CAS EC 101 Lecture Notes - Lecture 3: Complementary Good, Comparative Statics, Economic Equilibrium
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
o
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Document Summary
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.