ZeePedia

Changes in Market Equilibrium:Market for College Education

<< REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
Elasticities of supply and demand:The Demand for Gasoline >>
img
Microeconomics ­ECO402
VU
Lesson 4
Changes in Market Equilibrium
Equilibrium prices are determined by the relative level of supply and demand.
Supply and demand are determined by particular values of supply and demand
determining variables.
Changes in any one or combination of these variables can cause a change in the
equilibrium price and/or quantity.
P
S
D
Raw material prices fall
S'
­  S shifts to S'
­  Surplus @ P1 of Q1, Q2
­  Equilibrium @ P3, Q3
P1
P3
Q1 Q3  Q2
Q
P
S'
D
S
Raw material prices Rise
­  S shifts to S'
­  Shortage @ P1 of Q1, Q2
­  Equilibrium @ P3, Q3
P3
P1
Q3
Q1
Q2
Q
Income Increases
P
D
D'
S
­  Demand shifts to D' Shortage @ P1 of
Q1, Q2
­  Equilibrium @ P3, Q3
P3
P1
Q1  Q3  Q2
Q
9
img
Microeconomics ­ECO402
VU
P
Income Decreases
D
D'
S
­  Demand shifts to D'
­  Surplus @ P1 of Q1, Q2
­  Equilibrium @ P3, Q3
P1
P3
Q2 Q3
Q1
Q
Income Increases & raw material prices fall
P
­  The increase in D is greater than the increase
D
D'
S
S'
in S
­  Equilibrium price and quantity increase to P2,
Q2
P2
P1
Q
Q1
Q2
P
D
S
Income Increases & raw material prices fall
S'
D'
­  The increase in D is less than the increase in
S
­  Equilibrium price decrease to P2and quantity
increase to Q2
P1
P2
Q
Q1
Q2
P
Income Decreases & raw material prices Fall
D
S
S'
D'
­  The decrease in D is greater than the
increase in S
­  Equilibrium price and quantity decrease to P2
P1
Q2
P2
Q
Q2 Q1
10
img
Microeconomics ­ECO402
VU
Income decreases & raw material prices fall
P
D'
S
D
­  The decrease in D is less than the
S'
increase in S
­  Equilibrium price decrease to P2 and
quantity increase to Q2
P1
P2
Q
Q1  Q2
Shifts in Supply and Demand
When supply and demand change simultaneously, the impact on the equilibrium price
and quantity is determined by:
1) The relative size and direction of the change
2) The shape of the supply and demand curves
The Prices of Eggs & Education Revisited
The real price of eggs fell 59% from 1970 to 1998.
Supply increased due to the increased mechanization of poultry farming and the
reduced cost of production.
Demand decreased due to the increasing consumer concern over the health and
cholesterol consequences of eating eggs.
Market for Eggs
Prices fell until
P
a new equilibrium
S1970
(1970
was reached at $0.26
dollars per
and a quantity
dozen)
of 5,300 million dozen
S1998
$0.61
$0.26
D1970
D1998
Q (million dozens)
5,300 5,500
Price of College Education
The real price of a college education rose 68 percent from 1970 to 1995.
Supply decreased due to higher costs of equipping and maintaining modern
classrooms, laboratories and libraries, and higher faculty salaries.
Demand increased due a larger percentage of a larger number of high school
graduates attending college.
11
img
Microeconomics ­ECO402
VU
Market for College Education
P
S1995
Prices rose until
(annual cost
in 1970
a new equilibrium
dollars)
was reached at $4,573
and a quantity
of 12.3 million students
$4,573
S1970
$2,530
D1995
D1970
8.6
12.3
Q (millions of students enrolled)
The Long-Run Behavior of Natural Resource Prices
Observations
­  Consumption of copper has increased about a hundred fold from 1880 through
1998 indicating a large increase in demand.
­  The real price for copper has remained relatively constant.
Changes in Market Equilibrium
Price
S1900
S1950
S1998
Long-Run Path of
Price and
D1900
D1950
D1998
Quantity
Conclusion
­  Decreases in the costs of production have increased the supply by more than
enough to offset the increase in demand.
12
img
Microeconomics ­ECO402
VU
Factors Shifting Demand Curve
Factors Changing
Effect on
Direction of
Effect on
Effect on
Demand
Demand
Shift in
Equilibrium
Equilibrium
Demand Curve
Price
Quantity
Increase in income
Increase
Rightward
Increase
Increase
(normal good)
Decrease in
Decrease
Leftward
Decrease
Decrease
income(normal good)
Increase in income
Decrease
Rightward
Decrease
Decrease
(inferior good)
Decrease in
Increase
Rightward
Increase
Increase
income(inferior good)
Increase in price of
Increase
Rightward
Increase
Increase
Substitute
Decrease in price of
Decrease
Rightward
Decrease
Decrease
substitute
Increase in price of
Decrease
Leftward
Decrease
Decrease
complement
Decrease in price of
Increase
Rightward
Increase
Increase
complement
Increase in taste and
Increase
Rightward
Increase
Increase
preference for good
Decrease in taste and
Decrease
Leftward
Decrease
Decrease
preference for good
Increase in number of
Increase
Rightward
Increase
Increase
consumers
Decrease in number of
Decrease
Leftward
Decrease
Decrease
consumers
Factors Shifting Supply Curve
Factors Changing
Effect on Direction of
Effect on
Effect on
Supply
Supply
Shift in Supply
Equilibrium
Equilibrium
Curve
Price
Quantity
Increase in resource
Decrease Leftward
Increase
Decrease
price
Decrease in resource
Increase
Rightward
Decrease
Increase
price
Improved technology
Increase
Rightward
Decrease
Increase
Decline in technology
Decrease
Leftward
Increase
Decrease
Expect a price increase
Decrease
Leftward
Increase
Decrease
Expect a price decrease
Increase
Rightward
Decrease
Increase
Increase in number of
Increase
Rightward
Decrease
Increase
suppliers
Decrease in number of
Decrease Leftward
Increase
Decrease
suppliers
13
img
Microeconomics ­ECO402
VU
ELASTICITIES OF SUPPLY AND DEMAND
Generally, elasticity is a measure of the sensitivity of one variable to another.
It tells us the percentage change in one variable in response to a one percent change
in another variable.
Price Elasticity of Demand
Measures the sensitivity of quantity demanded to price changes.
It measures the percentage change in the quantity demanded for a good or
services that results from a one percent change in the price of that good or
service.
The price elasticity of demand is:
Percentage change in Quantity Demanded
Percentage change in Price
E  P = (% Δ Q)/(% Δ P)
The percentage change in a variable is the absolute change in the variable
­
divided by the original level of the variable.
So the price elasticity of demand is also:
­
Δ Q /Q
ΔQ
P
EP =
=
Δ P /P
Q  ΔP
Interpreting Price Elasticity of Demand Values
1) Because of the inverse relationship between P and Q; EP is negative.
2) If IEPI > 1, the percent change in quantity is greater than the percent
change in price. We say the demand is price elastic.
3) If IEPI < 1, the percent change in quantity is less than the percent
change in price. We say the demand is price inelastic.
The primary determinant of price elasticity of demand is the availability of substitutes.
­  Many substitutes demand is price elastic
­  Few substitutes demand is price inelastic
­
Price Elasticities of Demand
Price
The lower portion of a
Ep = ∞
4
_
downward sloping demand
curve is less elastic than the
upper portion.
Q = 8 - 2P
Ep = -1
2
Linear Demand Curve
Q = a - bP
Q = 8 - 2P
Ep = 0
Q
8
4
14
img
Microeconomics ­ECO402
VU
Price
12
A
Ep = -3
9
B
Ep = -1
6
Ep = -0.4
C
3
D
D
0
23
6
10
Q
Price
Infinitely Elastic Demand
Quantity
Completely Inelastic Demand
Price
EP = 0
*
Q
Quantity
15
Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor