The

The environment is cold environment is

hot
Nice cool
clothes are
put on

Nice warm
clothes are
Body’s Body’s
put on
equilibrium equilibrium
temperature temperature
~37oC ~37oC

NOW CONSIDER THIS – WHAT HAPPENS IF THE WEATHER CHANGES

BUT THE LAYERS OF CLOTHES DO NOT
We know non-price determinants can shift both the S curve and / or the D
curve.

A bit like the weather changing with the previous slide.

In economics we would say ‘a shift creates a new equilibrium’

- And we would then be concerned about whether .. the new equilibrium
price is the same as the actual price??
- If the answer to the question above is NO, we have inefficiency. And
efficiency to an economist is like … ---- to a -----
(insert your own simile
‘a shift creates a new equilibrium’

- This would mean the

Equilibrium Price moves : up or
down.

- The question is has the actual

price (the shelf price) moved
with it?

- In terms of our metaphor, we

would say the weather has
changed! Have we changed our
clothes as well? – because if
not….

- If the actual price doesn’t adjust

to the new equilibrium price we
are going to have INEFFICIENCY
 A change in a non-price determinant occurs that
increased Demand! (D to D1)
Price
Now we have a new equilibrium : a new
Equilibrium price (higher at P1) & a new
S
Equilibrium quantity (higher at Q1)

NOW THE REALITY IS : DEMAND IS MORE VOLATILE

Assume THAN SUPPLY
Equilibrium Price P1 Customers change their spending habits much quicker
to be same as than Producers can change their Production methods
Actual Price.
P Producers often initially leave the actual price at P,
Assume we have they, might not even immediately know the Invisible
efficiency Hand has moved the equilibrium!

So at P Suppliers will continue to Produce Q

but now, under the new equilibrium,
customers demand Q2
D1
D So at P there is shortage (of Q-Q2)

Q Q1 Q2 Quanti WHAT IS THE PROCESS VIA WHICH

ty THE MARKET RESOLVES SHORTAGE
AND RE-ESTABLISHES EFFICIENCY?
This shortage – based on Higher Equilibrium
Prices - sends a signal to buyers to reduce
their consumption and a signal to sellers to
increase their production.

Initial signals suggests Actual Price should

rise – the market experiments with P to Px
• Demand will fall from Dq to Dq1
• Supply will rise from Sq to Sq1
Px - Sq1 Dq1
Both buyers and sellers have an economic Sq Dq
incentive to act in this way

Shortage will fall from the red arrow to the

blue arrow.

Signals will continue to be sent until shortage

disappears and the Actual Price realigns with
the new Equilibrium Price (P1)

These market reactions ensure that shortages

are short lived
The body sends signals
when its not at
equilibrium temperature
YOUR TURN
• Can you do the equivalent of Slide 5 for when the equilibrium changes
due to a positive change in a non-price determinant of supply