Lecture on Effects of Demand and Supply Changes on Equilibrium

Introduction

• Examined changes in equilibrium price and quantity when only demand or supply shifts.
• Complexity increases when both demand and supply change simultaneously.
• Impact depends on the relative magnitude of shifts in both curves.

Basic Supply and Demand Curves

• Demand Curve: Downward sloping.
• Supply Curve: Upward sloping.
• Initial equilibrium at point A with price A and quantity A.

Increase in Demand

• Shift from Demand Curve 1 to 2:
  • Equilibrium price and quantity increase to point B (Price B, Quantity B).

Decrease in Supply

• Small Decrease (Supply Curve 2):
  • Equilibrium price increases to point C (Price C), quantity increases less than demand shift alone (Quantity C < Quantity B).
• Large Decrease (Supply Curve 3):
  • Price rises significantly to point D (Price D).
  • Equilibrium quantity decreases to Q sub D.

Increase in Demand and Supply

• Small Increase in Supply (Supply Curve 4):
  • Price increases less, point E (Price E, Quantity increases to Quantity E).
• Large Increase in Supply (Supply Curve 5):
  • Price decreases to point F (Price F), quantity increases significantly to Q sub F.

Overall Impacts

• Equilibrium Price:
  • Can increase (points C, D, E) or decrease (point F).
• Equilibrium Quantity:
  • Can increase (points C, E, F) or decrease (point D).

Analysis Strategy

• Analyze effects of changes in one curve, then combine with the other.
• "It depends" can be a valid analysis when both supply and demand change.

Real-World Implications

• Avoid reasoning solely from price changes without context.
• Example: Price of gas increases could be due to demand (more road trips) or supply (hurricane impact).
• Need more information to determine cause of price changes.

Conclusion

• Emphasize principles of willingness to pay and accept.
• Too many combinations to memorize; understanding principles allows for better analysis.
• Use principles to assess impacts on equilibrium prices and quantities.
• Recognize when more information is necessary to fully understand changes.