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These are notes about how changes in the market will affect equilibrium (price and
quantity). I will first give some examples when only one factor changes (only one curve
shifts). Then I will discuss the more complicated case when two factors change at once,
and provide a couple examples.
One Shifter
In class I gave the following steps for determining the change in equilibrium caused by a
market shifter.
Step 0:
P 1*
D1
Q
Q1*
1
Change 1: Due to sanitary conditions, a large portion of cattle stock is considered un-
edible (price of existing cattle increases).
P 2*
P 1*
S2
D1
Q
Q2* Q1*
2
Change 2: A consumer’s income increases
P 2*
P 1*
D2
D1
Q
Q1* Q2*
Two Shifters
Now let’s suppose two factors change at the same time. We can still use the same
process as above, but now steps 1 & 2 will involve analysis of multiple shifts. Also, step
3 is a little more complicated. We can see this by working an example.
P 1*
D1
Q
Q1*
3
Suppose that: (a) The price of satellite service decreases dramatically
(b) Firms expect a major television producer to leave the market
next year
Step 3:
As I said above, this step can be a bit complicated. To see this, consider the two
following diagrams – both of which increase demand and decrease supply.
P1*
S2
D2
D1
Q
Q1* Q2*
P1*
S2
D2
D1
Q
Q2* Q1*
4
First, again notice that both of these diagrams satisfy the fact that Demand is increasing
and Supply is decreasing. Now notice that in both diagrams P2*> P1*. However, in
Diagram 1 Q2*> Q1* and in Diagram 2 Q2*< Q1*.
An Important Fact: When both Demand and Supply shift one of the two possibilities
will occur:
The change in equilibrium price will be certain (either a definite increase or a definite
decrease) while the change in equilibrium quantity will be ambiguous (could be either an
increase, decrease or no change, depending on how much each curve is shifted).
OR
The change in equilibrium quantity will be certain (either a definite increase or a definite
decrease) while the change in equilibrium price will be ambiguous (could be either an
increase, decrease or no change, depending on how much each curve is shifted).
To see that in the above example (Demand increasing, Supply decreasing) that
equilibrium price will definitely increase, while change in equilibrium quantity will be
ambiguous, consider each curve shift individually.
An increase in demand increases P*. A decrease in supply increases P*. Thus these two
shifts working together will increase P*.
When working problems such as this, be sure to say if P* or Q* either changes with
certainty (then say if it increases or decreases) or if the change is ambiguous.
5
Example 2: (Market for Televisions)
Step 0:
Market for Televisions
P
S1
P 1*
D1
Q
Q1*
Suppose that: (a) A conclusive study shows that TV really does rot the brain
(b) The prices of plastic, glass and electrical cords go up
Step 3:
P1*
P2*
S2
D1
D2
Q
Q2* Q1*
6
We can see from this diagram that Q* definitely falls (Q2*< Q1*) but the change in P* is
ambiguous. This is because a decrease in supply and a decrease in demand both lead to a
lower Q*, while a decrease in supply pushes up P* and a decrease in demand pushes
down P*. When we combine these two effects, Q* will definitely fall, while the change
in P* is ambiguous.