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Chapter 4

Econ 1B03 - Chapter 4 Part 3.docx

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McMaster University
Hannah Holmes

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 price  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 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 quantity.  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) Richard Damra
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