Download What is Economics? 1 Chapter 3 Demand and Supply 1 What is

C h a p t e r
3
DEMAND AND
SUPPLY
Chapter Key Ideas
Slide, Rocket, Roller Coaster
A. Some prices slide, some rocket, and some roller coaster.
B. This chapter explains how prices are determined by demand and supply.
Outline
I.
Markets and Prices
A. A market is any arrangement that enables buyers and sellers to get information and do
business with each other.
B. A competitive market is a market that has many buyers and many sellers so no single
buyer or seller can influence the price.
C. The money price of a good is the amount of money needed to buy it. The relative price
of a good is the ratio of its money price to the money price of another good or a market
basket of goods. A relative price is an opportunity cost.
II. Demand
A. Wants are the unlimited desires or wishes people have for goods and services. Demand
reflects a decision about which wants to satisfy. The quantity demanded of a good or
service is the amount that consumers plan to buy during a particular time period, and at a
particular price.
B. The Law of Demand
1.
The law of demand states: Other things remaining the same, the higher the price of a
good, the smaller is the quantity demanded; and the lower the price of a good, the
greater is the quantity demanded.
50
CHAPTER 3
2.
The law of demand results from:
a)
the substitution effect—when the relative price (opportunity cost) of a good or
service rises, people seek substitutes for it—and
b) the income effect—when the price of a good or service rises relative to income,
people cannot afford all the things they previously bought.
C. Demand Curve and Demand Schedule
1.
The term demand refers to the entire relationship between the price of the good and
quantity demanded of the good.
a)
The demand curve shows
the relationship between the
quantity demanded of a good
and its price, holding all other
influences constant. Figure 3.1
shows a demand curve for
recordable compact discs (CDRs).
b) A demand curve is also a
willingness-and-ability-to-pay
curve, which means that a
demand curve is a marginal
benefit curve.
D. A Change in Demand
1.
When any factor that influences
buying plans other than the price of
the good changes, there is a
change in demand for that
good. The quantity of the good that
people plan to buy changes at each
and every price, so there is a new
demand curve.
a)
When demand increases, the
quantity that people plan to
buy increases at each and
every price. The demand curve
shifts rightward.
b) When demand decreases, the quantity that people plan to buy decreases at each
and every price. The demand curve shifts leftward.
DEMAND AND SUPPLY
2.
51
The factors that change demand (summarized in Table 3.1 page 62) are:
a)
Prices of related goods: A
substitute is a good that
can be used in place of
another good. A
complement is a good that
is used in conjunction with
another good. Using the CDR example, the demand for
CD-Rs increases (decreases)
and its demand curve shifts
rightward (leftward) if the
price of a substitute for a
CD-R rises (falls) or if the
price of a complement of a
CD-R falls (rises). Figure 3.2
shows the shift in the
demand curve for CD-Rs
when the price of CD-R
burners—a complement—
falls.
b) Expected future prices: If
the price of a good is
expected to rise (fall) in the
future, current demand
increases (decreases) and the
demand curve shifts
rightward (leftward).
c)
Income: When income
increases (decreases),
consumers buy more (less)
of most goods and the
demand curve shifts rightward (leftward). A normal good is one for which
demand increases as income increases. An inferior good is one for which
demand decreases as income increases.
d) Expected future income: When expected future income increases, demand might
increase.
e)
Population: The larger (smaller) the population, the greater (smaller) is the
demand for all goods.
f)
Preferences: People with the same income have different demands if they have
different preferences.
52
CHAPTER 3
E. A Change in the Quantity Demanded Versus a Change in Demand
Figure 3.3 illustrates the distinction
between a change in demand and a change
in the quantity demanded.
1.
When the price of the good changes
and everything else remains the same,
there is a movement along the
demand curve and a change in the
quantity demanded.
2.
When any other influence on buyers’
plans changes, there is a shift of the
demand curve and a change in
demand.
III. Supply
A. Resources and technology determine what
it is possible to produce. Supply reflects a
decision about which technologically
feasible items to produce. The quantity
supplied of a good or service is the amount that producers plan to sell during a given time
period at a particular price.
B. The Law of Supply
1.
The law of supply states: “Other things remaining the same, the higher the price of a
good, the greater is the quantity supplied; and the lower the price of a good, the
smaller is the quantity supplied.”
2.
The law of supply results because the marginal cost of producing a good or service
increases as the quantity produced increases (Chapter 2, page 35).
3.
Producers are willing to supply a good only if the price at least covers the marginal
cost of producing the good.
C. Supply Curve and Supply Schedule
1.
The term supply refers to the entire relationship between the quantity supplied and
the price of a good.
2
The supply curve shows the relationship
between the quantity supplied of a good and its price when
all other influences on producers’ planned sales remain the
same. Figure 3.4 shows the supply curve for CD-Rs.
3. The supply curve also shows the
producers’ minimum-supply price
for an additional unit to be
supplied. It shows the lowest
price at which someone is willing
to sell another unit.
D. A Change in Supply
1.
When any factor that influences
selling plans other than the price
of the good changes, there is a
DEMAND AND SUPPLY
53
change in supply of that good. The quantity of the good that producers plan to sell
changes at each and every price, so there is a new supply curve.
a)
When supply increases, the quantity that producers plan to sell increases at each
and every price. The supply curve shifts rightward.
b) When supply decreases, the quantity that producers plan to sell decreases at each
and every price. The supply curve shifts leftward.
2.
The factors that change supply (summarized in Table 3.2 page 67) are:
a)
Prices of productive resources: If the price of resource used to produce a good
rises (falls), the minimum price that a supplier is willing to accept for producing
each quantity of that good rises (falls). So a rise (fall) in the price of productive
resources decreases (increases) supply and shifts the supply curve leftward
(rightward).
b) Prices of related goods produced: A substitute in production for a good is
another good that can be produced using the same resources. Goods are
compliments in production if they must be produced together. The supply of a
good increases (decreases) and its supply curve shifts rightward (leftward) if the
price of a substitute in production falls (rises) or if the price of a complement in
production rises (falls).
c)
Expected future prices: If the price of a good is expected to fall (rise) in the
future, current supply increases (decreases) and the supply curve shifts rightward
(leftward).
d) The number of suppliers: The larger the number of suppliers of a good, the greater
is the supply of the good. An increase (decrease) in the number of suppliers shifts
the supply curve rightward (leftward).
e)
Technology: Advances in technology create new products and lower the cost of
producing existing products, so they increase supply and shift the supply curve
rightward.
54
CHAPTER 3
E. A Change in the Quantity Supplied Versus a Change in Supply
Figure 3.6 illustrates the distinction between
a change in supply and a change in the
quantity supplied.
1.
When the price of the good changes and
everything else remains the same, there
is a movement along the supply curve
and a change in the quantity
supplied.
2.
When one of the other factors that
influence selling plans changes, there is
a shift of the supply curve and a change
in supply.
IV. Market Equilibrium
A. Equilibrium is a situation in which opposing
forces balance each other. Equilibrium in a
market occurs when the price balances the
plans of buyers and sellers.
1.
The equilibrium price is the price at which the quantity demanded equals the
quantity supplied.
2.
The equilibrium quantity is the
quantity bought and sold at the
equilibrium price.
B. Price as a Regulator
1.
A market moves toward its
equilibrium because the price
regulates buying and selling plans
and the price adjusts when plans
don’t match.
2.
Figure 3.7 illustrates the equilibrium price and
equilibrium quantity in the market for CD-Rs.
C. Price Adjustments
1.
At prices below the equilibrium price, a shortage
arises, which forces the price up.
2.
At prices above the equilibrium price, a surplus
arises, which forces the price down.
3.
At the equilibrium price, buying plans and selling
plans agree, so the price doesn’t change.
4.
The price coordinates the plans of buyers and
sellers, and at the equilibrium price no one has an incentive
to change it.
V. Predicting Changes in Price and
Quantity
A. A change in demand or a change in
supply changes the equilibrium price
DEMAND AND SUPPLY
and the equilibrium quantity in a predictable way.
B. A Change in Demand
1.
Figure 3.8 shows the effect of
a change in demand.
2.
An increase in demand raises
the equilibrium price and
increases the equilibrium
quantity.
3.
A decrease in demand lowers
the equilibrium price and
decreases the equilibrium
quantity.
55
56
CHAPTER 3
C. A Change in Supply
1.
Figure 3.9 shows the effect of a
change in supply.
2.
An increase in supply lowers
the equilibrium price and
increases the equilibrium
quantity.
3.
A decrease in supply raises the
equilibrium price and
decreases the equilibrium
quantity.
DEMAND AND SUPPLY
57
D. A Change in Both Demand and Supply
A change both demand and supply changes the equilibrium price and the equilibrium
quantity but we need to know the relative magnitudes of the changes to predict some of the
consequences.
1.
Figure 3.10 shows the effects
of an increase in both demand
and supply. An increase
(decrease) in both demand
and supply increases
(decreases) the equilibrium
quantity but has an uncertain
effect on the equilibrium
price. If the increase
(decrease) in demand exceeds
the increase (decrease) in
supply, the price rises (falls).
58
CHAPTER 3
2.
Figure 3.11 shows the effects
of a decrease in demand and an
increase in supply. An increase
(decrease) in supply and a
decrease (increase) in demand
lowers (raises) the equilibrium
price but has an uncertain
effect on the equilibrium
quantity. If the increase
(decrease) in supply exceeds
the decrease (increase) in
demand, the quantity increases
(decreases).
Reading Between the Lines
A news article discusses the high price of gasoline following the blackout in the Northeast in the
summer of 2003.The analysis examines the impact of the blackout, which temporarily shut down
refineries, a rupture in a gasoline pipeline, and high demand on the price of gasoline. A distinction
between the money price and the relative price is considered.
New in the Seventh Edition
The lists of factors that change demand and supply are immediately followed by a description of the
factors. Expected future income has been added as a factor of demand. The Reading Between the
DEMAND AND SUPPLY
59
Lines is new and provides a straightforward example of using demand and supply to understand a
change in the price of gasoline.
Te a c h i n g S u g g e s t i o n s
1.
2.
Markets and Prices
Before you jump into the demand-supply model, be sure that your students understand that a
price in economics is relative price and that a relative price is an opportunity cost. Also spend
some class time ensuring that they appreciate the key lessons of Chapter 2:
a)
Prosperity comes from specialization and exchange.
b)
Specialization and exchange requires the social institutions of property rights and
markets.
c)
We must understand how markets work.
You might like to explain that the most competitive markets are explicitly organized as
auctions. An interesting market to describe is that at Aalsmeer in Holland, which handles a
large percentage of the world’s fresh cut flowers. Roses grown in Columbia are flown to
Amsterdam, auctioned at Aalsmeer, and are in vases in New York, London, and Tokyo all in
less than a day. If you have an Internet connection in your classroom, you can participate in a
simulation of an auction of flowers. Here is the URL (which you can also click on at the Parkin
Web site)
http://www.batky-howell.com/~jb/auction/daauction.cgi.
Demand
Estimating the demand for Coke (or bottled water) in the classroom.
Of the hundreds of classroom experiments that are available today, very few are worth the time
they take to conduct. The classic demand-revealing experiment is one of the most productive
and worthwhile ones.
Bring to class two bottles of ice-cold, ready-to-drink Coke, bottled water, or sports drink. (If
your class is very large, bring six bottles).
Tell the students that you have these drinks and ask them to indicate if they would like one.
Most hands will go up and you are now ready to make two points:
1. The students have just revealed a want but not a demand.
2. You don’t have enough bottles to satisfy their wants, so you need an allocation mechanism.
Ask the students to suggest some allocation mechanisms. You might get suggestions such as:
give them to the oldest, the youngest, the tallest, the shortest, the first-to-the-front-of-the-class.
For each one, point out the difficulty/inefficiency/inequity.
If no one suggests selling them to the highest bidder, tell the class that you are indeed going to
do just that. Tell them that this auction is real. The winner will get the drink and will pay.
Now ask for a show of hands of those who have some cash and can afford to buy a drink.
Explain that these indicate an ability to buy but not a definite plan to buy.
Now begin the auction. Appoint a student to count hands (more than one for a big class) and
appoint another student to keep a spreadsheet (see the Parkin Website for a sample that you can
download).
Begin at a low price: say 10¢ a bottle and count the number willing to buy.
Raise the price in 10¢ increments and keep tally of the number who are willing to buy at each
price.
60
CHAPTER 3
When the number willing to buy equals the number of bottles you have for sale, do the
transactions. (If you make a profit, and you might do so, tell the students that the profit, small
though it is, will go the department fund for undergraduate activities—and deliver on that
promise.)
Now use the data to make a demand curve for Coke (or other drink) in your classroom today.
Emphasize the law of demand.
Emphasize that every demand curve relates to a market for the good (as defined by geography
or some other spatial dimension) and for a given time period.
Now that you have a demand curve, you can do some thought experiments that will shift it.
Ask:
How would this demand curve have been different if the temperature in the classroom was
10 degrees higher/lower?
How would this demand curve have been different if half the class was sick and absent
today?
How would this demand curve have been different if there was a Coke machine right in the
classroom?
3.
4.
(Save your demand data for later. We’ll make some suggestions for its further use in Chapter
4.)
Supply
Estimating the supply of Coke (or bottled water) in the classroom.
(It is best to do this next classroom activity on a different day from the demand experiment.)
Tell the students that you would like a Coke (or other drink) that is available from a machine
somewhere near the classroom and you want someone to get it for you. You are going to
continue teaching while the student is out of the room and you will be giving hints about what is
on the next test.
Ask the students to raise their hand if they are willing to fetch one can of Coke if you pay
$5.00. Write down the number.
Lower the price you’ve willing to pay in $1 increments until the number of students willing to
fetch you the drink begins to decrease. Keep track of the numbers.
Lower the price you’re willing to pay in 25¢ increments until you get close to only having one
student willing to fetch you the drink. Keep track of the numbers.
Lower the price in smaller increments if necessary until just one student is willing to fetch you a
drink.
Now use the data to make a supply curve for Coke (or other drink) in your classroom today.
Emphasize the law of supply.
Emphasize that every supply curve relates to a market for the good (as defined by geography or
some other spatial dimension) and for a given time period.
Now that you have a supply curve, you can do some thought experiments that will shift it. Ask:
How would this supply curve have been different if the coke machine was a mile away?
How would this supply curve have been different if half the class was sick and absent today?
How would this supply curve have been different if there was a Coke machine right in the
classroom?
How would this supply curve have been different if the temperature in the classroom was 10
degrees higher/lower?
Market Equilibrium
DEMAND AND SUPPLY
5.
61
The magic of market equilibrium and the forces that bring it about and keep the market there
need to be demonstrated with the basic diagram, with intuition, and, if you’ve got the time, with
hard evidence in the form of further class activity.
You might want to begin with the demand curve experiment and explain that in that market, the
supply was fixed (vertical supply curve) at the quantity of bottles that you brought to class. The
equilibrium occurred where the market demand curve (demand by the students) intersected your
supply curve.
Then you might use the supply curve experiment and explain that in that market, demand was
fixed (vertical demand curve) at the quantity that you had decided to buy. The equilibrium
occurred where the market supply curve (supply by the students) intersected your demand
curve.
Point out that the trades you made in your little economy made buyers and sellers better off.
If you want to devote a class to equilibrium and the gains from trade in a market, you might
want to run a double oral auction. There are lots of descriptions of these and one of the best is
at Marcelo Clerici-Arias’s Web site at Stanford University—
http://www.stanford.edu/~marcelo/index.html?Teaching/Docs/Experiments/Auction/auction.ht
m~mainFrame
Predicting Changes in Price and Quantity
A. The whole chapter builds up to this section, which now brings all the elements of demand,
supply, and equilibrium together to make predictions.
B. Students are remarkably ready to guess the consequences of some event that changes either
demand or supply or both. They must be encouraged to work out the answer and draw the
diagram.
C. Explain that the way to answer any question that seeks a prediction about the effects of
some event(s) on a market has five steps. Walk them through the steps and have one or two
students work some examples in front of the class. The five steps are:
1.
Draw a demand-supply diagram and label the axes with the price and quantity of the
good or service in question.
2.
Think about the event(s) that you are told occur and decide whether they change
demand, supply, both demand and supply, or neither demand nor supply.
3.
Do the events that change demand or supply bring an increase or a decrease?
4.
Draw the new demand curve and supply curve on the diagram. Be sure to shift the
curve(s) in the correct direction—leftward for decrease and rightward for increase.
(Lots of students want to move the curves upward for increase and downward for
decrease—works ok for demand but exactly wrong for supply. Emphasize the left-right
shift.)
5.
Find the new equilibrium and compare it with the original one.
Walk them through the steps and have one or two students work some examples in front of
the class.
D. It is critical at this stage to return to the distinction between a change in demand (supply)
and a change in the quantity demanded (supplied). You can now use these distinctions to
describe the effects of events that change market outcomes.
E. At this point, the students know enough for it to be worthwhile emphasizing the magic of
the market’s ability to coordinate plans and reallocate resources.
62
CHAPTER 3
The Big Picture
Where we have been
In Chapter 3, the students have had their first encounter with demand and supply and the
powerful forces that determine price and quantity in a competitive market. The chapter builds
on Chapter 2, which provides the simplest rigorous description of the economic problem and
the implications of the pursuit of an efficient use of resources. If you have time, it is worth
forging links between Chapters 2 and 3. Chapter 2 explains why we trade in markets. Chapter 3
shows how trade in markets determines where on the PPF the economy operates.
Where we are going
Demand and supply lie at the heart of the principles course. Eventually, we derive the demand
curve and the supply curve from deeper views of the choices that people and firms make. But
there is much to be gained from using the demand and supply analysis before embarking on its
deeper derivation. In Chapter 4, the student next learns about the elasticity of demand and
supply so that the qualitative predictions of the current chapter can become quantitative. Then,
in Chapter 5, the student returns to the concept of efficiency encountered in Chapter 2 and
learns whether and when the market outcome is efficient. Chapter 6 puts the demand and supply
analysis to work to study price floors and ceilings, taxes, and illegal trading. Throughout the
macroeconomic chapters, the demand and supply model will show up in the examination of
markets such as the labor market, the capital market, and the money market.
O ve r h e a d Tr a n s pa r e n c i e s
Transparency
Text figure
12
Figure 3.1
The Demand Curve
13
Figure 3.3
A Change in the Quantity Demanded Versus a Change
in Demand
14
Figure 3.4
The Supply Curve
15
Figure 3.6
A Change in the Quantity Supplied Versus a Change in
Supply
16
Figure 3.7
Equilibrium
17
Figure 3.8
The Effects of a Change in Demand
19
Figure 3.9
The Effects of a Change in Supply
Transparency title
Electronic Supplements
MyEconLab
MyEconLab provides pre- and post-tests for each chapter so that students can assess their
own progress. Results on these tests feed an individualized study plan that helps students
focus their attention in the areas where they most need help.
DEMAND AND SUPPLY
63
Instructors can create and assign tests, quizzes, or graded homework assignments that
incorporate graphing questions. Questions are automatically graded and results are tracked
using an online grade book.
PowerPoint Lecture Notes
PowerPoint Electronic Lecture Notes with speaking notes are available and offer a full
summary of the chapter.
PowerPoint Electronic Lecture Notes for students are available in MyEconLab.
Instructor CD-ROM with Computerized Test Banks
This CD-ROM contains Computerized Test Bank Files, Test Bank, and Instructor’s Manual
files in Microsoft Word, and PowerPoint files. All test banks are available in Test
Generator Software.
Additional Discussion Questions
1.
“John Q: Could a legal market for human organ donations have saved his dying son?” An
opinion piece written by Richard Epstein in The Wall Street Journal (2/21/02) about the
donation of human organs for transplant operations. He raises the issue that if a market for
human donor organs were legal, the dilemma of a lack of organs, as raised by Denzel
Washington’s character in the movie “John Q,” might be closer to fiction rather than fact. You
can use this movie and the motive of the main character as an intriguing basis for getting
students to construct and interpret the demand and supply model.
“Can we illustrate a market for something as vital as organ donations?” Begin by asking the
students to graph a demand and supply model for the market for human organ donations,
making sure that their model reflects the real-life characteristics of this unique market: i) the
federal government does not allow individuals or businesses to engage in the buying and selling
of human organs, unless the organs are donated and received for free, ii) a small number of
organs are donated by living volunteers (like kidney donations) or by the families of the
recently deceased (especially after an otherwise healthy individual suffers an accidental death),
meaning that the positively sloped supply curve for human organ donations intercepts the
quantity axis at some positive value, iii) the demand curve for organs must intercept the supply
curve at a positive price.
“Are there unintended consequences when market forces are ignored?” The government
wants to assure that poor people have the same access to available organ transplants as rich
people, so it imposes a zero-price restriction on the market. However, this creates a shortage of
organs available for transplant, where the quantity of organs demanded at a zero price far
exceeds the quantity supplied. If the market for organ donations were unregulated, then the
equilibrium price for an organ would surely increase, but so would the total number of people
receiving an organ transplant, and presumably, the total number of people who would survive to
live another day.
“Should society institute a policy that maximizes the numbers of lives saved or manipulates
the characteristics of those fewer lives that do get saved?” Conclude this discussion with a
great set-up for the efficiency versus equity issues developed later in chapter five. Our
command of the demand and supply model for human organ donations allows us to discover an
important insight into one aspect of health care policy: the government places a lower priority
for maximizing the total number of people saved regardless of income, and a higher priority on
64
CHAPTER 3
2.
3.
4.
achieving a “proper” income mix among the smaller number of people that are saved by being
one of the few receiving organ transplants.
“What are some goods that college students might buy today but will give up when they enter
the workforce after graduation?” College students usually recognize that they will change
their consumption patterns when they are employed after college graduation. Use this to get the
students to appreciate inferior goods. When you were an undergraduate, you probably
complained about having to eat mostly canned soup or beans as a cheap staple to fill your
hungry stomach on a small budget. You swore that when you finally entered the workforce you
wouldn’t eat soup or beans again, unless under extreme duress. Today the single food item most
frequently cited by students as an inferior good is the Raman style noodles—those dry, thin,
near flavorless oriental style noodles that are reconstituted with boiling water. Get the students
to create a list other such inferior goods they will avoid when their incomes increase. This gets
them to carefully consider how income changes can cause demand curves to shift in an
unintuitive manner for an inferior good.
“Because computers are cheaper and more abundantly available now than a decade ago, doesn’t
this mean the supply curve for computers is downward sloping?” This is a real world example
for illustrating the confusion between changes in supply and changes in the quantity supplied.
(It is easier to analyze this example if the students assume that consumer demand for computer
software applications has not changed over the last decade.)
“Has anything in the world of computer manufacturing changed over the last decade?”
Point out that the observation about falling computer prices with rising quantities sold assumes
that nothing significant has changed in the computer industry. Emphasize how such statements
reflect how the ceteris paribus condition of careful economic analysis has been violated. Over
the years, advances in technology have allowed computer makers to: i) offer greater computer
power and versatility for contemporary software applications at the same opportunity cost of
resources (market price) as before, or ii) to provide the same level of computer power and
versatility for contemporary software applications at lower opportunity costs (market prices) as
before. Either way, this represents a rightward shift in the supply curve for computers. The
students should recognize that the two prices and two quantities that give the appearance of
more computers offered for less are actually from two separate supply curves.
“Since the average price of a car has increased substantially over the last 30 years, and the
number of cars owned has risen faster than the population, doesn’t this mean that the demand
curve for cars is upward sloping?” This is a real world example for illustrating the confusion
between changes in demand and changes in the quantity demanded. (It is easier to analyze this
example if the students assume that automobile production technology has not changed over
these last three decades.)
“Has anything in the world of consumers changed over the last decade?” Point out that this
real world observation of car prices and rising quantities sold over time assumes that nothing
significant has changed in the consumers’ environment. Emphasize how statements such as
these reflect how the ceteris paribus condition of careful economic analysis has been violated.
Consumer incomes have increased significantly over the last three decades, allowing them to: i)
consume greater personal transportation opportunities for more family members while giving
up the same amount of other goods as before, or ii) consume the same level of personal
transportation opportunities while giving up less of all other goods as before. Either way, this
represents a rightward shift in the demand curve for automobiles. The students should
recognize that the two prices and quantities that give the appearance of more automobiles
demanded at higher prices are actually from two separate demand curves.
“If the status of the family automobile has increased in recent decades, what affect would
this have on consumer demand?” There is evidence that the proportion of income that typical
DEMAND AND SUPPLY
65
families spend on automobiles (versus all other goods) has increased substantially over the last
30 years. This means that the percent increase in automobile purchases has been higher than the
percent increase in family incomes. This makes for a great lead into the measures of the income
elasticity of demand discussed in Chapter 4.
66
CHAPTER 3
Answ ers to the Review Quizzes
Page 58
1.
The money price of a good is the dollar amount that must be paid for it. The relative price of
a good is its money price expressed as a ratio to the money price of another good. Thus the
relative price is the amount of the other good that must be foregone to purchase a unit of the
first good.
2.
The relative price of a good is the opportunity cost of buying that good because it shows how
much of the next best alternative good must be forgone in order to buy a unit of the first
good.
3.
There are many potential examples that students may give. Some examples of items where
both the money price and the relative price have risen over time are college tuition;
automobiles; movie theater tickets.
4.
As in the previous question, many examples may be given. Some examples of items where
both the money price and the relative price have fallen over time are personal computers;
televisions; calculators.
1.
The quantity demanded of a good or service is the amount that consumers plan to buy during
a particular time period, and at a particular price.
2.
The law of demand states: “Other things remaining the same, the higher the price of a good,
the smaller is the quantity demanded.” The law of demand is illustrated by a downwardsloping demand curve drawn with the quantity demanded on the horizontal axis and the price
on the vertical axis. The slope is negative to show that the higher the price of a good, the
lower is the quantity demanded.
3.
For any fixed quantity of a good available, the height of the demand curve shows the
maximum price that consumers are willing to pay for that quantity of the good. The price on
the demand curve at this quantity indicates the marginal benefit to consumers of the last unit
consumed at that quantity.
4.
Influences that change the demand for a product include:
Page 63

The prices of related goods. A rise (fall) in the price of a substitute good shifts the
demand curve for the first good rightward (left). A rise (fall) in the price of a
complement good shifts the demand curve for the first good leftward (right).

The expected future price of the product. A rise (fall) in the expected future price of a
good shifts the demand curve in the current period rightward (left).

Consumer income. For a normal good, an increase (decrease) in income shifts the
demand curve rightward (left). For an inferior good, an increase in income shifts the
demand curve leftward (right).

Expected future income. For a normal good, an increase (decrease) in expected future
income shifts the demand curve rightward (left). For an inferior good, an increase in
expected future income shifts the demand curve leftward (right).

The population. An increase (decrease) in population in the market shifts the demand
curve rightward (left).

People’s preferences. If people’s preferences for a good rise (fall), this shifts the
demand curve rightward (left).
DEMAND AND SUPPLY
67
5.
If the price of Palm Pilots falls and nothing else changes, then the quantity of Palm Pilots
demanded will rise, but the demand for Palm Pilots will remain unchanged.
1.
The quantity supplied of a good or service is the amount of the good or service that firms
plan to sell in a particular period of time at a specified price.
2.
The law of supply holds that “other things remaining the same, the higher the price of a good,
the greater is the quantity supplied.” The law of supply is illustrated by an upward-sloping
supply curve drawn with the quantity supplied on the horizontal axis and the price on the
vertical axis. The slope is positive to show that the higher the price of a good, the greater is
the quantity supplied.
3.
For any quantity, the height of the supply curve shows the minimum price that suppliers must
receive to produce that quantity of output. As a result, the price is the marginal cost of the
last unit produced at this level of output.
4.
Influences that change the supply of a product include:
Page 67

Prices of productive resources. A rise (fall) in the price of a productive resource
increases firms’ costs of production and causes the supply curve for the product to shift
leftward (right).

Prices of other related goods produced. If the sale price of a substitute in production
rises (falls), firms decrease their sales of the original good and the supply curve for the
original good shifts leftward (right). A rise (fall) in the price of a complement in
production increases (decreases) production of the original good, causing the supply
curve of the original good to shift rightward (left).

The expected future price of the product. A rise (fall) in the expected future price of the
product causes suppliers to reduce (increase) the amount they sell today. This change in
expectations shifts the supply curve in the current period leftward (right).

Technology. An advance in technology shifts the supply curve rightward.

The number of sellers. An increase (decrease) in the number of sellers in a market
increases the quantity of the good available at every price, and shifts the supply curve
rightward (left).
5.
If the price of Palm Pilots falls and nothing else changes, then the quantity of Palm Pilots
supplied will rise, but the supply for Palm Pilots will remain unchanged.
1.
Equilibrium price is the price for which the quantity demanded by the buyers is equal to the
quantity supplied by the sellers.
2.
A shortage arises at market prices below the equilibrium price.
3.
A surplus arises at market prices above the equilibrium price.
4.
A shortage causes prices to rise, decreasing quantity demanded and increasing quantity
supplied until the equilibrium price is attained.
5.
A surplus causes prices to fall, decreasing quantity supplied and increasing quantity
demanded until the equilibrium price is attained.
6.
At the equilibrium price, the quantity demanded by consumers equals the quantity supplied
by producers. At this price, the plans of producers and consumers are coordinated and there
is no influence on the price to move away from equilibrium.
Page 69
68
CHAPTER 3
7.
The equilibrium price reflects that the highest price consumers are willing to pay for that
level of goods or services is just equal to the minimum price that suppliers would require for
delivering it. If less (more) quantity were supplied, then the price that consumers would be
willing to pay at this lower level of goods or services supplied would be higher (lower) than
the minimum price that suppliers would require to supply it. This means that suppliers would
gain profits from raising (lowering) their price at the lower level of supply or by increasing
(decreasing) their level supplied. Either way, the supply curve will shift rightward (left) and
the market price will rise (fall) to the equilibrium price.
(a)
A fall in the price of a PC increases the demand for CD-Rs because a PC is a complement of
a CD-R. The demand curve for CD-Rs shifts rightward. Supply remains unchanged. The
price of a CD-R rises and the quantity of CD-Rs increases. You can illustrate this outcome by
drawing a diagram like Figure 3.8 page 70.
(b)
A rise in the price of an MP3 download decreases the demand for CD-Rs because an MP3
download is a complement of a CD-R. The demand curve for CD-Rs shifts leftward. Supply
remains unchanged. The price of a CD-R falls and the quantity of CD-Rs decreases. You can
illustrate this outcome by drawing a diagram like Figure 3.8 page 70 but with the arrows
pointing in the opposite directions.
(c)
An increase in the number of firms that produce CD-Rs increases the supply of CD-Rs. The
supply curve of CD-Rs shifts rightward. Demand remains unchanged. The price of a CD-R
falls and the quantity of CD-Rs increases. You can illustrate this outcome by drawing a
diagram like Figure 3.9 page 71.
(d)
A rise in the wages of CD-R producers decreases the supply of CD-Rs because it increases
the cost of producing CD-Rs. The supply curve of CD-Rs shifts leftward. Demand remains
unchanged. The price of a CD-R rises and the quantity of CD-Rs decreases. You can
illustrate this outcome by drawing a diagram like Figure 3.9 page 71 but with the arrows
pointing in the opposite directions.
(e)
There are six combinations:
Page 73
(1) If (a) and (b) occur together, demand might increase or decrease, supply is unchanged, so
the outcome cannot be predicted. You can illustrate this outcome by drawing a diagram like
Figure 3.8 page 70 but with the demand curve possibly shifting in either direction.
(2) If (a) and (c) occur together, demand increases and supply increases so the quantity
increases and the price might rise or fall. You can illustrate this outcome by drawing a
diagram like Figure 3.10 page 72.
(3) If (a) and (d) occur together, demand increases and supply decreases so the price rises
and quantity might increase or decrease. You can illustrate this outcome by drawing a
diagram like Figure 3.11 page 73 but with the arrows pointing in the opposite directions.
(4) If (b) and (c) occur together, demand decreases and supply increases so the price falls
and quantity might increase or decrease. You can illustrate this outcome by drawing a
diagram like Figure 3.11 page 73.
(5) If (b) and (d) occur together, demand decreases and supply decreases so the quantity
decreases and the price might rise or fall. You can illustrate this outcome by drawing a
diagram like Figure 3.10 page 72 but with the arrows pointing in the opposite directions.
(6) If (c) and (d) occur together, supply might increase or decrease, demand is unchanged, so
the outcome cannot be predicted. You can illustrate this outcome by drawing a diagram like
Figure 3.9 page 71 but with the supply curve possibly shifting in either direction.
DEMAND AND SUPPLY
69
Answ ers to the Problems
1.
a.
b.
c.
d.
e.
f.
2.
a.
b.
c.
d.
The price of an audiotape will rise, and the quantity of audiotapes sold will increase.
CDs and audiotapes are substitutes. If the price of a CD rises, people will buy more
audiotapes and fewer CDs. The demand for audiotapes will increase. The price of an
audiotape will rise, and more audiotapes will be sold..
The price of an audiotape will fall, and fewer audiotapes will be sold.
Walkmans and audiotapes are complements. If the price of a Walkman rises, fewer
Walkmans will be bought. The demand for audiotapes will decrease. The price of an
audiotape will fall, and people will buy fewer audiotapes.
The price of an audiotape will fall and fewer audiotapes will be sold.
The increase in the supply of CD players will lower the price of a CD player. With CD
players cheaper than they were, some people will buy CD players. The demand for CDs
will increase, and the demand for audiotapes will decrease. The price of an audiotape will
fall, and people will buy fewer audiotapes.
The price of an audiotape will rise, and the quantity sold will increase.
An increase in consumers’ income will increase the demand for audiotapes. As a result, the
price of an audiotape will rise and the quantity bought will increase.
The price of an audiotape will rise, and the quantity sold will decrease.
If the workers who make audiotapes get a pay raise, the cost of making an audiotape
increases and the supply of audiotapes decreases. The price will rise, and people will buy
fewer audiotapes.
The quantity sold will decrease, but the price might rise, fall, or stay the same.
Walkmans and audiotapes are complements. If the price of a Walkman rises, fewer
Walkmans will be bought and so the demand for audiotapes will decrease. The price of an
audiotape will fall, and people will buy fewer audiotapes. If the wages paid to workers who
make audiotapes rise, the supply of audiotapes decreases. The quantity of audiotapes sold
will decrease, and the price of an audiotape will rise. Taking the two events together, the
quantity sold will decrease, but the price might rise, fall, or stay the same.
The price of a DVD player falls, and fewer DVD players will be sold.
A DVD is a complement of a DVD player. If the price of a DVD rises, fewer people will
want to own a DVD player, so the demand for DVD players will decrease. With all other
influences on the demand and supply of DVD players remaining the same, the price of a
DVD player will fall. The quantity of DVD players bought will decrease.
The price of a DVD player rises, and more DVD players will be sold.
A DVD is a complement of a DVD player. If the price of a DVD falls, more people will
want to own a DVD player, so the demand for DVD players will increase. With all other
influences on the demand and supply of DVD players remaining the same, the price of a
DVD player will rise. The quantity of DVD players bought will increase.
The price of a DVD player will fall, and the quantity of DVD players sold will increase.
If the supply of DVD players increases, the price of a DVD player will fall and the quantity
bought will increase.
The price of a DVD player will fall, and fewer DVD players will be sold.
The decrease in consumers’ incomes will decrease the demand for DVD players. Other
things remaining the same, the price of a DVD player will fall and fewer DVD players will
bought.
70
CHAPTER 3
e.
f.
3.
a.
b.
c.
d.
4.
a.
b.
The price of a DVD player will rise, and the quantity sold will decrease.
If the wage of workers who produce DVD players increases, the cost of producing a DVD
player increases and the supply of DVD players decreases. Other things remaining the
same, the price will rise, and people will buy fewer DVD players.
The price of a DVD player will rise, but the quantity might increase, decrease, or remain
the same.
A rise in the wage rate of the workers who make DVD players will decrease the supply of
DVD players. The fall in the price of a DVD will increase the demand for DVD players.
Taking the two events together, the decrease in supply and the increase in demand will lead
to a rise in the price of a DVD player. The quantity bought might increase, decrease, or
remain the same.
(ii) and (iii) and (iv)
The demand for gasoline will change if the price of a car changes, all speed limits on
highways are abolished, or robot production cuts the cost of producing a car. If the price of
a car rises, the quantity of cars bought decrease. So the demand for gasoline decreases. If
all speed limits on highways are abolished, people will drive faster and use more gasoline.
The demand for gasoline increases. If robot production plants lower the cost of producing a
car, the supply of cars will increase. With no change in the demand for cars, the price of a
car will fall and more cars will be bought. The demand for gasoline increases.
(i)
The supply of gasoline will change if the price of crude oil changes. If the price of crude
oil rises, the cost of producing gasoline will rise. So the supply of gasoline decreases.
(i)
If the price of crude oil (a resource used to make gasoline) rises, the cost of producing
gasoline will rise. So the supply of gasoline decreases. The demand for gasoline does not
change, so the price of gasoline will rise and there is a movement up the demand curve for
gasoline. The quantity demanded of gasoline decreases.
(ii) and (iii) and (iv)
If the price of a car rises, the quantity of cars bought decrease. So the demand for gasoline
decreases. The supply of gasoline does not change, so the price of gasoline falls and there
is a movement down the supply curve of gasoline. The quantity supplied of gasoline
decreases.
If all speed limits on highways are abolished, people will drive faster and use more
gasoline. The demand for gasoline increases. The supply of gasoline does not change, so
the price of gasoline rises and there is a movement up along the supply curve. The quantity
supplied of gasoline increases.
If robot production plants lower the cost of producing a car, the supply of cars will
increase. With no change in the demand for cars, the price of a car will fall and more cars
will be bought. The demand for gasoline increases. The supply of gasoline does not
change, so the price of gasoline rises and the quantity of gasoline supplied increases.
(i)
The demand for leather bags will increase when airfares halve. More people will plan on
buying an air ticket and will also plan on buying a travel bag. Then demand for leather
bags will increase.
(ii), (iii), and (iv)
The supply of leather will decrease when the price of beef falls. Cowhide (from which
leather is made) is a complement in production of beef. If the price of beef falls, fewer
DEMAND AND SUPPLY
c.
d.
5.
a.
b.
6.
a.
b.
7.
a.
b.
8.
a.
b.
9.
a.
71
cows will be slaughtered and less cowhide will be produced. The supply of leather
decreases. The price of leather will rise and the supply of leather bags will decrease.
The producers of leather bags will switch to using the cheaper cloth. The supply of leather
bags will decrease.
A new technology for cutting leather will lower the cost of making a leather bag and the
increase the supply of leather bags.
(ii), (iii), and (iv)
When the supply of leather bags changes, there is a shift of the supply curve and a
movement along the demand curve. The quantity demanded of leather bags will increase if
the supply of leather bags increases and the quantity demanded of leather bags will
decrease if the supply of leather bags decreases. So a fall in the price of beef and a new
cheaper cloth for making bags will lead to a decrease in the quantity demanded of leather
bags. A new technology increases the supply of leather bags and increases the quantity
demanded of leather bags.
(i)
When the demand for leather bags changes, there is a shift of the demand curve and a
movement along the supply curve. The quantity supplied of leather bags will increase if
airfares halve.
The demand curve is the curve that slopes down toward to the right. The supply curve is
the curve that slopes up toward to the right.
The equilibrium price is $14 a pizza, and the equilibrium quantity is 200 pizzas a day.
Market equilibrium is determined at the intersection of the demand curve and supply curve.
The demand curve is the curve that slopes downward to the right. The supply curve is the
curve that slopes upward toward to the right.
The equilibrium price is $3 a fish, and the equilibrium quantity is 100 fish a day.
Market equilibrium is determined at the intersection of the demand curve and supply curve.
The equilibrium price is 50 cents a pack, and the equilibrium quantity is 120 million packs
a week.
The price of a pack adjusts until the quantity demanded equals the quantity supplied. At 50
cents a pack, the quantity demanded is 120 million packs a week and the quantity supplied
is 120 million packs a week.
At 70 cents a pack, there will be a surplus of gum and the price will fall.
At 70 cents a pack, the quantity demanded is 80 million packs a week and the quantity
supplied is 160 million packs a week. There is a surplus of 80 million packs a week. The
price will fall until market equilibrium is restored—50 cents a pack.
The equilibrium price is 65 cents a bag, and the equilibrium quantity is 145 million bags a
week.
The price of a bag adjusts until the quantity demanded equals the quantity supplied. At 65
cents a bag, the quantity demanded is 145 million bags a week and the quantity supplied is
145 million bags a week.
At 60 cents a bag, there will be a shortage of potato chips and the price will rise.
At 60 cents a bag, the quantity demanded is 150 million bags a week and the quantity
supplied is 140 million bags a week. There is a shortage of 10 million bags a week. The
price will rise until market equilibrium is restored—65 cents a bag.
The supply curve has shifted leftward.
As the number of gum-producing factories decreases, the supply of gum decreases. There
is a new supply schedule, and the supply curve shifts leftward.
72
CHAPTER 3
b.
9.
c.
10. a.
b.
c.
There has been a movement along the demand curve.
The supply of gum decreases, and the supply curve shifts leftward. Demand does not
change, so the price rises along the demand curve.
The equilibrium price is 60 cents, and the equilibrium quantity is 100 million packs a week.
Supply decreases by 40 millions packs a week. That is, the quantity supplied at each price
decreases by 40 million packs. The quantity supplied at 50 cents is now 80 million packs,
and there is a shortage of gum. The price rises to 60 cents a pack, at which the quantity
supplied equals the quantity demanded (100 million packs a week).
There has been a movement along the supply curve.
The demand for potato chips increases, and the demand curve shifts rightward. Supply
does not change, so the price rises along the supply curve.
The demand curve has shifted rightward.
As the new dip comes onto the market, the demand for potato chips increases. There is a
new demand schedule, and the demand curve shifts rightward.
The equilibrium price is 80 cents, and the equilibrium quantity is 160 million bags a week.
Demand increases by 30 millions bags a week. That is, the quantity demanded at each price
increases by 30 million bags. The quantity demanded at 65 cents is now 17potatoe chips.
The price rises to 80 cents a bag, at which the quantity supplied equals the quantity
demanded (160 million bags a week).
11. The new price is 70 cents a pack, and the quantity is 120 million packs a week.
The demand for gum increases, and the demand curve shifts rightward. The quantity demanded
at each price increases by 40 million packs. The result of the fire is a price of 60 cents a pack.
At this price, there is now a shortage of gum. The price of gum will rise until the shortage is
eliminated.
12. The new price is 100 cents a bag, and the quantity is 140 million bags a week.
The supply of potato chips decreases, and the supply curve shifts leftward. The quantity
supplied at each price decreases by 40 million bags. The result of the new dip entering the
market is a price of 80 cents a bag. At this price, there is now a shortage of potato chips. The
price of potato chips will rise until the shortage is eliminated.
Additional Problems
1.
2.
What is the effect on the price of hotdogs and the quantity of hotdogs sold if
a. The price of a hamburger rises?
b.
The price of a hotdog bun rises?
c.
The supply of hotdog sausages increases?
d.
Consumers’ incomes increase?
e.
The wage rate of a hotdog seller increases?
f.
If the wage rate of the hotdog seller rises and at the same time prices of ketchup, mustard,
and relish fall?
Suppose that one of the following events occurs:
(i) The price of wool rises.
(ii) The price of sweaters falls.
(iii) A close substitute for wool is invented.
(iv) A new high-speed loom is invented.
DEMAND AND SUPPLY
73
Which of the above events increases or decreases (state which,
3.
a.
The demand for wool?
b.
The supply of wool?
c.
The quantity of wool demanded?
d.
The quantity of wool supplied?
The figure illustrates the market for bread.
a. Label the curves in the figure.
b.
4.
The demand and supply schedules for potato chips are
Price
Quantity
Quantity
(cents
demanded
supplied
per bag)
(millions of bags per week)
40
170
90
50
160
100
60
150
110
70
140
120
80
130
130
90
120
140
100
110
150
110
100
160
a. What are the equilibrium price and equilibrium quantity of potato chips?
b.
5.
What are the equilibrium price of bread and the equilibrium quantity of bread?
If chips were 60 cents a bag, describe the situation in the market for potato chips and
explain what would happen to the price of a bag of chips.
In problem 4, suppose a new snack food comes onto the market and as a result the demand for
potato chips decreases by 40 million bags per week.
a. Has there been a shift in or a movement along the supply curve of chips?
b.
Has there been a shift in or a movement along the demand curve for chips?
c.
What is the new equilibrium price and quantity of chips?
74
CHAPTER 3
6.
In problem 5, suppose that a flood destroys several potato farms and as a result supply
decreases by 20 million bags a week at the same time as the new snack food comes onto the
market. What is the new equilibrium price and quantity of chips?
Solutions to Additional Problems
1.
a.
b.
c.
d.
e.
f.
2.
a.
b.
c.
The price of a hot dog rises, and the quantity of hot dogs sold increases.
Hot dogs and hamburgers are substitutes. If the price of a hamburger rises, people buy
more hot dogs and fewer hamburgers. The demand for hot dogs increases. The price of a
hot dog rises, and more hot dogs are sold.
The price of a hot dog falls, and fewer hot dogs are sold.
Hot dog buns and hot dogs are complements. If the price of a hot dog bun rises, fewer hot
dog buns are bought. The demand for hot dogs decreases. The price of a hot dog falls, and
people buy fewer hot dogs.
The price of a hot dog falls and more hot dogs are sold.
The increase in the supply of hot dog sausages lowers the price of hot dog sausages. Hot
dog sausages are a resource used in the production of hot dogs. With the lower priced
resource, the supply of hot dogs increases. The price of a hot dog falls and people buy
more hot dogs.
The price of a hot dog rises, and the quantity sold increases.
An increase in consumers' income increases the demand for hot dogs. As a result, the price
of a hot dog rises and the quantity bought increases.
The price of a hot dog rises, and the quantity sold decreases.
If the wage of the hot dog seller increases, the cost of producing a hot dog increases and
the supply of hot dogs decreases. The price rises, and people buy fewer hotdogs.
The price of a hot dog rises, but the quantity might increase, decrease, or remain the same.
Ketchup, mustard, and relish are complements of hot dogs. If the price of a ketchup,
mustard, and relish fall, more ketchup, mustard, and relish are bought and the demand for
hot dogs increases. The price of a hot dog rises, and people buy more hot dogs. If the wage
of the hot dog seller increases, the cost of producing a hot dog increases and the supply of
hot dogs decreases. The price rises, and people buy fewer hotdogs. Taking the two events
together, the price of a hot dog rises, but the quantity might increase, decrease, or remain
the same.
(ii) and (iii)
Wool is used in the production of sweaters. If the price of a sweater falls because the
supply of sweaters has increased, then the equilibrium quantity of sweaters increases and
the demand for wool increases. If the price of a sweater falls because the demand for
sweaters has decreased, then the equilibrium quantity of sweaters decreases and the
demand for wool decreases.
If a close substitute for wool is invented, some sweater producers will switch from wool to
the substitute. When they do, the demand for wool decreases.
(iv)
If a new high-speed loom is invented, the cost of making wool will fall and the supply of
wool will increase.
(i) and (iv)
If the price of wool rises there is a movement up along the demand curve. The quantity
demanded of wool decreases.
DEMAND AND SUPPLY
d.
3.
a.
b.
4.
a.
b.
5.
a.
b.
c.
6.
75
If a new high-speed loom is invented, the cost of producing wool will fall. So the supply of
wool increases. With no change in the demand for wool, the price of wool will fall and
there is a movement down along the demand curve for wool. The quantity demanded of
wool increases.
(i), (ii), and (iii)
If the price of wool rises there is a movement up along the supply curve. The quantity
supplied of wool increases.
If the price of a sweater falls because the supply of sweaters has increased, then the
equilibrium quantity of sweaters increases and the demand for wool increases. With no
change in the supply of wool, the price of wool rises and the quantity of wool supplied
increases. If the price of a sweater falls because the demand for sweaters has increased,
then the equilibrium quantity of sweaters decreases and the demand for wool decreases.
With no change in the supply of wool, the price of wool falls and the quantity of wool
supplied decreases.
If some sweater producers switch to using the new close substitute for wool, the demand
for wool will decrease. With no change in the supply of wool, the price of wool falls and
the quantity of wool supplied decreases.
The demand curve is the curve that slopes down toward to the right. The supply curve is
the curve that slopes up toward to the right.
The equilibrium price is $3 a loaf, and the equilibrium quantity is 100 loaves a day.
Market equilibrium is determined at the intersection of the demand curve and supply curve.
The equilibrium price is 80 cents a bag, and the equilibrium quantity is 130 million bags a
week.
The price of a bag adjusts until the quantity demanded equals the quantity supplied. At 80
cents a bag, the quantity demanded is 130 million bags a week and the quantity supplied is
130 million bags a week.
At 60 cents a bag, there will be a shortage of potato chips and the price will rise.
At 60 cents a bag, the quantity demanded is 150 million bags a week and the quantity
supplied is 110 million bags a week. There is a shortage of 40 million bags a week. The
price will rise until market equilibrium is restored—80 cents a bag.
There has been a movement along the supply curve.
The demand for potato chips decreases, and the demand curve shifts leftward. Supply does
not change, so the price falls along the supply curve.
The demand curve has shifted leftward.
As the new snack food comes onto the market, the demand for potato chips decreases.
There is a new demand schedule, and the demand curve shifts leftward.
The equilibrium price is 60 cents, and the equilibrium quantity is 110 million bags a week.
Demand decreases by 40 millions bags a week. That is, the quantity demanded at each
price decreases by 40 million bags. The quantity demanded at 80 cents is now 90 million
bags, and there is a surplus of potato chips. The price falls to 60 cents a bag, at which the
quantity supplied equals the quantity demanded (110 million bags a week).
The new price is 70 cents a bag, and the quantity is 100 million bags a week.
The supply of potato chips decreases, and the supply curve shifts leftward. The quantity
supplied at each price decreases by 20 million bags. The result of the new snack food entering
the market is a price of 60 cents a bag. At this price, there is now a shortage of potato chips.
The price of potato chips will rise until the shortage is eliminated.