Microeconomics in Modules and Economics in Modules Third

Microeconomics in Modules and Economics in Modules Third Edition Krugman/Wells Module 7 Changes in Equilibrium

What You Will Learn 1 How equilibrium price and quantity are affected when there is a change in either supply or demand 2 How equilibrium price and quantity are affected when there are simultaneous changes in both supply and demand 2 of 9

Equilibrium and Shifts of the Demand Curve Price of cotton An increase in demand… … leads to a movement along the supply curve due to a higher equilibrium price and higher equilibrium quantity. E 2 Price rises Supply E 1 P 1 D 2 D 1 Quantity rises Q 1 Q 2 Quantity of cotton 3 of 9

Equilibrium and Shifts of the Supply Curve Price of cotton S 2 S 1 A decrease in supply… E 2 P 2 … leads to a movement along the demand curve due to a higher equilibrium price and lower equilibrium quantity. Price rises P 1 E 1 Demand Q 2 Q 1 Quantity falls Quantity of cotton 4 of 9

Simultaneous Shifts of Supply and Demand Curves (a) One possible outcome: Price rises, quantity rises Price of cotton Small decrease in supply E 2 P 2 E 1 S 2 S 1 Two opposingin The increase forces demand determiningthe dominates equilibrium decrease in quantity. supply. P 1 D 2 D 1 Q 1 Large increase in demand Q 2 Quantity of cotton 5 of 9

Simultaneous Shifts of Supply and Demand Curves (b) Another possible outcome: Price rises, quantity falls Price of cotton Large decrease in supply Two opposing forces determining the equilibrium quantity. S 2 S 1 E 2 P 2 E 1 P 1 Small increase in demand D 1 Q 2 Q 1 D 2 Quantity of cotton 6 of 9

Economics in Action The Rice Run of 2008 • In April 2008, the price of rice exported from Thailand reached $950 per ton, up from $360 at the beginning of 2008. • The factors, related to both demand supply, included growing incomes in China and India, drought in Australia, and pest infestation in Vietnam. • But it was hoarding by farmers, panic buying by consumers, and an export ban by India that explained the rapid rise in price. 7 of 9

Summary Simultaneous Shifts of Supply and Demand Supply Increases Supply Decreases Demand Increases Price: ambiguous Quantity: up Price: up Quantity: ambiguous Demand Decreases Price: down Quantity: ambiguous Price: ambiguous Quantity: down 8 of 9