prices. It might be an event that affects supply, like a change in natural conditions, input prices, or technology,

or government policies that affect production. How does this economic event affect equilibrium price and

quantity? We will analyze this question using a four-step process.

Step 1. Draw a demand and supply model before the economic change took place. To establish the model

requires four standard pieces of information: The law of demand, which tells us the slope of the demand curve

is negative; the law of supply, which tells us that the slope of the supply curve is positive; the shift variables for

demand; and the shift variables for supply. From this model, find the initial equilibrium values for price and

quantity.

Step 2. Decide whether the economic change you are analyzing affects demand or supply. In other words, does

the event refer to something in the list of demand factors or supply factors?
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