Equilibrium Analysis: Combining Demand and Supply -

Applications

Dr. Saima Khan (SaKn)

ECO 101: Introduction to Microeconomics

Department of Economics, School of Business,

North South University

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 Equilibrium Analysis: Applications

Case 1: Drought in Beef-Raising States

Beef supplies are sharply reduced because of a drought in the beef

producing states. This induced a lot of consumers to switch from
beef to lamb.
Explain, using a labelled diagram,
 the changes in the market for beef.
 the changes in the lamb market.

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 Equilibrium Analysis: Applications

Solution to Case 1: Drought in Beef-Raising States

 Initially, the market is at equilibrium at

P1 and Q1 .
 Step 1: Due to the draught, cattle
reproduction falls;
I Beef production falls at each and
every price;
I Supply of beef falls and Supply
curve shifts from S1 to S2 .
 Step 2: At P1 , there is excess demand;
this puts upward pressure on prices
thus raising price from P1 to P2 .
 Step 3: As price increases, consumers
reduce consumption of beef; thus,
quantity demanded falls from Q1 to
Q2 .

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 Equilibrium Analysis: Applications

Solution to Case 1: Drought in Beef-Raising States

 Initially, the market is at equilibrium at

P1 and Q1 .
 Step 1: Beef and lamb are substitutes;
I When beef gets more expensive,
a lot of people switch to lamb,
which is relatively cheaper;
I Demand for lamb increases from
D1 to D2 .
 Step 2: At P1 , there is excess demand;
this puts upward pressure on prices
thus raising price from P1 to P2 .
 Step 3: As price increases, lamb sellers
increase lamb production; thus,
quantity supplied rises from Q1 to Q2 .

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 Equilibrium Analysis: Applications

Case 2: Christmas Trees

In December, the price of Christmas trees rises and the number of

trees sold also increases. Would you say this VIOLATES the law of
demand?
Ans: No - because this is NOT about movement along demand
curve, rather this reflects an increased demand for Christmas trees
(detailed on next slide).

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 Equilibrium Analysis: Applications

Solution to Case 2: Christmas Trees

 Initially, the market is at equilibrium at

P1 and Q1 .
 Step 1: During Christmas, there is
high demand for Christmas trees;
I People buy more trees at each
and every price;
I Demand for trees shifts
rightwards from D1 to D2 .
 Step 2: At P1 , there is excess demand;
this puts upward pressure on prices
thus raising price from P1 to P2 .
 Step 3: As price increases, tree sellers
increase tree production (by cutting
more trees); thus, quantity supplied
rises from Q1 to Q2 .

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 Equilibrium Analysis: Applications

Case 3: Apple Prices & Demand

Justify your answers in the space provided.

 True or False: As the price of apple increases, the demand for
apples falls, ceteris paribas.
I False. When price of apples increases, quantity demanded falls (NOT
demand), ceteris paribas. Demand falls ONLY due to non-price
factors!

 The price of 1 kg of apples, which was $5 last month is $6 today.

True or False: The demand curve for apples must have shifted
rightwards between last month and today, thus raising price.

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 Equilibrium Analysis: Applications

Solution to Case 3: Apple Prices & Demand

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 Equilibrium Analysis: Applications

Case 4: Jeep Manufacturing

Consider the supply curve for Jeeps. Two factors that affect the
supply of Jeeps are (i) employee wages and (ii) the level of technical
knowledge - in this case, the speed with which robots can fasten
bolts (robot speed).
1. Initially, the robots can fasten 2500 bolts per hour. Due to a
technological decline, robot speed goes down to 2000 bolts per
hour. How does this technological decline affect the market for
Jeeps?
2. Say the employees go on strike because they want a higher wage.
Jeep manufacturers thus increase the wage rate form $25 per
hour to $30 per hour. How does this affect the equilibrium price
and quantity of in the jeep market post technological decline?

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 Equilibrium Analysis: Applications

Solution to Case 4 (question 1): Jeep Manufacturing

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 Equilibrium Analysis: Applications

Solution to Case 4 (question 1): Jeep Manufacturing

 Initially, the market is at equilibrium at P1 and Q1 .

 Step 1: As robot speed decreases
I the company produces less jeep at each and every price.
I Supply of jeep falls;
I Supply Curve thus shifts leftwards from S1 to S2 .
 Step 2: At P1 there is excess demand which pushes prices up
from P1 to P2 .
 Step 3: As price increases, consumers reduce their consumption
of jeeps and thus quantity demanded falls from Q1 to Q2 .

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 Equilibrium Analysis: Applications

Solution to Case 4 (question 2): Jeep Manufacturing

 Initially, the lamb market is at equilibrium at P1 and Q1 .

 Step 1:Due to worker protest, when Jeep has to pay higher
wages to all auto workers, Jeep’s cost of production increases.
I the company thus produces less jeep at each and every price.
I Supply of jeep falls further;
I Supply Curve thus shifts leftwards from S2 to S3 .
 Step 2: At P2 there is excess demand which pushes prices up
from P2 to P3 .
 Step 3: As price increases, consumers reduce their consumption
of jeeps even more and thus quantity demanded falls from Q2 to
Q3 .

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 Equilibrium Analysis: Applications

Case 5: Honey Honey

In March 2020, a parasite attack suddenly kills a large percentage of
the U.S. bee population. At the same time, a tiktok trend promoting
the use of honey instead of sugar goes viral. This causes the price of
honey to increase. Using a labelled diagram, explain what happens in
the honey market.

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 Equilibrium Analysis: Applications

Solution to Case 5: Honey Honey

 Initially, the market is at equilibrium at P1 and Q1 .
 Step 1: Due to parasite attack, bee population falls;
I Less honey is produced at each and every price;
I Supply of honey falls and the supply curve shifts leftwards from
S1 to S2 .
I At the same time, due to new tiktok trend, people buy more
honey at each & every price;
I Demand for honey increases & Demand Curve shifts rightwards
from D1 to D2
 Step 2: At P1 , there is excess demand; this puts upward pressure
on prices thus raising price from P1 to P2 .
 Step 3: As price increases, sellers motivated to sell more; so
quantity supplied increases; at the same time, rising prices prices
out some people and quantity demand falls. This continues until
market is cleared P2 & Q2 .
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 Equilibrium Analysis: Applications

Case 5: Bottled Water

Mum and Fresh are both bottled water brands. Partex Beverage
increases the price for Mum. At the same time, the government
provides a subsidy to Meghna Group which produces Fresh mineral
water. We see that the price of Fresh bottled water remains
unchanged after the combination of changes mentioned above.

Why do you think that is the case? Explain using a labelled diagram.

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 Equilibrium Analysis: Applications

Solution to Case 5: Bottled Water

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 Equilibrium Analysis: Applications

Solution to Case 5: Bottled Water

 Initially, the market is at equilibrium at P1 and Q1 .

 Step 1A: Since Mum and Fresh are substitutes, when the price of Mum
increases, consumers switch to buying more Fresh water bottles.
I More Fresh bottled waters are bought at each and every price;
I Demand for Fresh water bottles increases;
I the Demand Curve for Fresh shifts outwards from D1 to D2 .
 Step 1B: At the same time, due to government subsidy to Meghna group,
the cost of production of Fresh bottled water falls.
I Thus Meghna group produce more Fresh water bottle at each & every
price;
I Supply for Fresh bottled water increases
I Supply Curve shifts rightwards from S1 to S2
 Step 2 & 3: Since both demand and supply shifts by the same degree, price
remains unchanged at P1 ; new equilibrium quantity rises to Q2

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 Equilibrium Analysis: Applications

Solution to Case 5: Bottled Water

 Note that how price is affected depends on which shift is bigger!

 If Supply shift > Demand shift - excess supply - price would ↓.
 If Demand shift > Supply shift - excess demand - price would ↑.

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