Info

Effect on

Effect on

Change in

Change in

equilibrium

equilibrium

supply

demand

price

quantity

1 Increase

Decrease

Decrease

Indeterminate

2 Decrease

Increase

Increase

Indeterminate

3 Increase

Increase

Indeterminate

Increase

4 Decrease

Decrease

Indeterminate

Decrease

equilibrium price will rise. If the reverse is true, equilibrium price will fall. Because decreases in supply and in demand each reduce equilibrium quantity, we can be sure that equilibrium quantity will fall.

Table -9 summarizes these four cases. To understand them fully you should draw supply and demand diagrams for each case to confirm the effects listed in Table -9.

Special cases arise when a decrease in demand and a decrease in supply, or an increase in demand and an increase in supply, exactly cancel out. In both cases, the net effect on equilibrium price will be zero; price will not change. (Key Question 8)

A Reminder: "Other Things Equal"

We must stress once again that specific demand and supply curves (such as those in Figure -6) show relationships between prices and quantities demanded and supplied, other things equal. The downsloping demand curves tell us that price and quantity demanded are inversely related, other things equal. The upsloping supply curves imply that price and quantity supplied are directly related, other things equal.

If you forget the other-things-equal assumption, you can encounter situations that seem to be in conflict with these basic principles. For example, suppose salsa manufacturers sell one million bottles of salsa at \$4 a bottle in one year, two million bottles at \$5 in the next year; and three million at \$6 in the year thereafter. Price and quantity purchased vary directly, and these data seem to be at odds with the law of demand. But there is no conflict here; these data do not refute the law of demand. The catch is that the law of demand's other-things-equal assumption has been violated over the three years in the example. Specifically, because of changing tastes and rising incomes, the demand for salsa has increased sharply, as in Figure -6a. The result is higher prices and larger quantities purchased.

Another example: The price of coffee occasionally has shot upward at the same time that the quantity of coffee produced has declined. These events seemingly contradict the direct relationship between price and quantity denoted by supply. The catch again is that the other-things-equal assumption underlying the upsloping supply curve was violated. Poor coffee harvests decreased supply, as in Figure -6d, increasing the equilibrium price of coffee and reducing the equilibrium quantity.

These examples emphasize the importance of our earlier distinction between a change in quantity demanded (or supplied) and a change in demand (supply). In Figure -6a a change in demand causes a change in the quantity supplied. In Figure -6d a change in supply causes a change in quantity demanded.

Application: Pink Salmon

To reinforce these ideas, let's briefly examine a real-world market: the market for pink salmon. This market has a standardized product, for which price has substantially declined in recent years.

A decade or two ago, fishers earned a relatively high price for each kilogram of pink salmon brought to the dock. That price is represented as P1 in Figure -7 at the

Part One • An Introduction to Economics and the Economy