Page 43 - Microeconomics, Fourth Edition

c01analyzingeconomicproblems.qxd 7/14/10 10:55 AM Page 17

1.2 THREE KEY ANALYTICAL TOOLS 17

S : supply of corn
1
D : demand for corn
1
when income is I
1
D : demand for corn
2
when income is I 2
Price of corn P * S 1

*
P 2
1
FIGURE 1.5 Comparative Statics:
Increase in Income
D D When income rises from l 1 to l 2 , the de-
1 2
mand curve shifts from D 1 to D 2 (demand
Q * Q * increases). The equilibrium market price
1 2
will rise from P* to P* . The equilibrium mar-
1
2
Quantity of corn ket quantity will rise from Q* to Q*
1
2.

S : supply of corn when
1
rainfall is r
1
S : supply of corn when
2
rainfall is r
2
S 1
Price of corn P 1 * S 2

P * FIGURE 1.6 Comparative Statics:
2
Increase in Rainfall
When rainfall increases from r 1 to r 2 ,
D , Demand for corn
1 the supply curve shifts from S 1 to S 2
(supply increases). The equilibrium
Q * Q *
1 2 market price will fall from P* to P* .
1
2
The equilibrium market quantity will
Quantity of corn
rise from Q* to Q* 2.
1
d
*
The equilibrium quantity also rises, from Q 1 to fected because Q does not depend on r. The equilib-
*
*
*
Q 2 . So the change in income also leads to a change in rium price therefore falls from P 1 to P 2 . So the change
quantity. in rainfall leads to a change in equilibrium price.
*
*
The equilibrium quantity rises, from Q 1 to Q 2 . So
(b) As shown in Figure 1.6, the increase in rainfall shifts
the change in rainfall also leads to a change in quantity.
the supply curve to the right (increases supply), from S 1
to S 2 . The location of the demand curve, D 1 , is unaf- Similar Problems: 1.2, 1.5, 1.6, 1.7, 1.12, 1.13