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

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Published on 21 Mar 2016

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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