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demand and supply curves intersect at point E, where the price is
\$4 per bushel and the quantity is 11 billion bushels. At this point, the market is in
equilibrium (the quantity demanded equals the quantity supplied, so the market
clears). As we discussed in Chapter 1, an equilibrium is a point at which there is no
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34 CHAPTER 2 DEMAND AND SUPPLY ANALYSIS
tendency for the market price to change as long as exogenous variables (e.g., rainfall,
national income) remain unchanged. At any price other than the equilibrium price,
pressures exist for the price to change. For example, as Figure 2.5 shows, if the price
of corn is \$5 per bushel, there is excess supply\u2014the quantity supplied at that price
(13 billion bushels) exceeds the quantity demanded (8 billion bushels). The fact that
suppliers of corn cannot sell as much as they would like creates pressure for the price
to go down. As the price falls, the quantity demanded goes up, the quantity supplied
goes down, and the market moves toward the equilibrium price of \$4 per bushel. If
the price of corn is \$3 per bushel, there is excess demand\u2014the quantity demanded
at that price (14 billion bushels) exceeds the quantity supplied (9 billion bushels). Buyers
of corn cannot procure as much corn as they would like, and so there is pressure for the
price to rise. As the price rises, the quantity supplied also rises, the quantity demanded
falls, and the market moves toward the equilibrium price of \$4 per bushel.
excess supply A situa-
tion in which the quantity
supplied at a given price
exceeds the quantity
demanded.
excess demand A situ-
ation in which the quantity
demanded at a given price
exceeds the quantity
supplied.
Quantity (billions of bushels per year)
Pr
ic
e
(do
lla
rs
pe
r b
us
he
l)
13 14118 9
\$5
\$3
Excess supply
when price
is \$5
\$4
E
S
D
Excess
demand
when price is \$3
FIGURE 2.5 Excess Demand and Excess
Supply in Market for Corn
If the price of corn were \$3, per bushel, excess
demand would result because 14 billion bushels
would be demanded, but only 9 billion bushels
would be supplied. If the price of corn were \$5
per bushel, excess supply would result because
13 billion bushels would be supplied but only 8
billion bushels would be demanded.
Suppose the market demand curve for cran-
berries is given by the equation Qd \ufffd 500 \ufffd 4P, while the
market supply curve for cranberries (when
P \ufffd 50) is described by the equation Qs \ufffd \ufffd100 \ufffd 2P,
where P is the price of cranberries expressed in dollars per
barrel, and quantity (Qd or Qs) is in thousands of barrels
per year.
Calculating Equilibrium Price and Quantity
Problem At what price and quantity is the market
for cranberries in equilibrium? Show this equilibrium
graphically.
Solution At equilibrium, the quantity supplied equals
the quantity demanded, and we can use this relationship
to solve for P: Qd \ufffd Qs, or 500 \ufffd 4P \ufffd \ufffd100 \ufffd 2P,
L E A R N I N G - B Y- D O I N G E X E R C I S E 2 . 3
E
S
D
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2.1 DEMAND, SUPPLY, AND MARKET EQUILIBRIUM 35
SHIFTS IN SUPPLY AND DEMAND
Shifts in Either Supply or Demand
The demand and supply curves discussed so far in this chapter were drawn under the
assumption that all factors, except for price, that influence the quantity demanded and
quantity supplied are fixed. In reality, however, these other factors are not fixed, and
so the position of the demand and supply curves, and thus the position of the market
equilibrium, depend on their values. Figures 2.7 and 2.8 illustrate how we can enrich
our analysis to account for the effects of these other variables on the market equilib-
rium. These figures illustrate comparative statics analysis, which we discussed in
Chapter 1. In both cases, we can explore how a change in an exogenous variable (e.g.,
consumer income or wage rates) changes the equilibrium values of the endogenous
variables (price and quantity).
To do a comparative statics analysis of the market equilibrium, you first must de-
termine how a particular exogenous variable affects demand or supply or both. You
then represent changes in that variable by a shift in the demand curve, in the supply
curve, or in both. For example, suppose that higher consumer incomes increase the
demand for a particular good. The effect of higher disposable income on the market
equilibrium is represented by a rightward shift in the demand curve (i.e., a shift away
from the vertical axis), as shown in Figure 2.7.3 This shift indicates that at any price
which implies P \ufffd 100. Thus, the equilibrium price is
\$100 per barrel. We can then find the equilibrium quan-
tity by substituting the equilibrium price into the equa-
tion for either the demand curve or the supply curve:
Qd \ufffd 500 \ufffd 4(100) \ufffd 100
Qs \ufffd \ufffd100 \ufffd 2(100) \ufffd 100
Thus, the equilibrium quantity is 100,000 barrels per
year. Figure 2.6 illustrates this equilibrium graphically.
Similar Problem: 2.3
Quantity (thousands of barrels per year)
Pr
ic
e
(do
lla
rs
pe
r b
arr
el)
100 200 300 400 500
\$100
\$120
S
D
\$80
\$60
\$40
\$20
0
E
FIGURE 2.6 Equilibrium in the Market
for Cranberries
The market equilibrium occurs at point E,
where the demand and supply curves inter-
sect. The equilibrium price is \$100 per barrel,
and the equilibrium quantity is 100,000 bar-
rels of cranberries per year.
3The shift does not necessarily have to be parallel, as it is in Figure 2.7.
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36 CHAPTER 2 DEMAND AND SUPPLY ANALYSIS
the quantity demanded is greater than before. This shift moves the market equilibrium
from point A to point B. The shift in demand due to higher income thus increases both
the equilibrium price and the equilibrium quantity.
For another example, suppose wage rates for workers in a particular industry go
up. Some firms might then reduce production levels because their costs have risen
with the cost of labor. Some firms might even go out of business altogether. An
increase in labor costs would shift the supply curve leftward (i.e., toward the vertical
Quantity
Equilibrium
quantity goes up
Equilibrium
price goes
up
D1 D2
Pr
ic
e
A
B
S
FIGURE 2.7 Shift
in Demand Due to an
Increase in Disposable
Income
If an increase in
consumers\u2019 disposable
incomes increases
demand for a particular
good, the demand
curve shifts rightward
(i.e., away from the ver-
tical axis) from D1 to D2,
and the market equilib-
rium moves from point
A to point B. Equilibrium
price goes up, and
equilibrium quantity
goes up.
Quantity
Equilibrium
quantity goes down
Equilibrium
price goes
up
S2 S1
D
Pr
ic
e
A
B
FIGURE 2.8 Shift in
Supply Due to an
Increase in the Price of
Labor
An increase in the price
of labor shifts the sup-
ply curve leftward (i.e.,
toward the vertical axis)
from S1 to S2. The mar-
ket equilibrium moves
from point A to point B.
Equilibrium price goes
up, but equilibrium
quantity goes down.
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2.1 DEMAND, SUPPLY, AND MARKET EQUILIBRIUM 37
axis), as shown in Figure 2.8. This shift indicates that less product would be supplied
at any price, and the market equilibrium would move from point A to point B. The
increase in the price of labor increases the equilibrium price and decreases the equi-
librium quantity.
Figure 2.7 shows us that an increase in demand, coupled with an unchanged sup-
ply curve, results in a higher equilibrium price and a larger equilibrium quantity.
Figure 2.8 shows that a decrease in supply, coupled with an unchanged demand curve,
results in a higher equilibrium price and a smaller equilibrium quantity. By going
through similar