Using Supply and Demand Analysis
Exploration: How is equilibrium price and quantity affected by various events in the market for DVDs?

This interactive graph can be used to enhance our understanding of demand and supply analysis. To use the graph, shift either the supply or demand curve, by clicking on the curve’s label and, holding down the left mouse button, dragging the curve to the new location.

This graphing exercise illustrates how the buying decisions of households and the selling decisions of businesses are brought together in a market. Here, market pressures created by excess supply (surpluses) or excess demand (shortages) of DVD rentals determine the price and the quantity rented per week. Currently, the market is in equilibrium -- neither a surplus nor shortage -- at a price of $3 per DVD rental with 7 hundred rented per week. Using the interactive graph, you can determine the impact of changes in conditions affecting this DVD market on equilibrium market price and quantity.

1. What is the effect on the equilibrium price and quantity of DVD rentals if higher quality movies produced by Hollywood cause 200 more customers to want to rent one DVD each per week at every price?
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2. Press the Update button to display the new equilibrium of $3.50 per rental and 800 DVDs rented per week. What is the effect of a decrease in the price of DVDs purchases that results in 100 fewer DVD rentals per week at every price on the equilibrium price and quantity of DVD rentals?
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3. Press the Update button to display the equilibrium of $3.25 and 750 DVDs rented per week. What is the effect of a new video rental store in this market that makes an additional 250 DVDs available for rent at every price on the equilibrium price and quantity of DVD rentals?
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4. Press the Update button to display the equilibrium of $2.63 and 875 DVDs rented per week. What is the effect of higher costs at video stores that results in the quantity supplied falling by 300 DVDs available for rent at every price on the equilibrium price and quantity of DVD rentals?
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5. Experiment on your own. What general principles govern the workings of any market? What conclusions can you derive when considering the impact of changes in demand and supply in creating excess demand or excess supply and therefore causing changes in the equilibrium price and quantity in a market?
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