COMMERCE 1AA3 Lecture Notes - Lecture 6: Economic Equilibrium, Comparative Statics

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Published on 21 Mar 2016
School
McMaster University
Department
Commerce
Course
COMMERCE 1AA3
Professor
Shift factors of supply
Compliments: both items can be sold together (I.e. cars and gas)
Substitute: Items sold instead of other items (i.e. coke or pepsi)
Equilibrium: Qs=Qd
LAW OF DEMAND: When price increases, Qd decreases
LAW OF SUPPLY: When price increases, Qs Increases
If Qs>Qdm, price above equilibrium price = surplus or excess supply.
When there is a surplus, sellers will drop the price to reach equilibrium
If Qd>Qs, price below equilibrium price = shortage supply
When there is a shortage, sellers will lower the Qs.
Analyzing changes in equilibrium
Comparative statics: Using our diagrams to see what happens to equilibrium when
curves shift
E.g.
Suppose there is a heat wave (taste, seasonal). How will this impact the market for
ice cream?
Demand will shift right
New intersection of D and S
Equilibrium P increased and Q Increased.
E.g. suppose the price of sugar rises. How will this impact the market for ice cream?
Supply will shift left
New intersection of demand and supply
Eqm. Price increases and quantity decreases.
When D and S both shift, what happens to eqm. P and Q depends on the size of the
relative shifts.
Ex. If simultaneous increase in D and increase in Supply, then change in P is
Ambiguous
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