| Chapter 3 Outline |
| II. THE EFFECTS OF CHANGES IN DEMAND AND SUPPLY ON EQUILIBRIUM PRICE AND QUANTITY |
| A. Change in Demand |
| 1. A change in demand will cause equilibrium price and output to change in thesame direction. |
| a. A decrease in demand will cause a reduction in the equilibrium price and quantity of a good. |
| | 1. The decrease in demand causes excess supply to develop at the initial price. |
| | a. Excess supply will cause price to fall, and as price falls producers are willing to supply less of the good, thereby decreasing output. |
| b. An increase in demand will cause an increase in the equilibrium price and quantity of a good. |
| | 1. The increase in demand causes excess demand to develop at the initial price. |
| | a. Excess demand will cause the price to rise, and as price rises producers are willing to sell more, thereby increasing output. |
| B. Change in Supply |
| 1. A change in supply will cause equilibrium price and output to change inopposite directions. |
| a. An increase in supply will cause a reduction in the equilibrium price and an inase in the equilibrium quantity of a good. |
| | 1. The increase in supply creates an excess supply at the initial price. |
| | a. Excess supply causes the price to fall and quantity demanded to increase. |
| b. An dcrease in supply will cause an increase in the equilibrium price and a decrease in the equilibrium quantity of a good. |
| | 1. The decrease in supply creates an excess demand at the initial price. |
| | a. Excess demand causes the price to rise and quantity demanded to decrease. |
| C. Changes in Demand and Supply |
| 1. If demand and supply change in opposite directions, then the change in theequilibrium price can be determined, but the change in the equilibrium. output cannot. |
| a. A decrease in demand and an increase in supply will cause a fall in equilibrium price, but the effect on equilibrium quantity cannot be determined. |
| | 1. For any quantity, consumers now place a lower value on the good, and producers are willing to accept a lower price; therefore, price will fall. The effect on output will depend on the relative size of the two changes. |
| b. An increase in demand and a decrease in supply will cause an increase in equilibrium price, but the effect on equilibrium quantity cannot be detennined. |
| | 1. For any quantity, consumers now place a higher value on the good,and producers must have a higher price in order to supply the good; therefore, price will increase. The effect on output will depend on the relative size of the two changes. |
| 2. If demand and supply change in the same direction, the change in the equilibrium output can be determined, but the change in the equilibrium price cannot. |
| a. If both demand and supply increase, there will be an increase in the equilibrium output, but the effect on price cannot be determined. |
| | 1. If both demand and supply increase, consumers wish to buy more and firms wish to supply more so output will increase. However, since consumers place a higher value on each unit, but producers are willing to supply each unit at a lower price, the effect on price will depend on the relative size of the two changes. |
| b. If both demand and supply decrease, there will be a decrease in the equilibrium output, but the effect on price cannot be determined. |
| | 1. If both demand and supply decrease, consumers wish to buy less andfirms wish to supply less, so output will fall. However, since consumers place a lower value on each unit, but producers are willing to supply each unit only at higher prices, the effect on price will depend on the relative size of the two changes. |
