Comparative Statics of Market Equilibrium

Yujing Xu
University of Hong
Kong

Special Thanks to Dr. Ka-fu Wong1

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
($/apple) use the observations of many
equilibrium points to estimate
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
($/apple) use the observations of many
equilibrium points to estimate
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
($/apple) use the observations of many
equilibrium points to estimate
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.

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

If the Price increased, the

the quantity decreased
P0

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.

That means the change in a

D1 or b , will cause the
same Px    will give different Qx 
D0
Quantity of apples
Q0
16
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
17
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
18
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.

19
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 Example: meal in a fancy restaurant, a trip to Disneyland

o An Inferior Good: demand decreases when income

increases (and vice versa)
o Example: junk food
Question: Can we have inferior good if there is only one good in this
world? No. As there is only one product in the world. Thus,
inferior good exist when there are two or more goods.

20
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 A growing elderly population, like what we have in Hong Kong,

would lead to an increase in the demand for nursing-home care
services.

21
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 Reverse: An increase in the price of one leads to an increase in demand
for the other
o What happens to the demand for tea if the price of coffee increases?
      Demand for tea increase even though the price of tea remains
constant
o What happens to the demand for tea if research finds new health
risks of coffee? Increase in demand
o What happens to the demand for Honda cars if the price of Nissan
cars increases? Increase in demand

o The demand for a product increases if the price of its substitute

increases.
Note: Price can be defined in a broader sense. Monetary or non-monetary.
22
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). Reverse: An
increase in the price of one good leads to a decrease in the demand for
the other

o What happens to the demand for Sport Utility Vehicles when gasoline
gets more expensive?
       Decrease
o What happens to the demand for hot dog buns when the price of hot
dog sausages increases?
       Decrease

o The demand of a product decreases if the price of its complement

increases.
23
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, …..

24
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? Increase
o What happens to the demand for caterpillar fungus
after its newly perceived health benefits? 

25
Supply relations
Qx = a + b*Px+…
Price of apples
($/apple)

S0

Plot the most important pair of variables.

Quantity of apples

26
 Note: change is supply or
demand is NOT the same
as change in quantity of
supply and demand.
Change in Quantity Supplied Quantity is considering on
the same curve moving
Qx = a + b*Px+… from one point to another
Price of apples
($/apple) but change in supply or
demand is moving the
whole curve

S0 Note: For higher price,

more quantity supplied

Change in quantity supplied:

A change of Qx caused by a change of Px

Quantity of apples

27
Change in Supply
Qx = a + b*Px+…
Price of apples
($/apple)

That means the change in a

or b , will cause the
S0 same Px  will give different Qx 
S1

Change in supply:
A change of Qx caused by a change of
anything other than Px

Quantity of apples

28
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

29
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

30
Supply Shifters
1. Technological Innovations
2. Input Prices
3. Taxes and Subsidies
4. Expectations
5. Entry or Exit of Producers
6. Changes in Opportunity Costs

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

31
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.

o A reduction in costs is the most fundamental reason for

and increase in supply.

32
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)That is, An increase in the price of an input (all
else equal) decrease profits
o What will happen to the supply for tuna if diesel
becomes more expensive?

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?

33
Supply Shifters:
Taxes and Subsidies
o A tax on output raises costs, reduces profit and makes
sellers less willing to supply at a given price. A tax
decreases supply.
o After tax, the producer is paying MC plus tax for
selling one additional unit of product

o What will happen to the supply for tuna if the

government imposes sales taxes on sellers?

34
 Supply Shifters:
Taxes and Subsidies
Price of Oil
per Barrel Supply With $10 Tax

$50

Supply Without Tax

$10
$10
$1
0

With a $10 Tax Suppliers

$40 Require a $10 Higher Price to
Sell the Same Quantity
Note: In this case, the
curve is shifting upward
instead of shifting to the
left.
Quantity of Oil (MBD)
35
60
Supply Shifters:
Taxes and Subsidies
o A subsidy on production makes sellers willing to supply a
greater quantity at a given price, or the subsidy allows
producers to sell a given quantity at a lower price. A
subsidy on production increases supply.
o After subsidy, the producer is paying MC minus
subsidy for selling one additional unit of product
o A subsidy can be viewed as a negative tax.

o What will happen to the supply for cotton if the

government gives subsidy to cotton growers?

36
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). That is,  a lower price for a good in the future increases
current supply of the good

o Sellers will adjust their current offerings in anticipation of the

direction of future prices in order to obtain the highest possible
price.

o Note: If the price of future is expected to be higher, then the

opportunity cost of selling the good today is higher, thus the
supply decrease

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

price to rise? 37
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
38
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?

39
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 40
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)
That means the same cost is giving a higher profit if
selling more the alternate good
o Sellers always chase the highest profit goods.

Imagine a seller producing two goods that use the same input.

41
 Supply Shifters:
Changes in Opportunity Costs
Higher (Opportunity) Costs Reduce
Price per Unit Supply- Rising Wheat Prices Reduce
Soybean Supply
Higher Price Required to
Sell the Same Quantity
Supply with High Opportunity Costs

$7 Supply with Low Opportunity Costs

$5

Smaller Quantity Supplied at

the Same Price
Quantity of Soybeans
(Millions of Bushels)
2,000 2,800 42
Example
Recently, there is an increase in the price of
Price of apples oranges. How will it affect the price and
($/apple) quantity of apples?
Oranges and apples are substitutes.
An increase in the price of oranges
S0 causes people to switch to apples.
E1 The increase in the demanded is
P1
due to factors other than the price
E0
of apples.  Thus, it is called an
P0
increase in demand, not an
increase in quantity demanded.  
D1 Change in equilibrium:
P↑ Q↑
D0
Quantity of apples
Q0 Q1
43
Example Recently, a new pesticide has proven very
useful in controlling the bugs that would
Price of apples damage apples. How will it affect the price and
($/apple) quantity of apples?
The pesticide will increase harvest
of apples, hence supply of apples.
S0 The increase in the supplied is
S1 due to factors other than the
price of apples.  Thus, it is called
E0
P0 an increase in supply, not an
E3 increase in quantity supplied.  
P3

Change in equilibrium:
P↓ Q↑
D0
Quantity of apples
Q0 Q 3
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?

Oranges and apples are substitutes.
An increase in the price of oranges
causes people to switch to apples.
The increase in the quantity
demanded is due to factors other
than the price of apples. Thus, it is
called an increase in demand, not
an increase in quantity demanded.
The pesticide will increase harvest
of apples, hence supply of apples.
The increase in the quantity
supplied is due to factors other
than the price of apples. Thus,
it is called an increase in supply,
not an increase in quantity
supplied.

Change in equilibrium: Change in equilibrium:

P↑ Q↑ P↓ Q↑

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 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

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
S1
E4
P4 E0
P0 Change in equilibrium:
P↑ Q↑

D1

D0
Quantity of apples
Q0 Q4
47
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
48
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/ 49
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
50
The Price of Oil, 1960-2005

51
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
Inference from “An increase in price and a
decrease in quantity.”

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

P0

Q0 Quantity
55
Inference from “An increase in price and a
decrease in quantity.”
(Q1,P1) is a market equilibrium point.
Price

P1

Q1 Quantity
56
Inference from “An increase in price and a
decrease in quantity.”

Price

P1

P0

Q1 Q0 Quantity
57
Inference from “An increase in price and a
decrease in quantity.”
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
Inference from “An increase in price and an
increase in quantity.”

(Q0,P0) is a market equilibrium point.

Price

P0

Q0 Quantity
60
Inference from “An increase in price and an
increase in quantity.”

(Q1,P1) is a market equilibrium point.

Price

P1

Q1 Quantity
61
Inference from “An increase in price and an
increase in quantity.”

Price

P1

P0

Q0 Q1 Quantity
62
Inference from “An increase in price and an
increase in quantity.”
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
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
 Example: Impact of food aid
• 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) 66
Q’ Q
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.

67
 Example: Impact of food aid
• Five hundred tons of grain donation next year means
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
Quantity (tons of grain) 68
Q Q’
 Example: Impact of food aid
• Five hundred tons of grain donation next year means
that the supply of all grains in the domestic market will
increase by the same amount at all prices Note: The increase in
S (domestic) demand (Q'-Q ) is actually
500 tons less than 500 tons
Price S’ (domestic + donation)

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.
Quantity (tons of grain) 69
Q’’ Q Q’