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KW_Macro_Ch_03_Sec_04_Changes_in_Supply_and_Demand

# KW_Macro_Ch_03_Sec_04_Changes_in_Supply_and_Demand -...

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>> Supply and Demand Section 4: Changes in Supply and Demand chapter 3 Wayne Gretzky’s announcement that he was retiring may have come as a surprise, but the subsequent rise in the price of scalped tickets for that April game was no sur- prise at all. Suddenly the number of people who wanted to buy tickets at any given price increased—that is, there was an increase in demand. And at the same time, because those who already had tickets wanted to see Gretzky’s last game, they became less willing to sell them—that is, there was a decrease in supply. In this case, there was an event that shifted both the supply and the demand curves. However, in many cases something happens that shifts only one of the curves. For example, a freeze in Florida reduces the supply of oranges but doesn’t change the demand. A medical report that eggs are bad for your health reduces the demand for eggs but does not affect the supply. That is, events often shift either the supply curve or the demand curve, but not both; it is therefore useful to ask what happens in each case. We have seen that when a curve shifts, the equilibrium price and quantity change. We will now concentrate on exactly how the shift of a curve alters the equilibrium price and quantity.

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What Happens When the Demand Curve Shifts Coffee and tea are substitutes: if the price of tea rises, the demand for coffee will increase, and if the price of tea falls, the demand for coffee will decrease. But how does the price of tea affect the market for coffee? Figure 3-12 shows the effect of a rise in the price of tea on the market for coffee. The rise in the price of tea increases the demand for coffee. Point E 1 shows the equi- librium corresponding to the original demand curve, with P 1 the equilibrium price and Q 1 the equilibrium quantity bought and sold. An increase in demand is indicated by a rightward shift of the demand curve from D 1 to D 2 . At the original market price P 1 , this market is no longer in equilibrium: a shortage occurs because the quantity demanded exceeds the quantity supplied. So the price of coffee rises and generates an increase in the quantity supplied, an upward movement along the supply curve. A new equilibrium is established at point E 2 , with a higher equilibrium price P 2 and higher equilibrium quantity Q 2 . This sequence of events reflects a general principle: When demand for a good increases, the equilibrium price and the equilibrium quantity of the good both rise. And what would happen in the reverse case, a fall in the price of tea? A fall in the price of tea decreases the demand for coffee, shifting the demand curve to the left. At the original price, a surplus occurs as quantity supplied exceeds quantity demanded. The price falls and leads to a decrease in the quantity supplied, with a lower equilib- rium price and a lower equilibrium quantity. This illustrates another general princi- ple: When demand for a good decreases, the equilibrium price of the good and the equilibrium quantity both fall.
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