CAS EC 101 Lecture Notes - Lecture 3: Complementary Good, Comparative Statics, Economic Equilibrium

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1 May 2018

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CHAPTER 3: COMPARATIVE STATICS

Review

• The supply and demand curves intersect at the equilibrium

o At equilibrium, P* = Q* (Price Equilibrium = Quantity Equilibrium)

• When drawing the demand/supply curves, all of the non-price determinants are held

constant

o Need to be able to distinguish the supply v. demand determinants

Comparative Statics

• Steps:

o 1. Start at equilibrium

o 2. Change the value of one of the non-price determinants of supply or demand

o 3. The curve will shift either left or right

o 4. Compare the new equilibrium (the price and quantity equilibriums as well) to

the old one

o 5. Use these steps to answer old and new questions about the market economy

Objective 1: The Three Questions

• Must go through these three questions when dealing with a comparative statics problem

o ex: the price of DVD players declines. What happens to the equilibrium?

• Questions:

o 1. Which curve shifts?

▪ Is the change a determinant of demand or supply?

▪ ex: the demand curve shifts because of a complement good (the price of a

complement has changed)

o 2. Which way does the curve shift?

▪ ex: the demand curve shifts right because overall demand has increased

for the complement good

o 3. What happens to equilibrium P and Q after the shift?

▪ ex: Demand increased, leading to an increase in equilibrium price and

increase in equilibrium quantity

• It is important to draw the graph and identify if it is a change/change in quantity as well

as to see a visual of what is happening

o ex: there is an increase in demand and an increase in quantity supplied because

the demand curve has shifted right while we have only moved upwards along the

supply curve

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CAS EC 101 Full Course Notes

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Change the value of one of the non-price determinants of supply or demand: 3. The curve will shift either left or right: 4. Compare the new equilibrium (the price and quantity equilibriums as well) to the old one: 5. Use these steps to answer old and new questions about the market economy. Objective 1: the three questions: must go through these three questions when dealing with a comparative statics problem, ex: the price of dvd players declines. What happens to the equilibrium: questions, 1. Is the change a determinant of demand or supply: ex: the demand curve shifts because of a complement good (the price of a complement has changed, 2. Which way does the curve shift: ex: the demand curve shifts right because overall demand has increased for the complement good, 3. What happens to equilibrium p and q after the shift: ex: demand increased, leading to an increase in equilibrium price and increase in equilibrium quantity.

Related Questions

Section I: Supply & Demand Analysis (Chapter 3) In each of the following 10 questions, show what happens to the Demand, Supply, equilibrium price and equilibrium quantity of copper. Show an increase by use of +, a decrease with a -, and no change with 0 (thatâs a zero, not an O or o). Although in the real world, both supply and demand are constantly changing, in the model we are using here, only one curve shifts per problem. So, if demand goes + or -, supply will be 0, and vice versa. In no case will equilibrium price or equilibrium quantity be 0. You may want to sketch out the supply and demand curve analysis to help in answering the questions. You will also be required to identify which determinant (of demand or supply) has changed, thus causing the shift. Rather than actually writing in the determinant, fill in the blank with the number that corresponds to the relevant determinant, based upon the following list. You may want to refer to the lecture notes entitled Determinants of Demand & Supply in the COURSE CONTENTS section. For questions 1 - 10, refer back to this list. Some you may want to use more than once, some you won't use at all. Copy and paste this list to an MS Word document and then print it out if you don't want to keep scrolling back and forth between this list and the question you're trying to answer. Determinants of Demand: 1. Change in buyer tastes 2. Change in number of buyers 3. Change in income 4. Change in the prices of related goods (on the demand side) 5. Change in consumer expectations Determinants of Supply: 6. Change in resource prices 7. Change in technology 8. Changes in taxes and subsidies 9. Change in prices of related goods (on the supply side) 10. Change in producer expectations 11. Change in the number of suppliers. For example, if a rightward shift in the supply curve for an item were caused by an increase in the number of producers of that item, you would indicate this be entering 11 into the relevant blank. If the demand curve shifted to the left because people didn't like that item anymore (like mimeograph machines), you'd enter 1 into the blank. Q#1 President Trump signs into law a bill that says the U.S. government will subsidize the construction of new homes, office buildings, bridges, and other infrastructure projects requiring copper. Demand; Supply: Equilibrium Price: Equilibrium Quantity Exchanged; Which determinant changed?: Q#2 Non-capitalist economies around the world begin a phase of rapid economic development, construction and growth, becoming increasingly wealthy, as they begin to adopt more capitalist institutions, as in China, Russia, and the former communist countries of East Europe. Demand; Supply: Equilibrium Price: Equilibrium Quantity Exchanged: Which determinant changed?

The market demand curve

a. slopes upward.

b. is found by vertically adding the individual demand curves.

c. represents the sum of the quantities demanded by all the buyers at each price of the good.

d. represents the sum of the prices that all the buyers are willing to pay for a given quantity of the good.

When we move along a given demand curve,

all nonprice determinants of demand are held constant.

only price is held constant.

all determinants of quantity demanded are held constant.

d. income and price are held constant.

When the price of a good or service changes,

	a.	there is a movement along a given demand curve.
	b.	the demand curve shifts in the opposite direction.
	c.	the supply curve shifts in the opposite direction.
	d.	the demand curve shifts in the same direction.

A. Think about a product that you have purchased recently (e.g. soda, diapers, takeout meals, milk, shoes, manicure/pedicure, video game, etc.). Explain how the law of demand affected your purchase. Give specific examples of how the determinants of demand and supply affect this product (T-I-P-E-N and P-R-E-S-T). What happens to the demand curve and the supply curve when any of these determinants change? Give examples of scenarios that would cause a change in demand versus a movement along the same demand curve and supply curve for this product. Discuss the new equilibrium price and quantity that result from these changes. Can you demonstrate some of these changes graphically?

B. For your selected product, if the government places a mandated price ABOVE the equilibrium price, how would this affect the market equilibrium?

C. Would you rather have the forces of demand and supply determine the price of gasoline, or would you prefer a government-mandated price ceiling? What problems would a price ceiling on gasoline bring in this market?

CAS EC 101 Lecture Notes - Lecture 3: Complementary Good, Comparative Statics, Economic Equilibrium

CAS EC 101 Full Course Notes

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