1. University of Hawai‘i at Mānoa Department of Economics
ECON 130 (003): Principles of Economics (Micro)
Gerard Russo
Lecture #5
Tuesday, January 27, 2004

2. 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

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

4. Market Equilibrium
$/Q
Supply Pe
Demand Qe Q

5. $/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

6. $/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

7. $/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

8. $/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

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

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

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

12. 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.

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

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

15. 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.

16. $/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

17. 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.

18. $/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

19. 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.

20. 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

21. 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.

22. $/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

23. 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.