Supply and Demand Together, Part 5

• Law of supply and demand

– The price of any good adjusts
• To bring the quantity supplied and the quantity
demanded for that good into balance
– In most markets
• Surpluses and shortages are temporary

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 Supply and Demand Together, Part 6
Three steps to analyzing changes in equilibrium
1. Decide whether the event shifts the
supply curve, the demand curve, or, in
some cases, both curves
2. Decide whether the curve shifts to the
right or to the left
3. Use the supply-and-demand diagram
• Compare the initial and the new equilibrium
• Effects on equilibrium price and quantity

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 Table 3 Three Steps for Analyzing Changes in
Equilibrium

1. Decide whether the event shifts the supply or demand curve (or perhaps
both).

2. Decide in which direction the curve shifts.

3. Use the supply-and demand diagram to see how the shift changes the
equilibrium price and quantity.

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 Supply and Demand Together, Part 7
A change in market equilibrium due to a
shift in demand
– One summer, very hot weather
– Effect on the market for ice cream?
1. Hot weather: shifts the demand curve
(tastes )
2. Demand curve shifts to the right
3. Higher equilibrium price; higher
equilibrium quantity
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 Figure 10 How an Increase in Demand Affects the
Equilibrium

An event that raises quantity demanded at any given price shifts the demand curve to the right. The
equilibrium price and the equilibrium quantity both rise. Here an abnormally hot summer causes buyers to
demand more ice cream. The demand curve shifts from D 1 to D2, which causes the equilibrium price to rise
from $2.00 to $2.50 and the equilibrium quantity to rise from 7 to 10 cones.

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 Supply and Demand Together, Part 8
• Shifts vs. movements along curves
– Shift in the supply curve
• Change in supply
– Movement along a fixed supply curve
• Change in the quantity supplied
– Shift in the demand curve
• Change in demand
– Movement along a fixed demand curve
• Change in the quantity demanded

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learning management system for classroom use.
 Supply and Demand Together, Part 9
A change in market equilibrium due to a
shift in supply
– One summer, a hurricane destroys part of
the sugarcane crop: higher price of sugar
– Effect on the market for ice cream?
1. Change in price of sugar: supply curve
2. Supply curve: shifts to the left
3. Higher equilibrium price; lower
equilibrium quantity
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management system for classroom use.
 Figure 11 How a Decrease in Supply Affects the
Equilibrium

An event that reduces quantity supplied at any given price shifts the supply curve to the left.
The equilibrium price rises, and the equilibrium quantity falls. Here an increase in the price of
sugar (an input) causes sellers to supply less ice cream. The supply curve shifts from S 1 to S2,
which causes the equilibrium price of ice cream to rise from $2.00 to $2.50 and the equilibrium
quantity to fall from 7 to 4 cones.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 8
 Supply and Demand Together, Part 10

Shifts in both supply and demand

– One summer: hurricane and heat wave
1. Heat wave shifts the demand curve;
hurricane shifts the supply curve
2. Demand curve shifts to the right; Supply
curve shifts to the left
3. Equilibrium price raises
– If demand increases substantially while supply
falls just a little: equilibrium quantity rises
– If supply falls substantially while demand rises just
a little: equilibrium quantity falls
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 Figure 12 A Shift in Both Supply and Demand

Here we observe a simultaneous increase in demand and decrease in supply. Two outcomes are
possible. In panel (a), the equilibrium price rises from P 1 to P2, and the equilibrium quantity rises
from Q1 to Q2.
In panel (b), the equilibrium price again rises from P1 to P2, but the equilibrium quantity falls from
Q1 to Q2.
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 Table 4 What Happens to Price and Quantity When
Supply or Demand Shifts?

Demand No Change in An Increase in A Decrease in

Supply Supply Supply
No Change in P same; Q same P down; Q up P up; Q down
Demand
An Increase in P up; Q up P ambiguous; Q P up; Q
Demand up ambiguous
A Decrease in P down; Q down P down; Q P ambiguous; Q
Demand ambiguous down

As a quick quiz, make sure you can explain at least a few of the entries in this table using a
supply-and-demand diagram.

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 How Prices Allocate Resources, Part 1
• Supply and demand together
– Determine the prices of the economy’s
many different goods and services

“Two dollars”
“—and seventy-five cents.”

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 ASK THE EXPERTS
Price Gouging
“Connecticut should pass its Senate Bill 60, which
states that during a ‘severe weather event emergency,
no person within the chain of distribution of
consumer goods and services shall sell or offer to sell
consumer goods or services for a price that is
unconscionably excessive.’”

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 13
management system for classroom use.
 How Prices Allocate Resources, Part 2
• Prices
– Signals that guide the allocation of
resources
– Mechanism for rationing scarce resources
– Determine who produces each good and
how much is produced

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 14
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