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2.1 DEMAND, SUPPLY, AND MARKET EQUILIBRIUM 37
axis), as shown in Figure 2.8. This shift indicates that less product would be supplied
at any price, and the market equilibrium would move from point A to point B. The
increase in the price of labor increases the equilibrium price and decreases the equi-
librium quantity.
Figure 2.7 shows us that an increase in demand, coupled with an unchanged sup-
ply curve, results in a higher equilibrium price and a larger equilibrium quantity.
Figure 2.8 shows that a decrease in supply, coupled with an unchanged demand curve,
results in a higher equilibrium price and a smaller equilibrium quantity. By going
through similar comparative statics analyses for a decrease in demand and an increase
in supply, we can derive the four basic laws of supply and demand:

1. Increase in demand unchanged supply curve higher equilibrium price and
larger equilibrium quantity.
2. Decrease in supply unchanged demand curve higher equilibrium price and
smaller equilibrium quantity.
3. Decrease in demand unchanged supply curve lower equilibrium price and
smaller equilibrium quantity.
4. Increase in supply unchanged demand curve lower equilibrium price and
larger equilibrium quantity.

LEARNING-BY-DOING EXERCISE 2.4
S
E D
Comparative Statics on the Market Equilibrium
Suppose that the U.S. demand for alu- Solution
d
minum is given by the equation Q 500 50P 10I,
where P is the price of aluminum expressed in dollars per (a) We substitute I 10 into the demand equation to get
d
kilogram and I is the average income per person in the the demand curve for aluminum: Q 600 50P.
d
s
United States (in thousands of dollars per year). Average We then equate Q to Q to find the equilibrium
income is an important determinant of the demand for price: 600 50P 400 50P, which implies P 10.
automobiles and other products that use aluminum, and The equilibrium price is thus $10 per kilogram. The equi-
hence is a determinant of the demand for aluminum librium quantity is Q 600 50(10), or Q 100. Thus,
itself. Further suppose that the U.S. supply of aluminum the equilibrium quantity is 100 million kilograms per year.
s
(when P 8) is given by the equation Q 400 50P. (b) The change in I creates a new demand curve that we
In both the demand and supply functions, quantity is find by substituting I 5 into the demand equation shown
measured in millions of kilograms of aluminum per year. above: Q 550 50P. Figure 2.9 shows this demand
d
curve as well as the demand curve for I 10. As before, we
s
d
Problem equate Q to Q to find the equilibrium price: 550 50P
400 50P, which implies P 9.5. The equilibrium
(a) What is the market equilibrium price of aluminum price thus decreases from $10.00 per kilogram to $9.50 per
when I 10 (i.e., $10,000 per year)? kilogram. The equilibrium quantity is Q 550 50(9.50),
or Q 75. Thus, the equilibrium quantity decreases from
(b) What happens to the demand curve if average 100 million kilograms per year to 75 million kilograms.
income per person is only $5,000 per year (i.e., I 5 Figure 2.9 shows this impact. Note that it is consistent with
rather than I 10). Calculate the impact of this de- the third law of supply and demand: A decrease in demand
mand shift on the market equilibrium price and coupled with an unchanged supply curve results in a lower
quantity and then sketch the supply curve and the de- equilibrium price and a smaller equilibrium quantity.
mand curves (when I 10 and when I 5) to illustrate
this impact. Similar Problems: 2.11, 2.18