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Chapter 4

ECON 1B03 Chapter Notes - Chapter 4: Economic Equilibrium, Demand Curve, Shortage

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Hannah Holmes

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Richard Damra Wednesday, January 23, 2013
Econ 1B03 Chapter 4 Equilibrium
Markets Not in Equilibrium
Suppose that for some reason the market price of ice cream cones was $2.50
At $2.50, consumers will only buy 4 cones, but firms offer 10 cones for sale
There will be a surplus, or excess supply at a price above equilibrium price where Qs > Qd
o Firms will want to decrease inventory by decreasing the price
o As price decrease consumers will buy more cones
o EVENTUALLY, we return to equilibrium Price where Qd = Qs no further pressure on
Suppose that for some reason, the market price of ice cream cones was $1.50
At $1.50, consumers will want to buy 10 cones, but firms will only offer 4 cones for sale.
There will be a shortage or excess demand at a price below equilibrium price where Qd > Qs
o Too many buyer bid up the price
o Firms will supply more cones and at the same time, consumers start to buy fewer cones
o EVENTUALLY we will return to equilibrium price where Qd = Qs no further pressure
on price

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Richard Damra Wednesday, January 23, 2013
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
The market returns to equilibrium if it is left to operate freely
Analyzing Changes in Equilibrium
Often events can happen which will shift demand or supply or both
This will lead to a change in Equilibrium P and Q
We can sue our diagrams to see what happens to equilibrium when curves shift (this is called
comparative statics).
Decide whether the event shifts the supply or demand curve (or both)
Decide whether the curve(s) shift(s) to the left or to the right
Use the supply-and-demand diagram to see how the shifts affects equilibrium price and
Example: A change in demand: Suppose a heat wave increases the demand for ice cream:
o Demand curve shifts Right
o New intersection of Demand and Supply
o We’ll see that equilibrium price increased and quantity increased
o We have a change in demand (Demand curve shifts) and a change in NOT supply BUT
quantity supplied, Qs (move along the Supply curve; it doesn’t shift)
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