Economics » Demand and Supply » Changes in Equilibrium Price and Quantity: The Four-Step Process

Key Concepts and Summary

To do 3 min read

Key Concepts and Summary

When using the supply and demand framework to think about how an event will affect the equilibrium price and quantity, proceed through four steps: (1) sketch a supply and demand diagram to think about what the market looked like before the event; (2) decide whether the event will affect supply or demand; (3) decide whether the effect on supply or demand is negative or positive, and draw the appropriate shifted supply or demand curve; (4) compare the new equilibrium price and quantity to the original ones.

Review Questions

How does one analyze a market where both demand and supply shift?
What causes a movement along the demand curve? What causes a movement along the supply curve?

Critical Thinking Questions

Use the four-step process to analyze the impact of the advent of the iPod (or other portable digital music players) on the equilibrium price and quantity of the Sony Walkman (or other portable audio cassette players).
Use the four-step process to analyze the impact of a reduction in tariffs on imports of iPods on the equilibrium price and quantity of Sony Walkman-type products.
Suppose both of these events took place at the same time. Combine your analyses of the impacts of the iPod and the tariff reduction to determine the likely impact on the equilibrium price and quantity of Sony Walkman-type products. Show your answer graphically.

Problems

1. Demand and supply in the market for cheddar cheese is illustrated in the table below. Graph the data and find the equilibrium. Next, create a table showing the change in quantity demanded or quantity supplied, and a graph of the new equilibrium, in each of the following situations:

The price of milk, a key input for cheese production, rises, so that the supply decreases by 80 pounds at every price.
A new study says that eating cheese is good for your health, so that demand increases by 20% at every price.

Price per Pound	Qd	Qs
$3.00	750	540
$3.20	700	600
$3.40	650	650
$3.60	620	700
$3.80	600	720
$4.00	590	730

2. Supply and demand for movie tickets in a city are shown in the table below. Graph demand and supply and identify the equilibrium. Then calculate in a table and graph the effect of the following two changes.

Three new nightclubs open. They offer decent bands and have no cover charge, but make their money by selling food and drink. As a result, demand for movie tickets falls by six units at every price.
The city eliminates a tax that it had been placing on all local entertainment businesses. The result is that the quantity supplied of movies at any given price increases by 10%.