ECONOMIC SECOND EDITION in MODULES S Paul Krugman Robin Wells with Margaret Ray and David Anderson MODULE 7 Supply and Demand Changes in Equilibrium Krugman Wells How equilibrium price and quantity are affected when there is a change in either supply or demand How equilibrium price and quantity are affected when there is a simultaneous change in both supply and demand 3 of 9 Equilibrium and Shifts of the Demand Curve Price of coffee beans An increase in demand E P2 Price rises E P1 Supply leads to a movement along the supply curve due to a higher equilibrium price and higher equilibrium quantity 2 1 D 2 D1 Q 1 Q2 Quantity of coffee beans 4 of 9 Equilibrium and Shifts of the Supply Curve Price of coffee beans S S 2 1 A decrease in supply P E 2 2 leads to a movement along the demand curve due to a higher equilibrium price and lower equilibrium quantity Price rises P E1 1 Demand Q 2 Q 1 Quantity falls Quantity of coffee beans 5 of 9 Simultaneous Shifts of Supply and Demand Curves a One possible outcome Price Rises Quantity Rises Price of coffee Small decrease in supply E S 2 S Two opposingin The increase forces demand determining the dominates the equilibrium decrease in quantity supply 2 P2 E P1 1 1 D D Q 1 1 Q2 2 Large increase in demand Quantity of coffee 6 of 9 Simultaneous Shifts of Supply and Demand Curves b Another Possibility Outcome Price Rises Quantity Falls Price of coffee Large decrease in supply S Two opposing forces determining the equilibrium quantity 2 S E P 2 2 E P 1 1 1 Small increase in demand D D Q Q 2 1 Quantity of coffee 7 of 9 The Great Tortilla Crises There was a sharp rise in the price of tortillas in early 2007 a staple food of Mexico s poor going from 25 cents a pound to between 35 and 45 cents a pound in just a few months Much of Mexico s corn is imported from the United States U S corn prices were rising rapidly thanks to surging demand in a new market the market for ethanol 8 of 9 Simultaneous Shifts of Supply and Demand Supply Increases Supply Decreases Demand Increases Price ambiguous Quantity up Price up Quantity ambiguous Demand Decreases Price down Quantity ambiguous Price ambiguous Quantity down 9 of 9