1. Lecture 8 Market Equilibrium Analysis

2. Market Equilibrium Price Adjustments –A shortage forces the price up. –A surplus forces the price down. Such price changes are mutually beneficial to both buyers and sellers.

3. Predicting Changes in Price and Quantity The theory we have just studies provides us with a powerful way of analyzing influences on prices and the quantities bought and sold. A change in price must be caused by either a change in demand or a change in supply.

4. A Change in Demand An increase in demand shifts the demand curve up and to the right. The new equilibrium price and quantity are higher. You have been practicing this in EIA illustrations

6. A Change in Supply An increase in supply shifts the supply curve to the right. The new equilibrium price is lower, but the equilibrium quantity is higher.

8. A Change in Both Demand and Supply Both curves shift. The direction in which price and quantity change will depend on how each curve shifts.

9. Demand and Supply Change in the Same Direction If demand and supply increase, both the demand and supply curves shift out. The new equilibrium quantity will be higher. The new equilibrium price may be higher, lower, or it may remain the same.

11. Demand and Supply Change in Opposite Directions Suppose supply increases but demand decreases. Price falls. The direction in which quantity changes will depend on the magnitude of the shifts in the two curves.

12. The Effects of an Increase in Both Demand and Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (Walkman $200 )

13. The Effects of an Increase in Both Demand and Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (Walkman $200 ) Demand for tapes (Walkman $50)

14. The Effects of an Increase in Both Demand and Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (Walkman $200) Demand for tapes (Walkman $50) Supply of tapes (new technology)

15. A Change in Both Demand and Supply Prediction –When both demand and supply increase, the quantity increases and the price decreases, or remains constant. –When both demand and supply decreases, the quantity decreases and the price increases, decreases, or remains constant.

16. The Effects of an Decrease in Demand and an Increase in Supply Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week) Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded supplied per tape ) CD player old CD player new $400 technology $200 technology 1 13 0 2 10 3 3 8 4 4 7 5 5 6 6

17. The Effects of an Decrease in Demand and an Increase in Supply Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week) Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded supplied per tape ) CD player old CD player new $400 technology $200 technology 1 13 0 9 3 2 10 3 6 6 3 8 4 4 8 4 7 5 3 10 5 6 6 2 12

18. The Effects of an Decrease in Demand and an Increase in Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (CD player $400 )

19. The Effects of an Decrease in Demand and an Increase in Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (CD player $400 ) Demand for tapes (CD player $400 )

20. The Effects of an Decrease in Demand and an Increase in Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (CD player $400 ) Demand for tapes (CD player $400 ) Supply of tapes (new technology)

21. The Effects of an Decrease in Demand and an Increase in Supply Prediction –When demand decreases and supply increases, the price falls and the quantity increases, decreases, or remains constant. –When demand increases and supply decreases, the price rises and the quantity increases, decreases, or remains constant.

22. CD Players, Health Care, and Bananas A Price Slide: CD Players A Price Rocket: Health Care A Price Roller Coaster: Bananas The Invisible Hand –Adam Smith each buyer an seller in a market “is led by an invisible hand to promote an end which was no part of his intention”

23. Price Slide, Rocket, and Roller Coaster