ECON1101 Chap.10 Market Equilibrium and Comparative Statics
Market Equilibrium and Comparative Statics
Market Equilibrium and Comparative Statics puts supply and demand together. Equilibrium is the price at which quantity supplied equals quantity demanded; shortages bid prices up and surpluses push them down until the market clears.
The chapter solves equilibria algebraically, then applies the course’s four-step routine for comparative statics: which curve shifts, in which direction, the new intersection, and the adjustment story at the old price. It closes with simultaneous shifts, where one variable moves for certain and the other is ambiguous.
Examples include an income rise for normal and inferior goods, a cost-cutting technology, a double shock to one market and inferring which curve moved from price and quantity data.
What this chapter covers
- 01
Equilibrium price and quantity
- 02
The market clearing condition
- 03
Excess demand and excess supply
- 04
Solving equilibrium algebraically
- 05
The four steps of comparative statics
- 06
Simultaneous shifts and ambiguity
Worked example · free
Equilibrium and a shortage at a low price
- 1Set Qd = Qs: 120 − 4P = 2P, so P* = $20.
- 1Q* = 2 × 20 = 40, and demand agrees: 120 − 80 = 40.
- 1At $14, Qd = 120 − 56 = 64 and Qs = 28.
- 1The shortage is 64 − 28 = 36 units, which would bid the price up toward $20.
Key terms
- Equilibrium price
- The equilibrium price is the price at which quantity supplied equals quantity demanded.
- Excess demand
- Excess demand, or a shortage, is the amount by which quantity demanded exceeds quantity supplied at a given price.
- Comparative statics
- Comparative statics compares an equilibrium before and after an outside change without tracing the path between them.
- Market clearing condition
- The market clearing condition is the requirement that quantity demanded equals quantity supplied.
- Excess supply
- Excess supply, or a surplus, is the amount by which quantity supplied exceeds quantity demanded at a given price.
- Equilibrium quantity
- Equilibrium quantity is the amount both supplied and demanded at the equilibrium price, where the two curves cross.
Market Equilibrium and Comparative Statics FAQ
How does a market move toward equilibrium?
At a price below equilibrium buyers want more than sellers offer, so competition among buyers pushes the price up. Above equilibrium sellers cannot sell everything and cut prices. Either way the price moves until the two quantities match.
What are the steps of a comparative statics answer?
Decide which curve the event shifts, decide the direction, locate the new intersection on a graph, then explain the adjustment: the excess demand or supply at the old price and how the price change removes it.
Why is one variable ambiguous when both curves shift?
Each shift pushes price and quantity in its own direction. When the shifts agree on one variable, that change is certain; when they disagree on the other, its direction depends on which shift is larger, which the question usually does not say.
Can the same event shift demand in different directions?
Yes. A rise in income shifts demand right for a normal good and left for an inferior good, so state the assumption about the type of good before drawing the shift.
Why does equilibrium quantity change by less than the shift in demand?
When demand shifts right, the price rises at the same time, which moves buyers up the new demand curve and sellers up the supply curve. Part of the shift is absorbed by the higher price, so quantity rises by less than the horizontal size of the shift.
How do I solve for equilibrium when one function is written as inverse supply?
Put both functions in the same form first. Either rearrange each so quantity is on the left and set them equal, or rearrange each so price is on the left and set the prices equal. Then substitute the result back into both functions to check the quantities match.
Exam move
Write the four steps on a card and apply them to five events a day, mixing demand shocks, supply shocks and double shifts. For each, draw the graph and write two sentences explaining the adjustment at the old price. Keep one algebraic drill in the routine as well, solving the equilibrium before and after a shift and checking both quantities.
Collect the comparative statics events you meet in tutorials into one list with their verdicts, and revisit the ones you got wrong until the curve and the direction come without hesitation.
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