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Chapter 3: Problem 2

If, over time, the demand curve for a product shifts to the right more than the supply curve does, what will happen to the equilibrium price? What will happen to the equilibrium price if the supply curve shifts to the right more than the demand curve? For each case, draw a demand and supply graph to illustrate your answer.

Short Answer

Expert verified
If demand increases more than supply, equilibrium price rises. If supply increases more than demand, equilibrium price falls. These shifts in both scenarios can be illustrated with a supply and demand graph.

Step by step solution

01

Understanding the Theory

Before solving, it's important to understand that when demand increases (shifts to the right) and supply stays the same, the equilibrium price increases due to an excess demand at the old price. On the contrary, when supply increases (shifts right) and demand remains the same, the equilibrium price decreases due to excess supply at the old price.
02

Demand Increases More Than Supply

If demand curve shifts to the right more than the supply curve, this indicates an increase in demand greater than the increase in supply. Draw two graphs showing initially demand and supply curve intersecting at an equilibrium price. Now shift the demand curve to the right more than you shift the supply curve to illustrate this situation. This results in a new higher equilibrium price as there is more demand for the product than supply.
03

Supply Increases More Than Demand

If the supply curve shifts to the right more than the demand curve, this indicates an increase in supply which is greater than the increase in demand. Using the initial graph, you now shift the supply curve to the right more than the demand curve. This results in a new lower equilibrium price due to an increased supply relative to demand.

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Most popular questions from this chapter

In early 2017, an article in the Financial Times about the oil market quoted the chief economist of oil company \(\mathrm{BP}\) as saying, "Pricing pressure is likely to come from the supply side, because of strong growth in US shale oil (crude oil found within shale formations), and the demand side as the rise of renewable energy, including electric vehicles, gradually slows growth in oil consumption." After reading this article, a student argues: "From this information, we would expect that the price of oil will fall, but we don't know whether the equilibrium quantity of oil will increase or decrease." Is the student's analysis correct? Illustrate your answer with a demand and supply graph.

The Toyota Prius is a gasoline/electric hybrid car that gets 54 miles to the gallon. An article in the Wall Street Journal noted that sales of the Prius had been hurt by low gasoline prices and that "Americans are now more likely to trade in a hybrid or an electric vehicle for an SUV." Does the article indicate that gasoline-powered cars and gasoline are substitutes or complements? Does it indicate that gasoline-powered cars and hybrids are substitutes or complements? Briefly explain. Source: Sean McClain, "Toyota's Prius Pays Price for Cheap Gasoline," Wall Street Journal, September 6, 2016 .

What do economists mean by market equilibrium?

[Related to the Don't Let This Happen to You on page 96\(]\) A student writes the following: "Increased production leads to a lower price, which in turn increases demand." Do you agree with his reasoning? Briefly explain.

What is the difference between a change in supply and a change in quantity supplied?
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