Equilibrium Price & Equilibrium Quantity
Duffka School of Economics
11/16/2018
Figure New Demand for Greebes
A further drop in people’s incomes as the result of a prolonged recession causes the demand schedule to change…
Label the new equilibrium E2. Under these conditions, with the supply schedule at S1, competitive market forces would tend to establish an equilibrium price of _____ per Greebe and an equilibrium quantity of _______ million Greebes. Compared with the equilibrium price in question 5, because of this change in (price/underlying conditions), the (demand/quantity demanded) changed. The equilibrium price (increased/decreased), and the equilibrium quantity (increased/decreased).
$.25
100

18. APE U2 L3 A15 Part A: Figure 15.1 Jelly Beans Supply & Demand Graph A
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Part A: Figure 15.1 Jelly Beans Supply & Demand
Graph A
Graph B
Graph C
Graph D S S1 S S S1 S D1 D D D D1 D
The price of sugar increases ________.
The price of gum, a close substitute for jelly beans, increases_________.
A machine is invented that makes jelly beans at lower cost_________.
The govt. taxes foreign beans, with large mkt share_________.
The price of soda, a complementary good increases_________.
Widespread prosperity allows people to buy more jelly beans_______. B C A B D C

19. APE U2 L3 A15
Duffka School of Economics
11/16/2018
Connecticut ships large amounts of apples to ALL parts of the US. How does a hurricane in CT. affect other parts of the economy. S1 P S
7. Apples in Boston
Price: RISES
QTY: FALLS
Reason: A hurricane destroys apples. D Q
8. LAND devoted to apple orchards in Washington
Price: RISES
QTY: RISES
Reason: Washington farmers have the incentive to grow more apples b/c P is higher. They must buy more land. P S D1 D Q

20. APE U2 L3 A15
Duffka School of Economics
11/16/2018
Connecticut ships large amounts of apples to ALL parts of the US. How does a hurricane in CT. affect other parts of the economy. P S
9. Apples grown in the state of Washington
Price: RISES
QTY: RISES
Reason: Consumer sub Washington apples for CT apples. D1 D Q
10. Pears
Price: RISES
QTY: RISES
Reason: Sub pears for apples P S D1 D Q

21. APE U2 L3 A15
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11/16/2018
Connecticut ships large amounts of apples to ALL parts of the US. How does a hurricane in CT. affect other parts of the economy. S1 P S
11. Apple Pies
Price: RISES
QTY: FALLS
Reason: Apples used for pies. Higher priced apples increase the cost of producing pies. D Q

22. Practice Question #1
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11/16/2018
1. Which of the following describes what will happen in the market for tomatoes if a salmonella outbreak is attributed to tainted tomatoes? a. Supply will decrease and price will increase. b. Supply will decrease and price will decrease. c. Demand will decrease and price will increase. d. Demand will decrease and price will decrease. e. Supply and demand will both decrease.

23. Practice Question 2
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11/16/2018
2. Which of the following will lead to an increase in the equilibrium price of product “X”? A(n) a. increase in consumer incomes if product “X” is an inferior good b. increase in the price of machinery used to produce product “X” c. technological advance in the production of good “X” d. decrease in the price of good “Y” (a substitute for good “X”) e. expectation by consumers that the price of good “X” is going to fall

24. Practice Question 3
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The equilibrium price will rise, but equilibrium quantity may increase, decrease, or stay the same if a. demand increases and supply decreases. b. demand increases and supply increases. c. demand decreases and supply increases. d. demand decreases and supply decreases. e. demand increases and supply does not change.

25. Practice Question 4
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An increase in the number of buyers and a technological advance will cause a. demand to increase and supply to increase. b. demand to increase and supply to decrease. c. demand to decrease and supply to increase. d. demand to decrease and supply to decrease. e. no change in demand and an increase in supply.

26. Practice Question 5
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Which of the following is certainly true if demand and supply increase at the same time? a. The equilibrium price will increase. b. The equilibrium price will decrease. c. The equilibrium quantity will increase. d. The equilibrium quantity will decrease. e. The equilibrium quantity may increase, decrease, or stay the same.

27. Free Response Practice 1
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11/16/2018
Draw a correctly labeled graph showing the market for cups of coffee in equilibrium. On your graph, show the effect of a decrease in the price of coffee beans on equilibrium price and equilibrium quantity in the market for cups of coffee.

28. I. Changes in Supply and Demand
Duffka School of Economics
11/16/2018
A. What Happens When the Demand Curve Shifts Note: When a demand curve shifts, it is easy to locate the new intersection and label it as the new equilibrium price and quantity. It’s important to know how the market adjusts from original, to new, equilibrium points. There are three important components that students must identify for the AP exam. 1. What shifter is at work in the market? 2. What curve is shifting and in what direction? 3. What happens to equilibrium price and quantity?

29. A. What Happens When the Demand Curve Shifts?
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11/16/2018
Example 1: tickets to a concert for a popular musician or band. As the band has more success, and gets more popular with fans, what happens to the price of a concert ticket? Draw the market for concert tickets to this band. Identify the original price as Pe and quantity of Qe. Now analyze the three important components for this scenario. 1. Stronger tastes and preferences. 2. Demand shifts to the right. 3. Price and quantity both increase. Why? Show the rightward shift of the demand curve. At the original price of Pe, there is a now a shortage of tickets. When there is a shortage, the price must rise. The equilibrium quantity moves upward along the stationary supply curve to the intersection of supply and the new demand curve.

30. A. What Happens When the Demand Curve Shifts?
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11/16/2018
1. Stronger tastes and preferences.
2. Demand shifts to the right.
3. Price and quantity both increase. Why?

31. A. What Happens When the Demand Curve Shifts?
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11/16/2018
Example 2: During a recession, people buy fewer new cars and trucks. What happens to the price of a new car or truck? Draw the market for new autos. Identify the original price as Pe and quantity of Qe. Now analyze the three important components for this scenario. 1. Lower income during a recession. 2. Demand shifts to the left for normal goods. 3. Price and quantity both decrease. But why? Show the leftward shift of the demand curve. At the original price of Pe, there is a now a surplus of autos. When there is a surplus, the price must fall. The equilibrium quantity moves downward along the stationary supply curve to the intersection of supply and the new demand curve.

32. B. What Happens When the Supply Curve Shifts?
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Example Cotton is an important raw material in the making of clothes like denim jeans. If the global price of cotton rises, what happens to the price of jeans? Draw the market for jeans. Identify the original price as Peand quantity of Qe. Now analyze the three important components for this scenario. 1. An input price has increased (cotton). 2. Supply of jeans shifts to the left. 3. Price increases and quantity decreases. But why? Show the leftward shift of the supply curve. At the original price of Pe, there is a now a shortage of jeans. When there is a shortage, the price must rise. The equilibrium quantity moves upward along the stationary demand curve to the intersection of demand and the new supply curve.

33. B. What Happens When the Supply Curve Shifts?
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PRACTICE Production technology has greatly improved in agriculture, producing more corn on the same amount of land. How has the better technology affected the price of corn? Draw the market for corn. Identify the original price as Pe and quantity of Qe. Now analyze the three important components for this scenario. 1. Better technology. 2. Supply of corn shifts to the right. 3. Price decreases and quantity increases. But why? Show the rightward shift of the supply curve. At the original price of Pe, there is a now a surplus of corn. When there is a surplus, the price must fall. The equilibrium quantity moves downward along the stationary demand curve to the intersection of demand and the new supply curve.

34. C. Simultaneous Shifts of Supply and Demand Curves
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C. Simultaneous Shifts of Supply and Demand Curves
Demand and Supply move in opposite directions. • When demand increases and supply decreases, the equilibrium price rises but the change in the equilibrium quantity is ambiguous. • When demand decreases and supply increases, the equilibrium price falls but the change in the equilibrium quantity is ambiguous.

35. C. Simultaneous Shifts of Supply and Demand Curves
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PRACTICE Suppose the price of cheeseburgers is rising. In addition, the price of pepperoni is rising. How will these two events affect the market for pizza? Demand shift: 1. The price of a substitute is rising (cheeseburgers). 2. This shifts demand for pizza to the right. 3. Price and quantity of pizza both increase. Supply shift: 1. The price of an input is rising (pepperoni). 2. Supply of pizza shifts to the left. 3. Price increases, and quantity decreases. Both shifts generate an increase in the price, so we can certainly predict a higher price of pizza. However the change in quantity depends on which of the two shifts is stronger.

36. C. Simultaneous Shifts of Supply and Demand Curves
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C. Simultaneous Shifts of Supply and Demand Curves
Demand and Supply move in the same direction. • When both demand and supply increase, the equilibrium quantity increases but the change in equilibrium price is indeterminate. • When both demand and supply decrease, the equilibrium quantity decreases but the change in equilibrium price is indeterminate.

37. C. Simultaneous Shifts of Supply and Demand Curves
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PRACTICE The recent Winter Olympics has increased the popularity of snowboarding and more companies have begun producing snowboards. How will these events affect the market for snowboards? Demand shift: 1. Tastes and preferences are stronger for snowboarding. 2. This shifts demand for snowboards to the right. 3. Price and quantity of snowboards both increase. Supply shift: 1. More suppliers are producing snowboards. 2. Supply of snowboards shifts to the right. 3. Price decreases, and quantity increases. Both shifts generate an increase in the quantity, so we can certainly predict a higher equilibrium quantity of snowboards. However the change in price depends on which of the two shifts is stronger.

38. Free Response Practice 2
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Draw a correctly labeled graph showing the SUV market in equilibrium. On your graph, show the effect on equilibrium price and quantity in the market for SUVs if the price of gasoline increases.

39. Free Response Practice 2
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11/16/2018
Draw a correctly labeled graph showing the SUV market in equilibrium. On your graph, show the effect on equilibrium price and quantity in the market for SUVs if the price of gasoline increases.
1 point: The vertical axis is labeled “Price” (or “P”) and the horizontal axis is labeled “Quantity”‘ (or “Q”).
1 point: The graph shows a downward sloping demand curve and an upward sloping supply curve (with labels).
1 point: Equilibrium price and quantity are found where supply and demand intersect and are labeled on the appropriate axes.
1 point: A new (and labeled) demand curve is shown to the left of the original demand curve.
1 point: The new equilibrium price and quantity are found at the intersection of the original supply curve and the new demand curve and are labeled on the appropriate axes.

40. Duffka School of Economics
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