Lecture 4s.pdf

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(Why?) \$0.00 \$1.00 \$2.00 \$3.00 \$4.00 \$5.00 \$6.00 0 5 10 15 20 25 30 35 P Q D S Surplus

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GESB 1006: Economics of Everyday Life University of Macau Market Not in Equilibrium: Shortage Shortage (excess demand): quantity demanded is greater than quantity supplied Example: if P = \$1, then Q D = 21 and Q S = 5 resulting in a shortage of 16 units \$0.00 \$1.00 \$2.00 \$3.00 \$4.00 \$5.00 \$6.00 0 5 10 15 20 25 30 35 P Q D S Shortage
GESB 1006: Economics of Everyday Life University of Macau Market Not in Equilibrium: Shortage Facing a shortage, sellers raise the price, causing Q D to fall and Q S to rise, …which reduces the shortage. \$0.00 \$1.00 \$2.00 \$3.00 \$4.00 \$5.00 \$6.00 0 5 10 15 20 25 30 35 P Q D S Shortage

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GESB 1006: Economics of Everyday Life University of Macau Changes in Equilibrium Factors shifting demand and/or supply induce changes in equilibrium . Three Steps to Analyze Changes in Equilibrium: 1. Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves; 2. Decide whether the curve shifts to the right or to the left ; 3. Use the supply-and-demand diagram -to compare the initial and the new equilibrium ; -to evaluate the effects on equilibrium price and quantity .
GESB 1006: Economics of Everyday Life University of Macau An Example: Hybrid Cars P Q D 1 S 1 P 1 Q 1 price of hybrid cars quantity of hybrid cars

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GESB 1006: Economics of Everyday Life University of Macau Scenario 1: A Shift in Demand Question: What would happen if the price of gas increases?
GESB 1006: Economics of Everyday Life University of Macau Scenario 1: A Shift in Demand EVENT TO BE ANALYZED: Increase in the price of gas. STEP 1: D curve shifts because price of gas affects demand for hybrids. ( S curve does not shift, because price of gas does not affect cost of producing hybrids) STEP 2: D shifts right because high gas price makes hybrids more attractive relative to other cars. STEP 3: The shift causes an increase in price and quantity of hybrid cars. P Q D 1 S 1 P 1 Q 1 D 2 P 2 Q 2

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GESB 1006: Economics of Everyday Life University of Macau Scenario 2: A Shift in Supply Question: What would happen if new technology reduces production cost of hybrid cars?
GESB 1006: Economics of Everyday Life University of Macau Scenario 2: A Shift in Supply EVENT: New technology reduces cost of producing hybrid cars. STEP 1: S curve shifts because event affects cost of production. ( D curve does not shift, because production technology is not one of the factors that affect demand) STEP 2: S shifts right because event reduces cost, makes production more profitable at any given price. STEP 3: The shift causes price to fall and quantity to rise. P Q D 1 S 1 P 1 Q 1 S 2 P 2 Q 2

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GESB 1006: Economics of Everyday Life University of Macau Scenario 3: Shifts in both Supply and Demand Question: What would happen if price of gas increases, and also new technology reduces production cost of hybrid cars?
GESB 1006: Economics of Everyday Life University of Macau Scenario 3: Shifts in both Supply and Demand EVENTS: Price of gas rises AND new technology reduces production costs STEP 1: Both curves shift.

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