Comparative Statics of Market Equilibrium: Ka-Fu Wong

Comparative Statics of Market Equilibrium
Ka-fu Wong
University of Hong
Kong
1
Comparative Statics
The comparison of two different economic outcomes (in
our case, market equilibrium) with respect to exogenous
circumstances is called comparative statics.
2
Comparative Statics
Price of apples
($/apple)
Equilibrium:
E0 = (P0, Q0)
S0
E0
P0
D0
Quantity of apples
Q0
3
Comparative Statics
Price of apples
($/apple)
Equilibrium:
E1 = (P1, Q1)
S0
E1
P1
D1
Quantity of apples
Q1
4
Comparative Statics
Price of apples OLD Equilibrium:
($/apple) E0 = (P0, Q0)
NEW Equilibrium:
S0 E1 = (P1, Q1)
E1
P1
E0 Change in P:
P0 P = P1 - P0
Change in Q:
D1 Q = Q1 - Q0
D0
Quantity of apples
Q0 Q1
5
Comparative Statics
Price of apples OLD Equilibrium:
($/apple) E0 = (P0, Q0)
NEW Equilibrium:
S0 E2 = (P2, Q2)
S1
E2
P2 E0 Change in P:
P0 P = P2 - P0
Change in Q:
D1 Q = Q2 - Q0
D0
Quantity of apples
Q0 Q2
6
Comparative Statics
o Prediction:
o If we know the shift of the supply or/and demand, we
can predict the new equilibrium price-quantity pair.
o Inference:
o From the observation of equilibrium price-quantity
pairs, we will be able to infer about the demand and
supply curves.
o Policy:
o What policy can we use to induce certain equilibrium
price-quantity pair?
7
Inference
If supply remains unchanged, the
changes of equilibrium are all due
Price of apples to the shift of demand, we can
($/apple) use the observations of many
equilibrium points to estimate
supply curve.
S0
E1
P1
E0
P0
D1
D0
Quantity of apples
Q0 Q1
8
Inference
If supply remains unchanged, the
changes of equilibrium are all due
Price of apples to the shift of demand, we can
supply curve.
S0
E1
P1
E0
P0
Quantity of apples
Q0 Q1
9
Inference
If demand remains unchanged,
the changes of equilibrium are all
Price of apples due to the shift of supply, we can
demand curve.
S0
S1
E0
P0 E3
P3
D0
Quantity of apples
Q0 Q 3
10
Inference
If demand remains unchanged,
the changes of equilibrium are all
Price of apples due to the shift of supply, we can
demand curve.
E0
P0 E3
P3
D0
Quantity of apples
Q0 Q 3
11
Inference
If the equilibria are results of both
demand and supply shifts, we can still use
Price of apples the information to estimate the supply
($/apple) and demand, with slightly more advanced
econometric techniques and some
appropriate assumptions.
S0
S1
E2
P2 E0
P0
D1
D0
Quantity of apples
Q0 Q2
12
Comparative Statics
Shift of demand
change of market
equilibrium

Shift of supply
13
Demand relations
Qx = a+b*Px+…
Price of apples
($/apple)
Plot the most important pair of variables.

• Qx against Px
• Px against Qx  Usually
D0
Quantity of apples
14
Change in quantity demanded
Qx = a+b*Px+…
Price of apples
($/apple)
Change in quantity demanded:

A change of Qx caused by a change of Px
P0 Movement along a demand curve
P1
D0
Quantity of apples
Q0 Q1 15
Change in demand
Price of apples Qx = a+b*Px+…
($/apple)
Change in demand:
A change of Qx caused by a change of
anything other than Px
For any given Px, there is a
P0 change in quantity Qx.
A shift of demand curve
D1
D0
Quantity of apples
Q0
16
Change in demand
Qx = a+b*Px+… Likely a parallel shift
Qx = a+b*Px+… Likely a non-parallel shift
Actual shift can be more complicated and

depends on the situation/description.
17
Increase in demand
o An “increase in demand” means that
Price of apples o consumers buy more at every price
($/apple) level, or
o consumers are willing to pay more for
each quantity.
P0
D1
D0
Quantity of apples
Q0
18
Decrease in demand
o An “decrease in demand” means that
Price of apples o consumers buy less at every price
($/apple) level, or
o consumers are willing to pay less for
each quantity.
P0
D1 D0
Quantity of apples
Q0
19
Demand Shifters
1. Income
2. Population
3. Price of Substitutes
4. Price of Complements
5. Expectations
6. Tastes
Note: The above list of shifters is non-exhaustive.
20
Demand Shifters:
Income
o The effect of changes in income on demand depends on the
nature of the good in question.
o A Normal Good: demand increases when income increases

(and vice versa).
o An Inferior Good: demand decreases when income

increases (and vice versa)
Question: Can we have inferior good if there is only one good in

this world?
21
Demand Shifters:
Population
o As the population of an economy changes, the # of buyers of
a particular good also changes, (thereby changing its
demand.)
o What happens to the demand for baby diapers in mainland

China as the one-child policy is relaxed (to two-child
policy)?
o What happens to the demand for adult diapers as people

live longer?
22
Demand Shifters:
Price of Substitutes
o Two goods are Substitutes if a decrease in the price of
one leads to a decrease in demand for the other (or vice
versa).
o What happens to the demand for tea if the price of

coffee increases?
o What happens to the demand for travel between HK

and Japan if the (perceived) safety cost of traveling
between HK and South Korea increases?
Note: Price can be defined in a broader sense. Monetary or non-monetary.

23
Demand Shifters:
Price of Complements
o Two goods are Complements if a decrease in the price
of one good leads to an increase in the demand for the
other (or vice versa).
o What happens to the demand for Sport Utility

Vehicles when gasoline gets more expensive?
Note: SUV tends to consume more gasoline than ordinary passenger

cars.
24
Demand Shifters:
Expectations
o The expectation of a higher (lower) price for a good in the future
increases (decreases) current demand for the good.
o Consumers will adjust their current spending in anticipation of the

direction of future prices in order to obtain the lowest possible price.
o We can view today’s consumption and tomorrow’s consumption as

substitutes. Some people will call it intertemporal substitution.
o If prices for Xbox One consoles are expected to drop right before
Christmas, what will happen to sales during November?
o If the housing price is expected to fall, …..
25
Demand Shifters:
Tastes
o Tastes and preferences are subjective and will vary among
consumers.
o Seasonal changes or fads have predictable effects on demand.

o What happens to demand for ice-cream in the summer?
o What happens to demand for carbohydrates during the Atkins
diet fad?
o What happens to the demand for caterpillar fungus after its
newly perceived health benefits?
26
Supply relations
Qx = a + b*Px+…
Price of apples
($/apple)
S0
Plot the most important pair of variables.

• Qx against Px
• Px against Qx  Usually
Quantity of apples
27
Change in Quantity Supplied
Qx = a + b*Px+…
Price of apples
($/apple)
S0
Change in quantity supplied:

A change of Qx caused by a change of Px
Quantity of apples
28
Change in Supply
Qx = a + b*Px+…
Price of apples
($/apple)
S0
S1
Change in supply:
A change of Qx caused by a change of
anything other than Px
Quantity of apples
29
Increase in Supply
o An “increase in supply” means that
Price of apples o Producers sell more at every price level,
($/apple) or
o Producers are willing to accept a lower
compensation for each quantity.
S0
S1
Quantity of apples
30
Decrease in Supply
Price of apples
($/apple)
S1
S0
o A “decrease in supply” means that

o Producers sell less at every price level, or
o Producers are willing to accept only with a
higher compensation for each quantity.
Quantity of apples
31
Supply Shifters
1. Technological Innovations
2. Input Prices
3. Expectations
4. Entry or Exit of Producers
5. Changes in Opportunity Costs
Note: The above list of shifters is non-exhaustive.
32
Supply Shifters:
Technological Innovations
o A technological innovation makes sellers willing to offer
more at a given price, or sell a quantity at a lower price.
o A technological innovation lowers costs and increases
supply.
33
Supply Shifters:
Input Prices
o A decrease in the price of an input (all else equal)
increases profits and encourages more supply (and vice
versa)
o What will happen to the amount of new businesses if
the government reduces the fees and red tape
associated with new business licenses? What happens
if the fees rise?
34
Supply Shifters:
Expectations
o The expectation of a higher price for a good in the
future decreases current supply of the good – if they can
store the good- (and vice versa).
o Sellers will adjust their current offerings in
anticipation of the direction of future prices in order
to obtain the highest possible price.
o What would happen to today’s supply if sellers expect

tomorrow’s price to rise?
35
Supply Shifters:
Expectations
Price per
Expectations Can Shift the
Supply Today with
Unit Expectation of Future Supply Curve
Price Increase
Supply Today
Into Storage
Quantity
36
Supply Shifters:
Entry or Exit of Producers
As producers enter and exit the market, the overall supply
changes.
o Entry implies more sellers in the market increasing

supply.
o Exit implies fewer sellers in the market decreasing
supply.
o What will happen to the supply for Marijuana in

California if the drug is legalized for general use?
37
Supply Shifters:
Entry or Exit of Producers
Entry Increases Supply
Price Greater Quantity Supplied

Domestic Supply at the Same Price
Domestic Supply Plus

Canadian Imports
Lower Price for the Same

Quantity Supplied
Quantity 38
Supply Shifters:
Changes in Opportunity Costs
o Inputs used in production have opportunity costs.
Sellers will choose to use those inputs where the profit is
the highest
o Sellers will supply less of a good if the price of an
alternate good using the same inputs rises (and vice
versa).
o Sellers always chase the highest profit goods.
Imagine a seller producing two goods that use the same input.
39
Allocation of a fixed amount of resources to the
production of the two goods
Marginal benefit per unit of resources
Amount of resources Good A Good B
1 10 13
2 10 11
3 10 9
4 10 7
Should I send the first unit of resources to the production of good A (or good B)?
No. MB(A 1) = 10 < MC(A 1) = MB(B 1) = 13
Should I send the second unit of resources to the production of good A (or good B)?
No. MB(A 1) = 10 < MC(A 1) = MB(B 2) = 11
Should I send the third unit of resources to the production of good A (or good B)?
Yes. MB(A 1) = 10 > MC(A 1) = MB(B 3) = 9
Should I send the fourth unit of resources to the production of good A (or good B)?
Yes. MB(A 2) = 10 > MC(A 2) = MB(B 3) = 9
40
Allocation of a fixed amount of resources to the
production of the two goods
Marginal benefit per unit of resources
Amount of resources Good A Good B
1 10 15
2 10 13
3 10 11
4 10 9
Should I send the first unit of resources to the production of good A (or good B)?
No. MB(A 1) = 10 < MC(A 1) = MB(B 1) = 15
Should I send the second unit of resources to the production of good A (or good B)?
No. MB(A 1) = 10 < MC(A 1) = MB(B 2) = 13
Should I send the third unit of resources to the production of good A (or good B)?
Yes. MB(A 1) = 10 < MC(A 1) = MB(B 3) = 11
Should I send the fourth unit of resources to the production of good A (or good B)?
Yes. MB(A 1) = 10 > MC(A 1) = MB(B 4) = 9
41
Example
Recently, there is an increase in the price of
Price of apples oranges. How will it affect the price and
($/apple) quantity of apples?
Oranges and apples are substitutes.
An increase in the price of oranges
S0 causes people to switch to apples.
E1 The increase in the quantity
P1
demanded is due to factors other
E0
than the price of apples. Thus, it is
P0
called an increase in demand, not
an increase in quantity demanded.
D1 Change in equilibrium:
P↑ Q↑
D0
Quantity of apples
Q0 Q1
42
Example Recently, a new pesticide has proven very
useful in controlling the bugs that would
Price of apples damage apples. How will it affect the price and
($/apple) quantity of apples?
The pesticide will increase harvest
of apples, hence supply of apples.
S0 The increase in the quantity
S1 supplied is due to factors other
than the price of apples. Thus,
E0
P0 it is called an increase in supply,
E3 not an increase in quantity
P3
supplied.
Change in equilibrium:
P↓ Q↑
D0
Quantity of apples
Q0 Q 3
43
Example
Recently, (1) there is an increase in the price of oranges, and (2) a new pesticide
has proven very useful in controlling the bugs that would damage apples. How
will these two events affect the price and quantity of apples?
Oranges and apples are substitutes. The pesticide will increase harvest
An increase in the price of oranges of apples, hence supply of apples.
causes people to switch to apples. The increase in the quantity
The increase in the quantity supplied is due to factors other
demanded is due to factors other than the price of apples. Thus,
than the price of apples. Thus, it is it is called an increase in supply,
called an increase in demand, not not an increase in quantity
an increase in quantity demanded. supplied.
Change in equilibrium: Change in equilibrium:
P↑ Q↑ P↓ Q↑
44
Example
Recently, (1) there is an increase in the price of oranges, and (2) a new pesticide
has proven very useful in controlling the bugs that would damage apples. How
will these two events affect the price and quantity of apples?
Change in equilibrium: Change in equilibrium:

P↑ Q↑ + P↓ Q↑
Overall change in equilibrium:

Change of P uncertain
Q will definitely increase
45
Example Recently, (1) there is an increase in the price of
oranges, and (2) a new pesticide has proven
very useful in controlling the bugs that would
Price of apples damage apples. How will these two events
($/apple) affect the price and quantity of apples?
S0
S1
E4
P4 E0
P0 Change in equilibrium:
P↑ Q↑
D1
D0
Quantity of apples
Q0 Q4
46
Example Recently, (1) there is an increase in the price of
oranges, and (2) a new pesticide has proven
very useful in controlling the bugs that would
Price of apples damage apples. How will these two events
($/apple) affect the price and quantity of apples?
S0
Change in equilibrium:
E0 S1 P↓ Q↑
P0 E4
P4
D1
D0
Quantity of apples
Q0 Q4
47
The Price of taxi operating license in HK
1986-2019 (yearly low and high)
(10,000 HKD) 750 means 7.5 million HKD
Source: http://taxixchange.com/ 48
The price fluctuations are driven by change
in demand since 1994.
The Hong Kong government stopped issuing licenses in 1994, when
there were a total of 18,138 in the territory.
https://en.wikipedia.org/wiki/Taxicabs_of_Hong_Kong
P
S
Q
49
The Price of Oil, 1960-2005
50
Prediction
o An oil shock will cause the price oil to increase, quantity
to decrease.
51
Numerous examples
• Impact of X on the price and quantity of various kinds of
meat, and on the price of wine and quantity of wine
– Fishing holiday
– Avian Flu
– Mad-cow disease
– African swine fever
• The impact of development of genetic modified food
• The expansion of HKU on the housing prices in the

Western District.
52
Inference
o We observed an increase in price and a decrease in
quantity.
o Likely a supply shock had occurred?
53
Inference from “An increase in price and a
decrease in quantity.”
(Q0,P0) (Q1,P1)
Price
P1
P0
Q1 Q0 Quantity
54
Price (Q0,P0) is a market equilibrium point.
P0
Q0 Quantity
55
(Q1,P1) is a market equilibrium point.
Price
P1
Q1 Quantity
56
Price
P1
P0
Q1 Q0 Quantity
57
If either shift of supply or shift of
demand had happened, but not both
Price
…
P1
Likely it is a shift in
P0 supply!
Q1 Q0 Quantity
58
Inference from “An increase in price and an
increase in quantity.”
(Q0,P0) (Q1,P1)
Price
P1
P0
Q0 Q1 Quantity
59

Price
P0
Q0 Quantity
60

Price
P1
Q1 Quantity
61
Price
P1
P0
Q0 Q1 Quantity
62
If either shift of supply or shift of
demand had happened, but not both
Price
…
Likely it is a shift in
P1 demand!
P0
Q0 Q1 Quantity
63
Policy-HK housing price
o The housing price is too high. What can government do to lower the price?
o Increase the supply by

o Increasing the supply of land,
o Providing incentive for redevelopment of old districts
o Lowering the entry barrier to housing development.
o Price will be lower and quantity will be higher.
o Decrease the demand for housing, by

o Restricting the purchase by “foreigners”
o Raising the down payment ratio (thus increasing the “other” cost of
buying apartments/flats).
o Price will be lower and quantity will be lower.
Two different sets of policies help achieve the same goal of lowering price,
but their implication on quantity is vastly different! 64
Example: Impact of food aid
An important determinant of the amount of grains harvested next year

by Ethiopian farmers is the amount of seeds planted this year. Given
that Western nations have guaranteed to donate five hundred tons of
grain next year, this year the Ethiopian farmers will:
A. plant more seeds as the food aid established a minimum price for
grain.
B. plant more seeds as the farmers’ confidence is restored.
C. plant the same amount of seeds as they would have without the
food aid.
D. plant less seeds as the price of grain will be lower with the food
aid.
65
• Five hundred tons of grain donation next year means
that the demand for grain in the market of domestically
produced grain (excluding donation) will be lowered by
the same amount at all prices?
500 tons S
Price
Anticipating a lower market
equilibrium price next year, farmer
would want to supply less quantity
P next year.
P’ They do so by planting less
seeds this year.
D
D’
Quantity (tons of grain)
Q’ Q 66

grain.
food aid.
aid.
67
that the supply of grains in the market of all grains
(domestic plus donation) will increase by the same
amount at all prices? S (domestic)
500 tons
Price S’ (domestic + donation)
P
P’
D
Q Q’ 68

grain.
food aid.
aid.
??? 69
that the supply of all grains in the domestic market will
increase by the same amount at all prices?
S (domestic)
500 tons
Anticipating a lower market

equilibrium price next year,
P farmer would want to supply less
quantity next year.
P’
They do so by planting less
D seeds this year.
Q’’ Q Q’ 70
• Change in producer surplus
S (domestic)
500 tons
P
P’
D
Q’’ Q Q’ 71
S (domestic)
Price
P
P’

Q’’ Q
72
Producer surplus decreases due to the donation program.
Domestic producers would not support such donation program.
S (domestic)
Price
If the producers can lobby the

government NOT to implement this
P donation program, how much are they
willing to pay to do such lobbying
P’ activities?

Q’’ Q
73
• Change in consumer surplus
S (domestic)
500 tons
P
P’
D
Q’’ Q Q’ 74
Price
P
P’
D
Q Q’ 75
Consumer surplus increases due to the donation program.
Consumers would support such donation program.
If the consumers can lobby the

Price government to implement this donation
program, how much are they willing to
pay to do such lobbying activities?
P
P’
D
Q Q’ 76
Taxi regulations in Hong Kong
• During economic recession, taxi is in excess supply at the
regulated taxi fare.
– Every day, a lot of taxi line up at the airport for
customers. Some of them have to wait several hours
for business.
– Some offer discount to customers.
• During economic boom, taxi is in excess demand at the
regulated taxi fare.
– It is so difficult to obtain taxi service.
TITLE Conflicting interests in taxi-fare regulation / Yue-Chim Richard Wong, Ka-Fu Wong.
IMPRINT Hong Kong : Asia Case Research Centre, The University of Hong Kong, c2005.
• Number of taxi license is also regulated.
http://library.hku.hk/record=b3580220
77
Taxi Regulations
Taxi Fare S
Maximum amount of taxi

services supplied is
constrained by the number
of taxi operating license.
When the fare is too low,

no one wants to supply.
Taxi services
78
Taxi Regulations
Taxi Fare S
Maximum amount of taxi
services supplied is
constrained by the number
of taxi operating license.
Taxi operators (drivers)

may have different cost of
supplying taxi services.
Taxi services
79
Taxi Regulations
Taxi Fare
Regulated fare
Taxi services
80
Taxi Regulations
Taxi Fare S
Equilibrium achieved only if

demand curve happens to pass
through this point!
Regulated fare
Because both quantity and
price are regulated, we are
almost always in disequilibrium.
Taxi services
81
Taxi Regulations
Economy in a recession:
Taxi Fare S Excess supply
Regulated fare
D1 (economy in a recession)
Taxi services
82
Taxi Regulations
Taxi Fare S
Economy in a boom:
Excess demand
Regulated fare
D2
(economy in a boom)
Taxi services
83
Quality of taxi service
o When price is not allowed to adjust in response to the excess demand
and excess supply conditions, quality would adjust.
o Bad service expected when there is an excess demand.
o Good service expected when there is an excess supply.
o Service quality is not identifiable given that all taxis are required to
have the same paint and design. A potential passenger waiting for a
taxi cannot tell whether an approaching taxi is
o driven by a smoking or non-smoking driver.
o whether a taxi is clean
o More likely to provide bad service than to provide good service.
84

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Comparative Statics of Market Equilibrium

Plot the most important pair of variables.

Change in quantity demanded:

Qx = a+b*Px+… Likely a parallel shift

Qx = a+b*Px+… Likely a non-parallel shift

Actual shift can be more complicated and

Note: The above list of shifters is non-exhaustive.

o A Normal Good: demand increases when income increases

o An Inferior Good: demand decreases when income

Question: Can we have inferior good if there is only one good in

o What happens to the demand for baby diapers in mainland

o What happens to the demand for adult diapers as people

o What happens to the demand for tea if the price of

o What happens to the demand for travel between HK

Note: Price can be defined in a broader sense. Monetary or non-monetary.

o What happens to the demand for Sport Utility

Note: SUV tends to consume more gasoline than ordinary passenger

o Consumers will adjust their current spending in anticipation of the

o We can view today’s consumption and tomorrow’s consumption as

o If the housing price is expected to fall, …..

o Seasonal changes or fads have predictable effects on demand.

Plot the most important pair of variables.

Change in quantity supplied:

o A “decrease in supply” means that

Note: The above list of shifters is non-exhaustive.

o What would happen to today’s supply if sellers expect

o Entry implies more sellers in the market increasing

o What will happen to the supply for Marijuana in

Price Greater Quantity Supplied

Domestic Supply Plus

Lower Price for the Same

o Sellers always chase the highest profit goods.

Change in equilibrium: Change in equilibrium:

Overall change in equilibrium:

• The impact of development of genetic modified food

• The expansion of HKU on the housing prices in the

o Likely a supply shock had occurred?

Price (Q0,P0) is a market equilibrium point.

(Q0,P0) is a market equilibrium point.

(Q1,P1) is a market equilibrium point.

o Increase the supply by

o Decrease the demand for housing, by

An important determinant of the amount of grains harvested next year

An important determinant of the amount of grains harvested next year

An important determinant of the amount of grains harvested next year

Anticipating a lower market

Quantity (tons of grain)

If the producers can lobby the

Quantity (tons of grain)

If the consumers can lobby the

Maximum amount of taxi

When the fare is too low,

Taxi operators (drivers)

Equilibrium achieved only if

o More likely to provide bad service than to provide good service.

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