37 Changes in Equilibrium
Learning Objectives
- Create a graph that illustrates equilibrium price and quantity
- Predict how economic conditions cause a change in supply, demand, and equilibrium (using the four-step process)
Finding Equilibrium using the Four-Step Process
We know that equilibrium is the place where the supply and demand curves intersect, or the point where buyers want to buy the same amount that sellers want to sell. Let’s take a closer look at how to find the equilibrium point using the four-step process. These steps explain how to first, draw the demand a supply curves on a graph and find the equilibrium. Next, consider how an economic change (e.g. a natural disaster, a change in production technology, a change in tastes and preferences, income, etc.) might affect supply or demand, then make adjustments to the graph to identify the new equilibrium point.
Step 1. Draw demand and supply curves showing the market before the economic change took place. Think about the shift variables for demand, and the shift variables for supply. Using this diagram, find the initial equilibrium values for price and quantity.
Step 2. Decide whether the economic change being analyzed affects demand or supply. In other words, does the event refer to something in the list of demand shift variables or supply shift variables?
Step 3. Determine whether the effect on demand or supply causes the curve to shift to the right or to the left, and sketch the new demand or supply curve on the diagram. In other words, does the event increase or decrease the amount consumers want to buy or the amount producers want to sell?
Step 4. Identify the new equilibrium, and then compare the original equilibrium price and quantity to the new equilibrium price and quantity.
Let’s consider one example that involves a shift in supply and one that involves a shift in demand. Then we will consider an example where both supply and demand shift.
Exercise 1: Good Weather for Salmon Fishing
Let’s suppose that during the summer of 2015, weather conditions were excellent for commercial salmon fishing off the California coast. Heavy rains meant higher than normal levels of water in the rivers, which helps the salmon to breed. Slightly cooler ocean temperatures stimulated the growth of plankton, the microscopic organisms at the bottom of the ocean food chain, providing everything in the ocean with a hearty food supply. The ocean stayed calm during fishing season, so commercial fishing operations did not lose many days to bad weather. How did these climate conditions affect the quantity and price of salmon?
Let’s consider this situation using the four-step process and the data below.
| Table 1. Salmon Fishing | |||
|---|---|---|---|
| Price per Pound | Quantity Supplied in 2014 | Quantity Supplied in 2015 | Quantity Demanded |
| $2.00 | 80 | 400 | 840 |
| $2.25 | 120 | 480 | 680 |
| $2.50 | 160 | 550 | 550 |
| $2.75 | 200 | 600 | 450 |
| $3.00 | 230 | 640 | 350 |
| $3.25 | 250 | 670 | 25