Look at exhibit 6 4 suppose that d1 and s1 represent

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Unformatted text preview: at the same time. Let’s look at one case and see how equilibrium price changes as a result. Look at Exhibit 6-4. Suppose that D1 and S1 represent the initial situation in the market, and the resulting equilibrium price is $300. Then both demand and supply increase. Demand increases from D1 to D2, and supply increases from S1 to S2. Notice that the increase in demand is greater than the increase in supply. In other words, the 11/21/05 3:13 PM Page 137 demand curve shifts further right (from D1 to D2) than the supply curve shifts right (from S1 to S2). As we can see in the exhibit, equilibrium price rises from $300 to $400. So, if both demand and supply increase and demand increases more than supply, the equilibrium price increases. The change in equilibrium price will be determined by which changes more, supply or demand. If demand increases more than supply, the equilibrium price goes up. If supply increases more than demand, the equilibrium price will go down. Does It Matter if Price Is at Its Equilibrium Level? Think of two different worlds. World 1 has ten markets, each of which is in equilibrium. If all markets are in equilibrium, it means no shortages or surpluses of any good or service. In this world, buyers or sellers have no complaints. Everyone is happy. World 2 also has ten markets, but in five of the ten markets price is below equilibrium price, and in five markets price is above equilibrium price. In other words, half the markets are in surplus, and half are in shortage. In this world, both buyers and sellers are complaining. Which world would you rather live in? Can you see why economists think it is important to study and understand price and equilibrium? Price Is a Signal You are probably beginning to see that price has certain important jobs that it fulfills in the marketplace. One such job is to provide information, which it does in a kind of “market conversation.” For example, suppose for two goods—clocks and books— preferences one day shift against clocks and in...
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This document was uploaded on 01/16/2014.

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