ECON202 Chapter 4 Notes CHENG
• Laws of Supply and Demand –
o Why do we need to understand these in the market?
▪ Helps determine market price of a product
▪ Helps determine the quantity of products needed in the market
o Markets – the environment in which a buyer and seller interact in the exchange of goods, services, and payments
▪ Competitive markets – environment where multiple buyers and sellers interact; results in the buyers/sellers having little to no impact on market price
• Perfectly competitive markets – makes market analysis simple; they don’t really exist in reality, but it serves as a benchmark/baseline Don't forget about the age old question of What is the role of the tangent line?
when we’re evaluating more complicated market scenarios;
characterized by the following features:
o Homogenous goods – goods in each category are the exact
same (e.g. a laptop is simply a laptop; there’s no MacBooks,
no Microsoft Studio…there are just..laptops)
o Price takers – buyers and sellers have no influence on the
market price of a good
o Law of Demand (LOD) – states that, when all other variables remain constant, the quantity of a good decreases when its price increases; there is a negative relationship between price and quantity demanded (downward sloping curve) • NOTE: In some instances, the demand curve CAN slope upward,
meaning that people will buy more when the price goes up. (e.g.
wealthy people might buy a luxury car that’s super expensive
because it’s a status symbol)
▪ Quantity Demanded (QD) – the amount of a good that buyers are willing and able to purchase If you want to learn more check out In the human variation, what is heritability?
▪ Market Demand Curves – can be determined when there are multiple consumer’s being analyzed
• Example: Helen buys 8 lattes when they’re priced at $4 a piece, and Ken buys 4 lattes at $4 a piece; when the lattes are $5, Helen buys 6
and Ken buys 3. Market demand curve is determined by adding the
quantities of Helen and Ken’s lattes that they bought at the different
price levels. So two of the points on the curve would be (4, 12) and
▪ Change in Quantity Demanded vs. Change in Demand
• Change in QD – due to a change in the good’s price; curve itself does NOT shift, only the point on the curve shifts from one position to another Don't forget about the age old question of Who is henry the 8th?
• Change in Demand – due to a change in ANY factors (“other things”), excluding the good’s price; entire curve shifts from one location on the graph to another (left or right of its original position) Don't forget about the age old question of Why do most polar covalent bonds involve nitrogen or oxygen?
o Demand shifters – the “other things” that can affect the position of the demand curve; there are 5 demand shifters we should be aware of:
▪ Number of buyers – when there are more buyers
present, there is an increase in demand, which shifts
the demand curve to the right (e.g. during football
season, there are more fans in town to buy Ole Miss
▪ Levels of income –
• When income increases, demand increases for
normal goods like new cars (demand curve If you want to learn more check out What is the painting bronzino's venus, cupid, folly, and time mannerism, about 1546, all about?
shifts to the right)
• When income increases, demand decreases
for inferior goods like public transit (demand
curve shifts to the left)
▪ Prices of related goods – We also discuss several other topics like How is the consumer price index (cpi) calculated?
• Substitutes (e.g. Coke and Pepsi) – if the price
of one substitute increases, the demand for
the OTHER substitute increases (curve for
good 2 shifts to the right)
• Complements (e.g. smartphones and apps) – if
the price of a good increases, the demand for
its complement goods decreases (curve for
complement good shifts to the left)
▪ Tastes – when a consumer’s taste for certain products
▪ Expectations – sometimes there are events that allow
consumers to make predictions about price changes
(e.g. iPhone 7 comes out in September, so we assume
the price of iPhone 6s will go down in September)
o Law of Supply (LOS) – states that, when other factors are held constant, the quantity of a good supplied increases when the price of a good increases (sellers want to sell more when they’re selling their goods at a higher price); there is a positive relationship between price and quantity supplied (upward sloping curve)
▪ Quantity Supplied (QS) – the amount of a good that sellers are willing and able to sell
▪ Change in Quantity Supplied vs. Change in Supply
• Like quantity demanded, when there is a change in the quantity supplied, there will only be a move ALONG the curve; the curve itself will not shift
• When there is a change in supply, it is due to factors other than the price of the good and the entire curve can shift left or right
o Supply shifters – the “other things” that can affect the
position of the supply curve; there are 4 supply shifters we
should be aware of:
▪ Number of sellers – when there is an increasing
number of sellers in a market (regardless of price)
they will sell more, so the supply curve will shift to the
▪ Input prices – an increase in input prices (cost of
materials/labor to make a product) is less profitable for
the seller, so supply decreases; supply curve shifts to
▪ Technology – advanced technology often makes
production easier and more profitable for sellers,
therefore supply increases and the supply curve shifts
to the right
o Combining Supply and Demand
▪ Market Equilibrium – when sellers produce exactly as many goods as the buyers will purchase; QS = QD
• Market Equilibrium Price/Market Clearing Price (P*) – the price of a good when QS and QD are equal; basically the perfect price that benefits sellers and suppliers equally
• Market Equilibrium Quantity (Q*) – the quantity of goods that are supplied at that perfect price
• P* and Q* are located at the intersection of the demand and supply curves
o Example: Market research has revealed the following
information about the market for chocolate bars: the demand schedule/curve can be represented by the equation Qd =
1600 – 300P; the supply schedule/curve can be represented by the equation Qs = 1400 + 700P. What are market
equilibrium price and quantity?
▪ Set each equation equal to one another and solve for P
(price). Then substitute this value of P into one of the
individual equations to determine Q (quantity).
▪ What happens when the market is not in equilibrium?
• Surplus – excess supply; occurs when quantity supplied is greater than quantity demanded; on a supply/demand graph, a surplus is any points above the intersection
o To determine the surplus on the supply/demand graph, take the higher quantity and subtract it from the lower quantity.
• Shortage – excess demand; occurs when quantity supplied is less than quantity demanded; on a supply/demand graph, a shortage is any points below the intersection
o To determine the shortage, take the higher quantity and subtract it from the lower quantity.
• How does the market overcome shortages and surpluses? o The market will cure itself with adjustments in price. If there is a surplus of goods, sellers will lower the price, so people will buy more. If there is a shortage of goods, the seller will raise the price so less people are interested in the good. Rational people rely on self-interest, which will eliminate any surpluses or shortages.
o This concept is referred to as the market mechanism, which is driven by the law of demand and the law of supply.
▪ The market mechanism only applies to a market
economy, and has no effect in a centrally-planned
economy, where the government has control over the
production of goods and the land they’re produced
▪ Shifts in Supply and Demand – the factors of supply and demand determine the equilibrium price and quantity. As these factors shift, the equilibrium price and quantity will also change.
• If the demand decreases, for example a particular style of sunglasses becomes less popular, (i.e., a change a tastes and preferences), the quantity demanded at each price has
decreased. At the current price there is now a surplus in the market and pressure for the price to decrease. The new equilibrium will be at a lower price and lower quantity. Note that the supply curve does not shift but a lower quantity is supplied due to a decrease in the price.
• If the demand curve shifts right, there is a greater quantity demanded at each price, the newly created shortage at the original price will drive the market to a higher equilibrium price and quantity. As the demand curve shifts the change in the equilibrium price and quantity will be in the same direction, i.e., both will increase.
• If the supply curve shifts left, say due to an increase in the price of
the resources used to make the product, there is a lower quantity supplied at each price. The result will be an increase in the market equilibrium price but a decrease in the market equilibrium quantity. The increase in price, causes a movement along the demand curve to a lower equilibrium quantity demanded.
• A rightward shift in the supply curve, say from a new production technology, leads to a lower equilibrium price and a greater
quantity. Note that as the supply curve shifts, the change in the
equilibrium price and quantity will be in opposite directions.
Chapter 4 Homework Questions:
1. Which of the following statements is correct? …Buyers determine demand, and sellers determine supply.
2. For a market for a good or service to exist, there must be a …group of buyers and sellers.
3. A competitive market is a market in which…no individual buyer or seller has any significant impact on the market price.
4. If a seller in a competitive market chooses to charge more than the going price, then…buyers will make purchases from other sellers.
5. In competitive markets, which of the following is NOT correct? …Some sellers can set prices.
6. A movement upward and to the left along a demand curve is called a(n)…decrease in quantity demanded.
7. When the price of a good or service changes, …there is a movement along a given demand curve.
8. The movement from point A to point B on the graph shows…an increase in quantity demanded.
9. When we move along a given demand curve, …all non-price determinants of demand are held constant.
10.When quantity demanded decreases at every possible price, the demand curve has …shifted to the left.
11.The market demand curve…represents the sum of the quantities demanded by all the buyers at each price of the good.
12.To obtain the market demand curve for a product, sum the individual demand curves…(not sure on this one, but it’s not diagonally or vertically, lol)
13.If Consumer A and Consumer B are the only consumers in a market, then the market quantity demanded when the price is $6 is…12 units.
14.The shift from D to D’ is called…a decrease in demand.
15.If the demand curve shifts from D to D’, then…(not sure on this one either ☹)
16.The movement from D to D’ could be caused by…a decrease in the price of a substitute.
17.The movement from D’ to D could be caused by…(idk, sorry.)
18.The movement from D’ to D in the market for potato chips could be caused by a(n) 19.Which of the following changes would NOT shift the demand curve for a good or service? …a change in the price of the good or service.
20.Soup is an inferior good if the demand…for soup falls when income rises.
21.Suppose that a decrease in the price of good X results in fewer units of good Y being demanded. This implies that X and Y are…substitute goods.
22.If toast and butter are complements, then which of the following would increase the demand for toast? …a decrease in the price of butter.
23.Suppose scientists provide evidence that chocolate pudding increases the bad cholesterol levels of those who eat it. We would expect to see…a decrease in the demand for chocolate pudding.
24.Ford Motor Company announces that next month it will offer $3000 rebates on new Mustangs. As a result of this information, today’s demand curve for Mustangs…shifts to the left.
25.A movement along the supply curve might be caused by a change in…the price of the good or service that is being supplied.
26.A supply curve slopes upward because…an increase in price gives producers an incentive to supply a larger quantity.
27.When quantity supplied decreases at every possible price, we know that the supply curve has…shifted to the left.
28.Which of the following changes would not shift the supply curve for a good or service? …a change in the price of the good or service.
29.In a market, to find the total amount of supplied at a particular price, we must…sum the quantities that individual firms are willing and able to supply at that price.
30.A market supply curve shows…the total quantity supplied at all possible prices. 31.Which supply schedules obey the laws of supply? …Firm B’s and Firm D’s only.
32.If these are the only four sellers in the market, then the market quantity supplied at a price of $4 is…30 units.
33.Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal government increases the minimum wage by $1 per hour, then it is likely that the…supply of bicycles will shift to the left.
34.An improvement in production technology will…decrease a firm’s costs and increase its supply.
35.If suppliers expect the price of their product to fall in the future, then they will…increase supply now.
36.A decrease in the number of sellers in the market causes…the supply curve to shift to the left.
37.The shift from S to S’ could be caused by a(n)…improvement in production technology.
38.The shift from S to S’ in the market for peaches could be caused by a(n)…decrease in the labor costs of the workers who pick peaches.
39.The shift from S’ to S in the market for chocolate cake could be caused by a(n)…decrease in the number of commercial bakers.
40.At the equilibrium price, the quantity of the good that buyers are willing and able to buy…exactly equals the quantity that sellers are willing and able to sell.
41.If the demand can be represented by the equation QD = 2400-200P and supply can be represented by the equation QS = 2000+200P, what are the equilibrium price and quantity? …P=1; Q=2200
42.In markets, prices move toward equilibrium because of…the actions of buyers and sellers.
43.When the price of a good is higher than the equilibrium price, …sellers desire to produce and sell more than buyers wish to purchase.
44.When a surplus exists in a market, sellers…lower price, which increases quantity demanded and decreases quantity supplied until the surplus disappears.
45.Suppose roses are currently selling for $20 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a…shortage to exist and the market price of roses to increase.
46.The law of supply and demand asserts that…the price of a good will eventually rise in response to an excess demand for that good.
47.If there is currently a shortage of 20 units of the good, then the law of …supply and demand predicts that the price will rise by $2 to eliminate the shortage.
48.The equilibrium price and quantity, respectively, are…$6 and 30 units. 49.If the price were $8, a…surplus of 25 units would exist, and price would tend to fall.
50.If the price were $4, a…shortage of 25 units would exist, and price would tend to rise.
51.Which of the following events must cause equilibrium quantity to fall? …demand and supply both decrease.
52.If the demand for a product decreases, then we would expect equilibrium price…and equilibrium quantity to both decrease.
53.Suppose that demand for a good increases and, at the same time, supply of the good decreases. What would happen in the market for the good? …Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.
54.If scientists discover that steamed milk, which is used to make lattes, prevents heart attacks, what would happen to the equilibrium price and quantity of lattes? …both the equilibrium price and quantity would increase.
55.What would happen to the equilibrium price and quantity of peanut butter if the price of peanuts goes up, the price of jelly falls, fewer firms decide to produce peanut butter, and health officials announced that eating peanut butter was good for you? …price will rise and the effect on quantity is ambiguous.
56.All else equal, an increase in the income of buyers who consider turkey to be an inferior good would cause a move from…DA to DB.
57.All else equal, in increase in the number of turkey sellers would cause a move from …y to x.