CHAPTER 5

Markets in movements
 - Equilibrium price
Ceteris paribus
Changes in demand and supply
Price of
music
down-
loads

P1

P2

D1

Q1 Q2 Quantity of
music downloads
3
Price of
music
down-
loads

P1

D2 D1

Q2 Q1 Quantity of
music downloads
4
 Price of
tax return
S1
software

P1

P2

Q2 Q1 Quantity of tax
return software
5
 Price of
tax return
S1 S2
software

P1

Q1 Q2 Quantity of tax
return software
6
Changes in market price
Four possibilities for change
EXAMPLE 1: A Shift in Demand

P
S1
P2

P1

D1 D2
D3 Q
Q1 Q2
EXAMPLE 2: A Shift in Supply

P S3
S1 S2

P1
P2

D1
Q
Q1 Q2
Complex changes
EXAMPLE 3: A Shift in Both Supply
and Demand
P
S1 S2

P2
P1

D1 D2
Q
Q1 Q2
EXAMPLE 3: A Shift in Both Supply
and Demand
P
S1 S2

P1
P2

D1 D2
Q
Q1 Q2
 The effect of time on
prices
Time lags:
Supply often takes some time to respond to changes
in demand.
Two types of response:
a) one-period time lag.
b) Distributed time lag.
Time lags and prices
P
S1 S2

D1 D2
Q
Government interference with
equilibrium price
Flat price: any price artificially imposed by law.
ceiling price: a maximum price for a commodity
that stipulated by government.
is the price fixed below the
equilibrium level.
Price floor
is the minimum price allowed by law; or
is the price fixed above the equilibrium level.
The objectives
Cheapness
The maintenance of income
Price stability
How Price Ceilings Affect Market Outcomes
The eqm P S
price ($800) is
above the
ceiling and
therefore $800
illegal.
Price
The ceiling $500
ceiling
is a binding shortage
constraint D
Q
on the price, 250 400
causes a
shortage.
How Price Floors Affect Market Outcomes
labor
The eqm wage W surplus S
($4) is below the Price
floor and $5
floor
therefore
illegal. $4
The floor
is a binding
constraint
on the wage, D
L
causes a 400 550
surplus (i.e.,
unemployment).