For example in 1998 the average price of gasoline was 103gallon and about 350

For example in 1998 the average price of gasoline was

This preview shows page 6 - 8 out of 11 pages.

over time for many goods. For example, in 1998, the average price of gasoline was $1.03/gallon, and about 350 million gallons per day were consumed in the US. By 2007 the price had risen to $2.80, and the consumption had risen to 390 million gallons/day. But in 2009, the average price was $2.35 and consumption had dropped to 378 million gallons/day. Each of these three points represents an equilibrium, and each is quite different. The following chart is a plot of the annual average equilibria for gasoline in the United States from 1990 to 2009. The point at the start of the line, near the lower left corner, is the equilibrium for 1990, and the line then travels through the next 20 years. You might notice that the path that is followed is pretty predictable for most of the period – the price is fairly stable for several years, from about 1991 to 1999, and then again from 2000 to 2003, after which it climbs pretty steadily. Except for the 1990 to 1991 period, we see the quantity of sales increase every year from 1991 to 2007. Then something strange happens – over the last three years, the path of the equilibrium has “doubled back” on itself, going down in price and quantity. We will talk a little more about “why" in the next section, but I am showing you this path here to illustrate the idea of economic dynamics: how things change with time. Each point on the above graph represents an equilibrium, an intersection of (not shown) supply and demand curves. But the equilibrium moves with time, with both the equilibrium price and quantity shifting. If each point is an intersection of two lines, clearly one or both of the lines are moving with time. When you look at a standard supply and demand diagram, you are looking at something that is in two dimensions: it has length and width, or price and quantity, and these are both variable, but there is a third variable that we cannot see on the S-D diagram: time. If we had some sort of 3-D paper, there would be not two but three axes intersecting at the origin: price, quantity, and time, and the supply and demand curves would not be lines, but planes that have three dimensions, planes that are wavy and twisty, not flat. This is a rather long-winded way of saying: things change with time. All things change with time, and markets are no exception.
Image of page 6
Results of Changes in the Market In the next section, we will talk a bit about what causes changes in the market, but first, we will discuss the results of these changes. That is, what happens to the equilibrium as market dynamics occur? Our model of a market consists of two things: a demand curve, and a supply curve. So, when we look at market dynamics, we are looking at a movement of either the demand curve or the supply curve, or, more likely, a movement of both. Let’s take a look at these one at a time first, and then together.
Image of page 7
Image of page 8

You've reached the end of your free preview.

Want to read all 11 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture