SkarpChapter 5 of 5
Predicting Market Changes
A new technology, changing preference, or rising input cost can unsettle a market in seconds. Comparative statics offers a systematic way to predict the new price and quantity.
Comparative Statics: A Market Before and After
A Before-and-After Tool
Comparative statics compares an original market equilibrium with a new equilibrium after an external condition changes. It focuses on the destination, not every moment of adjustment.
The Core Question
Ask: after buyers and sellers respond to the change, what happens to equilibrium price and equilibrium quantity?
A Reliable Sequence
- Define the market. 2. Identify the change. 3. Locate the affected curve. 4. Find its direction. 5. Compare the old and new equilibrium.
Demand Shifts: Start With Buyers
What Counts as a Shift?
Demand shifts when buyers change the quantity they would buy at every price. The curve moves right for an increase in demand and left for a decrease.
Hold Supply Constant
If demand shifts right while supply stays fixed, equilibrium price rises and equilibrium quantity rises. A leftward shift lowers both.
Common Demand Shifters
Income, preferences, related-good prices, expectations, and the number of buyers can shift demand. These are changes outside the good's current price.
Shift vs. Movement
A change in the product's own price creates a movement along demand. A change in a non-price determinant creates a shift of demand.
Thought Exercise: Identify the Demand Effect
Thought Exercise: Streaming Subscriptions
A major streaming platform releases a highly anticipated series. Assume the prices of subscriptions, production costs, and competing platforms do not change.
- Does this event affect demand or supply?
- Which demand shifter is involved?
- Does the demand curve shift right or left?
- If supply is unchanged, predict equilibrium price and quantity.
Reveal
The release changes tastes and preferences, so demand shifts right. With supply unchanged, the equilibrium price and quantity of subscriptions both increase.
Visualize the graph: keep the upward-sloping supply curve fixed. Move the downward-sloping demand curve rightward. The new intersection is higher and farther right.
Supply Shifts: Start With Sellers
Supply Is About Sellers
Supply shifts when sellers change the quantity they are willing and able to offer at every price. More supply shifts right; less supply shifts left.
Hold Demand Constant
A rightward supply shift produces a lower price and higher quantity. A leftward supply shift produces a higher price and lower quantity.
What Shifts Supply?
Input prices, technology, taxes, subsidies, regulation, expectations, weather, and the number of firms can all shift the supply curve.
Key Diagnostic
If the event changes firms' costs or productive capacity, begin by analyzing supply. A product's own price still causes movement along a fixed supply curve.
Example: A Coffee-Bean Cost Shock
The Event
Extreme weather reduces coffee harvests, raising the price of coffee beans. For cafes, beans are an input used to produce brewed coffee.
Trace the Causal Chain
Higher input costs make supplying coffee less profitable at each menu price. Therefore, the market supply curve shifts left.
Equilibrium Prediction
With demand unchanged, a leftward supply shift causes the equilibrium price to rise and equilibrium quantity to fall.
Visualize It
Keep demand fixed. Move supply from `S1` left to `S2`. The new intersection is higher on the price axis and leftward on the quantity axis.
Simultaneous Shifts and Ambiguous Outcomes
More Than One Change
When demand and supply shift together, do not jump to a conclusion. First identify each shift, then state what each one does to price and quantity.
Both Curves Shift Right
Higher demand raises price and quantity. Higher supply lowers price and raises quantity. Therefore, quantity rises, while the price effect is uncertain.
Meaning of Ambiguous
Ambiguous does not mean unknowable forever. It means the available information does not reveal which opposing force is stronger.
A Fast Rule
When both shifts push an outcome the same way, predict that direction. When they push in opposite directions, label that outcome ambiguous.
Quick Check: A New Production Technology
Quick Check
A manufacturer adopts technology that lowers the cost of producing solar panels. Assume demand for solar panels is unchanged. What happens in the solar-panel market?
A manufacturer adopts technology that lowers the cost of producing solar panels. Assume demand is unchanged. What is the predicted market outcome?
- Supply shifts right; equilibrium price falls and equilibrium quantity rises.
- Demand shifts right; equilibrium price and quantity rise.
- Supply shifts left; equilibrium price rises and equilibrium quantity falls.
- There is movement along the supply curve, but no shift.
Show Answer
Answer: A) Supply shifts right; equilibrium price falls and equilibrium quantity rises.
Cost-reducing technology increases supply at every price, shifting supply right. With demand fixed, the new equilibrium has a lower price and a higher quantity.
Example: Electric Vehicles With Two Shifts
Two Events, Two Curves
Better charging networks increase consumers' willingness to buy EVs, shifting demand right. Cheaper batteries lower firms' costs, shifting supply right.
Quantity Is Clear
Both the demand increase and the supply increase push equilibrium EV sales upward. Therefore, equilibrium quantity rises.
Price Is Not Clear
Demand puts upward pressure on price, while supply puts downward pressure on price. The net price change is ambiguous.
What More Would You Need?
To predict the final price, you need evidence about the relative size of the shifts, not just knowledge that both shifts occurred.
Apply a Five-Step Market-Change Method
Apply the Method: Apartment Rentals
A city gains many new university students while a new apartment complex opens. Analyze the rental-apartment market.
Your Five Steps
- Define the market: rental apartments in the city.
- Classify each event: more students affect demand; new apartments affect supply.
- Find directions: student arrivals shift demand right; new apartments shift supply right.
- Compare effects: both shifts raise quantity. Demand raises rent, while supply lowers rent.
- State the result: equilibrium quantity of apartments rented rises; the change in equilibrium rent is ambiguous.
Practical Habit
Write a small table before drawing the graph:
- More students: `D right` -> price up, quantity up
- New apartments: `S right` -> price down, quantity up
This prevents a common error: treating a two-shift problem as if only one curve changed.
Key Terms Review
Key Terms Review
Flip each card, then explain the term in your own words before moving on.
- Comparative statics
- Analysis that compares an initial equilibrium with a new equilibrium after an external change.
- Demand shift
- A change in the quantity buyers want at every price; the entire demand curve moves.
- Supply shift
- A change in the quantity sellers offer at every price; the entire supply curve moves.
- Movement along a curve
- A change in quantity demanded or supplied caused by a change in the good's own price, with the curve unchanged.
- Ambiguous outcome
- An outcome whose direction cannot be determined from the information given because different shifts have opposing effects.
Key Terms
- input cost
- The cost of a resource used to produce a good or service, such as materials, labor, or energy.
- demand shift
- A movement of the entire demand curve caused by a non-price determinant of demand.
- supply shift
- A movement of the entire supply curve caused by a non-price determinant of supply.
- ambiguous outcome
- A result whose direction is uncertain because simultaneous shifts exert opposing effects.
- equilibrium price
- The price at which quantity demanded equals quantity supplied.
- comparative statics
- A method that compares market equilibria before and after a change in an external condition.
- equilibrium quantity
- The quantity bought and sold at the equilibrium price.
- movement along a curve
- A change in quantity demanded or supplied caused by a change in the good's own price.