Economics, 3rd Edition

 

−3p + 4Q = 5

 

(1)

 

2p − 5Q = −15

 

(2)

To eliminate p, multiply (1) by 2 and (2) by 3

 

−6p + 8Q = 10

 

(3)

 

6p − 15Q = −45

 

(4)

Add together (3) and (4)

 

−6p + 8Q = 10

 

(3)

 

6p − 15Q = −45

    

 

−7Q = −35

 

(4)

Divide both sides by 

−7

Q = 5

We can now substitute Q into equations (1) and (2) to find (and check) p

If Q

= 5 then:

 

 

−3p + 4(5) = 5

  

 

 

−3p + 20 = 5

       

  

20

− 5 = 3p

             

  

15

= 3p

               

 

 

p = 5

As a check:

 

   

2p − 5(5) = −15

  

 

  

2p − 25

 

= −15

          2p = −15 + 25

     2p = 10

     p = 5

In this example the equilibrium price is 

€5 and the equilibrium quantity is 5.

Three Steps to Analysing Changes in Equilibrium

So far we have seen how supply and demand together determine a market’s equilibrium, which in turn 

determines the price of the good and the amount of the good that buyers purchase and sellers produce. 

Of course, the equilibrium price and quantity depend on the position of the supply and demand curves. 

We use comparative static analysis to look at what happens when some event shifts one of these curves 

and causes the equilibrium in the market to change.

To do this we proceed in three steps:

1. 

We decide whether the event in question shifts the supply curve, the demand curve or, in some cases, 

both curves.

2. 

We decide whether the curve shifts to the right or to the left.

3. 

We use the supply and demand diagram to compare the initial and the new equilibrium, which shows 

how the shift affects the equilibrium price and quantity.

Remember that the process by which equilibrium changes is not instantaneous – some markets will 

take longer to adjust to changes than others. To see how these three steps work in analysing market 

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CHAPTER 3  THE MARKET FORCES OF SUPPLY AND DEMAND  63

changes, let’s consider various events that might affect the market for milk. We begin the analysis by 

assuming that the market for milk is in equilibrium with the price of milk at 

€0.50 per litre and 13,000 litres 

are bought and sold and then follow our three-step approach.