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© 2009 Pearson Education, Inc. Publishing as Prentice Hall   Principles of Economics 9e by Case, Fair and Oster

General Equilibrium Analysis

Market Adjustment to Changes in Demand

 FIGURE 12.2  Adjustment in an Economy with Two Sectors

Initially, demand for X shifts from DX to DX. This shift pushes the price of X up to PY creating profits.

Demand for Y shifts down from DY to DY, pushing the price of Y down to PY and creating losses.

Firms have an incentive to leave sector Y and an incentive to enter sector X.

Exiting sector Y shifts supply in that industry to SY, raising price and eliminating losses. Entry shifts supply in X to SX thus reducing and eliminating profits.

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