1. Market Equilibrium Lecture 6
Dr. Jennifer P. Wissink
©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved.
September 11, 2018 1

2. Movements vs. Shifts QXD = f(PX) given Ps, Pc, I, T&P, Pop
A movement along the demand curve for X would be caused by a change in Px.
Remember this is referred to as an increase or decrease in quantity demanded!
A shift of the entire demand curve would be caused by a change in one of the “ceteris paribus” demand variables.
This would be referred to as an increase or decrease in demand.
Price
Demand 25 15
Quantity

3. Movements vs. Shifts: Getting It Right Summary
Recall: QXD = f(PX) given Ps, Pc, I, T&P, Pop
ΔPx
Movement along demand curve, Px and QDx move in opposite directions; law of demand.
ΔPS
Shift of Demand. Ps and Demand move in the same direction.
ΔPc
Shift of Demand. Pc and Demand move in opposite directions. ΔI
Shift of Demand. Relationship depends on if X is a normal good (same direction) or if X is an inferior good (opposite direction).
ΔT&P
Shift of Demand. T&P and Demand move in the same direction.
ΔPop
Shift of Demand. Pop and Demand move in the same direction.

4. The Demand Curve (Equation)
A linear demand curve: QXD = 40 – PX
So, 15 = 40 – 25
Law of Demand?
YES.
Beware: the graph we draw is the inverse of the equation we write (most times). P 25 15
Demand Q

5. The Demand Curve (Equation)
Another example
Suppose…
QD = 100 – 2P P Q

6. i>clicker question
Which one of the following would NOT generate a shift in the demand curve for portable speakers?
A change in the price of music downloads.
A change in the price of headphones.
A change in the income of college-aged people.
A change in the perceived “coolness” factor of portable speakers.
A change in the price of plastic used to make portable speakers.

7. Supply Concepts
The supply function for X: QXS = g(PX, Pfop, Poc, S&T, N) Where: QXS = quantity that sellers are willing and able to supply PX = X’s price Pfop = the prices of factors of production Poc = the opportunity costs S&T = science and technology N = number of firms in the market

8. The Supply Curve (Graph)
QXS = g(PX)
Note 1: Law of Supply implies a positive or upward slope to the graph.
Note 2: In the graph we switched the axes... again.
Price
Supply
$25 31
Quantity

9. Movements vs. Shifts QXS = g(PX) given Pfop, Poc, S&T, N
A movement along the supply curve for X would be caused by a change in Px.
Remember this is referred to as an increase or decrease in quantity supplied.
A shift of the entire supply curve would be caused by a change in one of the “ceteris paribus” supply variables.
This would be referred to as an increase or decrease in supply.
Price
Supply 25 31
Quantity

10. Movements vs. Shifts: Getting It Right Summary
Recall: QXS = g(PX) given Pfop, Poc, S&T, N
ΔPx
Movement along the supply curve, Px and QSx move in the same direction; law of supply.
ΔPfop
Supply curve shifts. Pfop and supply curve move in opposite directions.
ΔPoc
Same as above.
ΔS&T
Supply curve shifts. S&T and supply curve move in the same direction. ΔN
Supply curve shifts. N and supply curve move in the same direction.

11. The Supply Curve (Equation)
A linear supply curve from the points we’ve used. QXS = 6 + PX
So, 31 =
Law of Supply?
yes!
Beware: the graph we draw is the inverse of the equation we write (most times).
Price
Supply 25 31
Quantity

12. i>clicker question
Suppose the supply curve in market “Y” is as follows: QS = P. The equation for the market inverse supply (so the picture we draw) is:
QS = /3P.
PS = Q.
QS = /3P.
PS = 5 + 1/3Q.
PS = 5 – 1/3Q. P Q

13. Market Equilibrium
We are considering the market for portable speakers.
Recall that we defined the following for our market:
The type and style of portable speakers.
The quality of the portable speakers.
All other attributes of the generic portable speaker.
A time frame that applies to our market for portable speakers.
Demanders are the buyers and from them we get the demand function, etc.
QxD = f(PX, Ps, Pc, I, T&P, Pop)
Suppliers are the sellers and from them we get the supply function, etc.
QXS = g(PX, Pfop, Poc, S&T, N)
The market is a perfectly competitive market.

14. Market Equilibrium (Verbal)
A place of “rest”.
Equilibrium: a price where the quantity demanded equals the quantity supplied.
In notation:
Find a PX* so that: QXD(PX*) = QXS(PX*)

15. Market Equilibrium (Table)
At P* = $17, the QD = QS=23
So Q*=23

16. Market Equilibrium (Graph)
The market equilibrium occurs at the intersection of the supply and demand curves.
Let’s drop the subscript X, ok?
Price
Demand
Supply 17
At P* = $17, QD = QS = 23
So Q* = 23 23
Quantity

17. Market Equilibrium (Equations)
Two equations and Two unknowns
Equations: Demand and Supply Curves
Unknowns: P and Q
To find P*, set QD = QS
Recall: QD = 40 - P and QS = 6 + P
So for an equilibrium: (40 - P*) = (6 + P*)
34 = 2P* or P* = 34/2 so... P*=$17
To find Q*, plug P* into either the demand or supply equation.
Q*=23 = or Q*=23 =

18. i>clicker question
Suppose the demand and supply curves in the market for fidget spinners are as follows: QD = 40 – 4P and PS = 1 + 1/2Q.
Which one is true?
Q*=7 and P*=12
Q*=12 and P*=7
Q*=7/12 and P*=12/7
Q*=7 and P*=7
none of the above is true