Equilibrium Analysis Examples

Equilibrium Analysis

Demand, Supply & Equilibrium Analysis Steps

  1. Draw the basic graph:
    • Price on the y-axis and quantity on the x-axis.
    • Add a downward sloping demand curve and an upward sloping supply curve.
    • Label them D and S.
    • Determine where the initial equilibrium price intersects the y-axis and where the initial equilibrium quantity intersects the x-axis using the point where demand and supply cross.
  2. Check for Equilibrium:
    • If the quantity demanded and the quantity supplied are not the same at the current price, it is not equilibrium; it is a surplus or shortage.
  3. Determine changes:
    • Determine what, if anything, in the market is changing that would change supply and demand.
    • Draw new Demand and Supply curves if appropriate and label them D’ and S’.
  4. Determine the new equilibrium point:
    • Find the new equilibrium point, where the supply and demand curves now intersect, and the new equilibrium price and equilibrium quantity.

Example 1: Population Doubles Due to Pope's Visit

  • Initial conditions:
    • Market price of a cheese steak sandwich: 10
    • Quantity purchased each day: 200,000
  • Change: Population of Philadelphia doubles because the Pope is visiting.
  • Analysis:
    • Demand increases.
    • Supply is unchanged.
    • Quantity increases.
    • Price increases.
  • New equilibrium (e2): 300,000 sandwiches at 15

Example 2: Price of Turkey Sandwich Decreases

  • Initial conditions:
    • Market price of a cheese steak sandwich: 10
    • Quantity purchased each day: 200,000
  • Change: The price of a turkey sandwich decreases from 9.50 to 6.50.
  • Analysis:
    • Demand decreases.
    • Supply is unchanged.
    • Quantity decreases.
    • Price decreases.
  • New equilibrium (e2): 100,000 sandwiches at 6

Example 3: Residents Receive Monetary Payment

  • Initial conditions:
    • Market price of a cheese steak sandwich: 10
    • Quantity purchased each day: 200,000
  • Change: Each resident of Philadelphia receives a monetary payment for their role in the movie “Rockie 4”.
  • Analysis:
    • Demand increases.
    • Supply is unchanged.
    • Quantity increases.
    • Price increases.
  • New equilibrium (e2): 400,000 sandwiches are sold at 15.

Example 4: Price of Cheese Increases

  • Initial conditions:
    • Market price of a cheese steak sandwich: 10
    • Quantity purchased each day: 200,000
  • Change: The price of cheese increases by 50% because of a shortage of cows.
  • Analysis:
    • Demand is unchanged.
    • Supply decreases.
    • Quantity decreases.
    • Price Increases.
  • New equilibrium (e2): 100,000 sandwiches are sold at 14

Example 5: Half of Cheesesteak Shops Close

  • Initial conditions:
    • Market price of a cheese steak sandwich: 10
    • Quantity purchased each day: 200,000
  • Change: Half the shops that sell cheesesteaks close because of health code violations.
  • Analysis:
    • Demand is unchanged.
    • Supply decreases.
    • Quantity decreases.
    • Price increases.
  • New equilibrium (e2): 100,000 sandwiches are sold at 15

Example 6: Price of Cheese Curls Decreases

  • Initial conditions:
    • Market price of a cheese steak sandwich: 10
    • Quantity purchased each day: 200,000
  • Change: The price of cheese curls, which use the same cheese to make both cheesesteaks and curls, decreases by 50%.
  • Analysis:
    • Demand is unchanged.
    • Supply increases.
    • Quantity increases.
    • Price decreases.
  • New equilibrium (e2): 300,000 sandwiches are sold at 7

Example 7: New Grill Machine is Invented

  • Initial conditions:
    • Market price of a cheese steak sandwich: 10
    • Quantity purchased each day: 200,000
  • Change: A new grill machine is invented that reduces the time it takes for an employee to make the sandwich from 5 minutes to 1 minute.
  • Analysis:
    • Demand is unchanged.
    • Supply increases.
    • Quantity increases.
    • Price decreases.
  • New equilibrium (e2): 400,000 sandwiches are sold at 5