Three Steps to Analyzing Changes in Equilibrium

So far, we have seen how supply and demand together determine a market’s equilibrium which in turn determines the price of the good and the amount of the good that buyers purchase and sellers produce. Of course the equilibrium price and quantity depend on the position of the supply and demand curves. When some event shifts one of these curves the equilibrium in the market change resulting in a new price and a new quantity exchanged between buyers and sellers.

When analyzing how some event affects the equilibrium in a market, we proceed in three steps. First we decide whether the event shifts the supply curve the demand curve or in some cases, both curves. Second we decide whether the curve shifts to the right or to the left. Third we use the supply and demand diagram to compare the initial and the new equilibrium which shows how the shifts affects the equilibrium price and quantity. Table 3 summarizes these three steps. To see how this recipe is used let’s consuder various events that might affect the market for ice cream.

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RENT CONTROL IN THE SHORT RUN AND LONG RUN

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