Economics
Changes in Equilibrium
Changes in equilibrium occur when there is a shift in the supply or demand curve, leading to a new equilibrium price and quantity. This can be caused by factors such as changes in consumer preferences, input prices, or government policies. When the equilibrium changes, it reflects the new balance between supply and demand in the market.
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eBook - PDFEconomics
Principles & Policy
- William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 70 Part 1 Getting Acquainted with Economics Many outside forces can disturb the equilibrium in a market by shifting the demand curve or the supply curve, either temporarily or permanently. Between 2006 and 2009, for example, U.S. home prices fell by roughly 30 percent because an oversupply of unsold homes, coupled with the larger effect of the economic crisis of 2007–2009, shifted the real estate demand curve downward. 7 In the fall of 2010, heavy rains ruined the napa cabbage crop in South Korea, shifting the supply curve downward and quadrupling prices of napa cabbage—the essential ingredient in kimchi, a staple of most Koreans’ diets. 8 Today, the increasing popularity of tequila has led to a shortage of agave, the plant used to make it, driving up the prices of both agave and tequila. 9 Such outside influences change the equi- librium price and quantity. If you look again at Figures 8 and 9, you can see clearly that any event that causes either the demand curve or the supply curve to shift will also change the equilibrium price and quantity. 4-6a Application: Who Really Pays That Tax? Supply-and-demand analysis offers insights that may not be readily apparent. Here is an example. Suppose your state legislature raises the gasoline tax by 10 cents per gallon. Service station operators will then have to pay 10 additional cents in taxes on every gallon they pump. They will consider this higher tax as an addition to their costs and will pass it on to you and other drivers by raising the price of gas by 10 cents per gallon.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
It might be an event that affects supply, like a change in natural conditions, input prices, or technology, or government policies that affect production. How does this economic event affect equilibrium price and quantity? We will analyze this question using a four-step process. Step 1. Draw a demand and supply model before the economic change took place. To establish the model requires four standard pieces of information: The law of demand, which tells us the slope of the demand curve is negative; the law of supply, which tells us that the slope of the supply curve is positive; the shift variables for demand; and the shift variables for supply. From this model, find the initial equilibrium values for price and quantity. Step 2. Decide whether the economic change you are analyzing affects demand or supply. In other words, does the event refer to something in the list of demand factors or supply factors? Step 3. Decide whether the effect on demand or supply causes the curve to shift to the right or to the left, and sketch the new demand or supply curve on the diagram. In other words, does the event increase or decrease the amount consumers want to buy or producers want to sell? Step 4. Identify the new equilibrium and then compare the original equilibrium price and quantity to the new equilibrium price and quantity. 64 3 • Demand and Supply Access for free at openstax.org Let’s consider one example that involves a shift in supply and one that involves a shift in demand. Then we will consider an example where both supply and demand shift. Good Weather for Salmon Fishing Suppose that during the summer of 2015, weather conditions were excellent for commercial salmon fishing off the California coast. Heavy rains meant higher than normal levels of water in the rivers, which helps the salmon to breed.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Equilibrium quantity increases. Equilibrium price rises. Equilibrium quantity change is indeterminate. Equilibrium price falls. Equilibrium quantity change is indeterminate. Equilibrium price change is indeterminate. Equilibrium quantity decreases. When the demand and supply curves shift in the same direction, equilibrium quantity also shifts in that direction. The effect on equilibrium price depends on which curve shifts more. If the curves shift in opposite directions, equilibrium price will move in the same direction as demand. The effect on equilibrium quantity depends on which curve shifts more. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 84 Part 1 Introduction to Economics C H E C K P O I N T What happens to equilibrium price and quantity if demand and supply both increase? 4-7 Disequilibrium A surplus exerts downward pressure on the price, and a shortage exerts upward pres- sure. Markets, however, don’t always reach equilibrium quickly. During the time re- quired to adjust, the market is said to be in disequilibrium. Disequilibrium is usually temporary as market forces push toward equilibrium. But sometimes, often as a result of government intervention, when market forces are suppressed, disequilibrium can last a while, perhaps decades, as we will see next. 4-7a Price Floors Sometimes public officials force a price above the equilibrium level. For example, the fed- eral government regulates some agriculture prices in an attempt to ensure farmers a higher and more stable income than they would otherwise earn.
eBook - PDF- Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Brian Roach, Mariano Torras, Jonathan Harris, Julie Nelson(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
Market adjustment analysis can, however, tell us what to expect from normal market forces: most generally, disequilibrium situations create forces that tend to push prices toward an equilibrium level. 4.3 S HIFTS IN S UPPLY AND D EMAND Our model predicts that once we reach equilibrium, the price and quantity sold will stay the same unless something changes. In the real world, of course, things are constantly changing. For example, consider the change in housing prices in the United States over the past few decades, as noted in the introduction to this chapter. Constantly fluctuating prices are also common with fossil fuels, minerals such as gold and copper, and consumer electronics. Even coffee prices vary considerably over time. Many price changes can be explained, and in some cases even predicted in advance, by using our microeconomic market model. We can determine how a shift in one (or both) of our curves, as a result of a change in one or more nonprice determinants, will lead to a change in the equilibrium price and quantity. Returning to our coffee market, let’s suppose that a new seller enters the market. As we discussed earlier, this is a change in a nonprice determinant of supply and will shift the supply curve out (to the right). This is shown in Figure 4.10 with the supply curve shifting from S 1 to S 2 . Our initial Figure 4.10 Market Adjustment to an Increase in Supply 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40 0 200 400 600 800 1000 1200 140 0 1 600 Price of Coffee ($ per Cup) Cups of Coffee per Week S 1 S 2 Demand Surplus E 1 E 2 T HE T HEORY OF M ARKET A DJUSTMENT 99 equilibrium is point E 1 with a price of $1.10 and a quantity of 700 cups per week. But note that with the entry of the new coffee seller shifting the supply curve to S 2 , and assuming that initially the price stays at $1.10, we go from equilibrium to a situation of surplus (as shown in Figure 4.10 ).
eBook - PDFMacroeconomics for Business
The Manager's Way of Understanding the Global Economy
- Lawrence S. Davidson, Andreas Hauskrecht, Jürgen von Hagen(Authors)
- 2020(Publication Date)
- Cambridge University Press(Publisher)
disturbance, it will return to a macroeconomic equilibrium all by itself. Liberal and left-leaning analysts, commentators and policymakers typically think that the market system is not robust in that sense and needs the assistance of government policies to return to an equilibrium. Eclectic analysts, commentators, and policy- makers think that conservatives and liberals are both sometimes right and some- times wrong, and that all depends on the situation. What’s so special about macroeconomic equilibrium? The answer is that it gives us a tool to analyze and a framework to predict co-movements of real GDP and the price level in response to changes in other macroeconomic factors. Starting from an equilibrium position, we first determine whether such changes in other factors would lead to a shift in the AD curve or a shift in the AS curve. Then we apply the relevant shift to see how real GDP and the price level respond. The only justification for using the concept of macroeconomic equilibrium is its usefulness for understanding and predicting economic developments. But is it really that useful? The answer to that question has two dimensions. One is practical experi- ence. Try it out and you will see. The other is competition. Check to see if there are alternative frameworks not relying on macroeconomic equilibrium that work better. Now let’s see how we can use macroeconomic equilibrium. In the next section, we analyze the impact of two kinds of shocks on aggregate supply and aggregate demand and their effects on real GDP and the price level. A shock is a change in one of the causal factors on the AD and the AS side of the economy which is not itself a reaction to a macroeconomic development. For example, an oil price hike caused by military conflicts in the Middle East would be an oil price shock. In contrast, an oil price hike caused by an increase in firms’ demand for oil following an increase in aggregate demand would not be considered to be a shock.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Equilibrium quantity increases. Equilibrium price rises. Equilibrium quantity change is indeterminate. Equilibrium price falls. Equilibrium quantity change is indeterminate. Equilibrium price change is indeterminate. Equilibrium quantity decreases. When the demand and supply curves shift in the same direction, equilibrium quantity also shifts in that direction. The effect on equilibrium price depends on which curve shifts more. If the curves shift in opposite directions, equilibrium price will move in the same direction as demand. The effect on equilibrium quantity depends on which curve shifts more. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 84 Part 1 Introduction to Economics C H E C K P O I N T What happens to equilibrium price and quantity if demand and supply both increase? 4-7 Disequilibrium A surplus exerts downward pressure on the price, and a shortage exerts upward pres-sure. Markets, however, don’t always reach equilibrium quickly. During the time re-quired to adjust, the market is said to be in disequilibrium. Disequilibrium is usually temporary as market forces push toward equilibrium. But sometimes, often as a result of government intervention, when market forces are suppressed, disequilibrium can last a while, perhaps decades, as we will see next. 4-7a Price Floors Sometimes public officials force a price above the equilibrium level. For example, the fed-eral government regulates some agriculture prices in an attempt to ensure farmers a higher and more stable income than they would otherwise earn.
eBook - PDFRational Choice Theory
Potential and Limits
- Lina Eriksson(Author)
- 2011(Publication Date)
- Red Globe Press(Publisher)
The resting point, to which the ball always returns, is called an equilibrium . Because of the intuitiveness of ideas like that of a resting point, the concept of equilibrium is often discussed as if it is one (or a set of related) concept(s). But it is not. One reason for the multitude of equilibrium notions in use is that different approaches use different notions of equilibrium. Another reason is that each approach uses more than one such notion. The first approach is comparative stat-ics. Analysts study how changes in variable values shift a system from one equilibrium to another. This type of analysis says nothing about the process through which the shift takes place; it tells us only about the static equilibria that constitute the start and end points of that process. The second approach is (standard) game theory, and it uses a completely different set of equilibrium concepts. The third is evolutionary theory, which has the capacity to study the process through which changes happen. Evolutionary theory draws heavily on game theory, but has equilibrium concepts of its own to capture the process dynamics better. Economics makes wide use of a variety of notions of equilibrium. The basic idea is that when a system of economic variables is in Equilibrium 197 equilibrium, it will stay there until an exogenous shock changes one of the variables and drives the system towards a new equilibrium where the magnitudes of the variables are once again compatible with each other. But when this basic idea is applied, the work is done by different notions of equilibrium in different applications. Sometimes the relevant notion is of a balance of forces, sometimes of a system at rest, of the clearing of all markets, of the compatibil-ity between the magnitudes of a given set of variables, of the fulfil-ment of rational expectations, or of the compatibility of optimizing individuals’ plans.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Factors that can shift the supply curve for goods and services, causing a different quantity to be supplied at any given price, include input prices, natural conditions, changes in technology, and government taxes, regulations, or subsidies. 76 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process When using the supply and demand framework to think about how an event will affect the equilibrium price and quantity, proceed through four steps: (1) sketch a supply and demand diagram to think about what the market looked like before the event; (2) decide whether the event will affect supply or demand; (3) decide whether the effect on supply or demand is negative or positive, and draw the appropriate shifted supply or demand curve; (4) compare the new equilibrium price and quantity to the original ones. 3.4 Price Ceilings and Price Floors Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result. Price floors prevent a price from falling below a certain level. When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. Price floors and price ceilings often lead to unintended consequences. 3.5 Demand, Supply, and Efficiency Consumer surplus is the gap between the price that consumers are willing to pay, based on their preferences, and the market equilibrium price. Producer surplus is the gap between the price for which producers are willing to sell a product, based on their costs, and the market equilibrium price. Social surplus is the sum of consumer surplus and producer surplus. Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price.
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Factors that can shift the supply curve for goods and services, causing a different quantity to be supplied at any given price, include input prices, natural conditions, changes in technology, and government taxes, regulations, or subsidies. 76 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col23729/1.3 3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process When using the supply and demand framework to think about how an event will affect the equilibrium price and quantity, proceed through four steps: (1) sketch a supply and demand diagram to think about what the market looked like before the event; (2) decide whether the event will affect supply or demand; (3) decide whether the effect on supply or demand is negative or positive, and draw the appropriate shifted supply or demand curve; (4) compare the new equilibrium price and quantity to the original ones. 3.4 Price Ceilings and Price Floors Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result. Price floors prevent a price from falling below a certain level. When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. Price floors and price ceilings often lead to unintended consequences. 3.5 Demand, Supply, and Efficiency Consumer surplus is the gap between the price that consumers are willing to pay, based on their preferences, and the market equilibrium price. Producer surplus is the gap between the price for which producers are willing to sell a product, based on their costs, and the market equilibrium price. Social surplus is the sum of consumer surplus and producer surplus. Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price.
eBook - PDFEconomics
Theory and Practice
- Patrick J. Welch, Gerry F. Welch(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
Perhaps this is a decrease in the supply of super‐sized pizzas caused by a rise in the cost of cheese, a key ingredient. You will find it easier to understand the behavior of buyers and sellers in mar- kets, and how they react to various price and nonprice considerations, if you remem- ber these distinctions. Changes in Equilibrium PRICE AND EQUILIBRIUM QUANTITY We have seen that when nonprice factors affecting demand or supply change, demand or supply curves shift. Recall that the equilibrium price and quantity of a good or service appear at the intersection of its demand and supply curves. Therefore, whenever a prod- uct’s demand or supply curve shifts, its equilibrium price and quantity change as well. Can we analyze and predict how changes in buyer and seller behavior alter both the equilibrium price of a product and the quantity bought and sold? Yes, we can by using the following tools to order our thinking about such changes in market condi- tions. Let’s consider separately how each change in demand and supply affects equi- librium price and quantity. Effect of Increases and Decreases in Demand Increase in Demand How does an increase in demand affect a product’s equilibrium price and quantity? Consider an item that becomes a fad. Suppose that volleyball becomes the “in” sport and that all over the country people are searching for volleyball nets to put in their yards and take to parks and beaches. Common sense would tell us that the vol- leyball net market might heat up with such an increase in demand, and price would rise. But even at this increased price, more nets would be sold. Let’s examine the graphical analysis in Figure 3.8a to determine whether our common‐sense analysis is correct. S is the monthly market supply curve for volleyball nets, and D1 shows the monthly demand for volleyball nets before the sport becomes a fad. With supply curve S and demand curve D1, the equilibrium price is $40 per net, and the equilibrium quantity is 25,000 nets.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(Publication Date)
- Openstax(Publisher)
The likely reason is that people drive more in the summer, and are also willing to pay more for gas, but that does not explain how steeply gas prices fell. Other factors were at work during those six months, such as increases in supply and decreases in the demand for crude oil. This chapter introduces the economic model of demand and supply—one of the most powerful models in all of economics. The discussion here begins by examining how demand and supply determine the price and the quantity sold in markets for goods and services, and how changes in demand and supply lead to changes in prices and quantities. 3.1 | Demand, Supply, and Equilibrium in Markets for Goods and Services By the end of this section, you will be able to: • Explain demand, quantity demanded, and the law of demand • Identify a demand curve and a supply curve • Explain supply, quantity supply, and the law of supply • Explain equilibrium, equilibrium price, and equilibrium quantity First let’s first focus on what economists mean by demand, what they mean by supply, and then how demand and supply interact in a market. 44 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col11858/1.4 Demand for Goods and Services Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is based on needs and wants—a consumer may be able to differentiate between a need and a want, but from an economist’s perspective they are the same thing. Demand is also based on ability to pay. If you cannot pay for it, you have no effective demand. What a buyer pays for a unit of the specific good or service is called price. The total number of units purchased at that price is called the quantity demanded. A rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded.
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