3.1 Changes in Equilibrium Price and Quantity: The Four-Step Process
3.1 Changes in Equilibrium Price and Quantity: The Four-Step Process
Learning Objectives
By the end of this section, you will be able to:
- Identify equilibrium price and quantity through the four-step process
- Graph equilibrium price and quantity
- Contrast shifts of demand or supply and movements along a demand or supply curve
- Graph demand and supply curves, including equilibrium price and quantity, based on real-world examples
Let’s begin this discussion with a single economic event. It might be an event that affects demand, like a change in income, population, tastes, prices of substitutes or complements, or expectations about future prices. It might be an event that affects supply, like a change in natural conditions, input prices, or technology, or government policies that affect production. How does this economic event affect equilibrium price and quantity? We will analyze this question using a four-step process.
Step 1. Draw a demand and supply model before the economic change took place. Establishing the model first requires four standard pieces of information: the law of demand, which tells us the slope of the demand curve; the law of supply, which gives us the slope of the supply curve; the shift variables for demand; and the shift variables for supply. From this model, find the initial equilibrium values for price and quantity.
Step 2. Decide whether the economic change you are analyzing affects demand or supply. In other words, does the event refer to something in the list of demand factors or supply factors?
Step 3. Decide 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.
Good Weather for Salmon Fishing
Supposed that during the summer of 2015, weather conditions were excellent for commercial salmon fishing off the Californian coast. Heavy rains meant higher than normal levels of water in the rivers, which helped the salmon to breed. Slightly cooler ocean temperatures stimulated the growth of plankton, the microscopic organisms at the bottom of the oceanic food chain, providing ocean-life 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? Figure 3.2 illustrates the four-step approach (explained below) used to work through this problem. Table 3.1 also provides the information to work the problem.
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Price per Pound |
Quantity Supplied in 2014 |