CHAPTER 16 • General Equilibrium and Economic Efficiency 597 Price ($) * SM 6.82 6.75 SM 6.35 * DM 6.00 DMЈ Price ($) SV 3.58 3.50 3.00 D*V DVЈ DM QMЈ QЉM Q*M QM Number of movie tickets (a) DV QV QVЈ Q*V Number of DVDs (b) F IGURE 16.1 TWO INTERDEPENDENT MARKETS: (A) MOVIE TICKETS AND (B) DVD RENTALS When markets are interdependent, the prices of all products must be simultaneously determined * , as shown in (a) The Here a tax on movie tickets shifts the supply of movies upward from SM to S M higher price of movie tickets ($6.35 rather than $6.00) initially shifts the demand for DVDs upward (from DV to DV= ), causing the price of DVDs to rise (from $3.00 to $3.50), as shown in (b) The higher = video price feeds back into the movie ticket market, causing demand to shift from DM to D M and the price of movies to increase from $6.35 to $6.75 This continues until a general equilibrium is reached, * and S * in (a), with a movie ticket of $6.82, and the intersection of as shown at the intersection of D M M * D V and SV in (b), with a DVD price of $3.58 What about the market for movies? The original demand curve for movies presumed that the price of DVDs was unchanged at $3.00 But because that = in price is now $3.50, the demand for movies will shift upward, from DM to D M * Figure 16.1 (a) The new equilibrium price of movies (at the intersection of S M = and D M) is $6.75, instead of $6.35, and the quantity of movie tickets purchased = == has increased from Q M to Q M Thus a partial equilibrium analysis would have underestimated the effect of the tax on the price of movies The DVD market is so closely related to the market for movies that to determine the tax’s full effect, we need a general equilibrium analysis Reaching General Equilibrium Our analysis is not yet complete The change in the market price of movies will generate a feedback effect on the price of DVDs that, in turn, will affect the price of movies, and so on In the end, we must determine the equilibrium prices and quantities of both movies and DVDs simultaneously The equilibrium movie price of $6.82 is given in Figure 16.1 (a) by the intersection of the equilibrium supply * and D * ) The equilibrium DVD price and demand curves for movie tickets (S M M of $3.58 is given in Figure 16.1 (b) by the intersection of the equilibrium supply and demand curves for DVDs (SV and D V* ) These are the correct general equilibrium prices because the DVD market supply and demand curves have