how to do the 3- step analysis to analyzing the changes in Equilibrium.

V. The Three-Step Analysis to Analyzing Changes in Equilibrium:

When analyzing how some event affects a market, we should proceed in the following 3-step analysis:

First: We decide whether the events shifts the DD , SS or both curves.

Second: We decide whether the curve shifts to the right, left, downward or upward.

Third: We use the DD-SS diagram to examine how the shift affects the equilibrium of the market.

1- A Change in DD:

Suppose that income of consumers increases, study the effect of this determinant on the market of a normal good ( x) using the 3-step analysis.

Step One: Income is a non-price factor affecting DD.

Step Two: If income increases, then the DD of a normal good increases assuming all…. Hence the DD curve shifts upward and SS curve remains constant.

Step Three: DD increases and SS remains constant.

DD > SS (market shortage). Producers respond by increasing the price from P to P1.

As price increases, the quantity supplied increases from Q to Q1 until equilibrium is maintained at E1

2- A Change in Supply:

Suppose that cost of all resources and raw materials used in production decrease, study the effect of this variable on the production of all manufactured goods in the economy using the 3-step analysis.

Step One: Decrease in cost of raw materials or productive resources decreases the cost of producing all manufactured goods in the economy, hence the SS of manufactured goods increases. As to DD on manufactured goods, it remains constant.

Step Two: The SS increases and the SS curve shifts rightward whereas the DD curve remains constant.

Step Three: SS increases and DD remains constant. Hence SS > DD (market surplus)

Producers will respond by decreasing the price. As price decreases, the quantity demanded tends to increase from Q to Q1 until equilibrium is maintained at E1.