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CHAPTER 4
SUPPLY AND DEMAND

LAUGHER CURVE
Q. What do you get when you cross the Godfather with an economist?
A. An offer you can’t understand.
______________________________________________________________________________
CHAPTER OVERVIEW: What’s It All About?
The chapter introduces students to some of the most powerful analytical tools in economics: the
law of demand and the law of supply. The law of demand is discussed first showing the
difference between a shift in demand, with an analysis of the shift factors of demand, versus a
movement along a demand curve. Then the law of supply is introduced showing the difference
between a shift in supply, with an analysis of the shift factors of supply, versus a movement
along a supply curve. Finally demand and supply are brought together with table and graphs.
The chapter ends with a discussion of equilibrium as an intellectual construct and of the
limitations of supply and demand analysis.
CHAPTER OBJECTIVES: Students Should Be Able To …
1. State the law of demand and draw a demand curve from a demand table.. Quantity
demanded rises as price falls (other things constant), or put another way, quantity
demanded falls as price rises (other things constant). The demand curve is a graphic
representation (a picture) of the demand table. In the real world, demand curves do not
spring up like mushrooms overnight. They are drawn only after empirical data have been
collected.
2. Explain the importance of substitution to the laws of supply and demand. If the price of
beef rises, a less expensive alternative such as chicken or turkey may be substituted.
3. Distinguish a shift in demand from a movement along the demand curve. A change in
quantity demanded results from a change in price alone. A change in demand that will
shift the entire demand curve to the right or left results from a change in one or more of the
shift factors: tastes, expectations, society’s income, etc.
4. State the law of supply and draw a supply curve from a supply table. Quantity supplied
rises as price rises (other things constant), or put another way, quantity supplied falls as
price falls (other things constant). The supply curve is a graphic representation (a picture)
of the supply table.
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Chapter 4: Supply and Demand
5. Distinguish a shift in supply from a movement along the supply curve. A change in
quantity supplied results from a change in price alone. A change in supply that will shift
the entire supply curve to the right or left results from a change in one or more of the shift
factors: technology, expectations, price of inputs, etc.
6. Explain how the law of demand and the law of supply interact to bring about equilibrium.
Equilibrium is not a state of the world nor is it good or bad. It is the point where the
market clears. The seller may grumble since he thinks the price is too low. The buyer
might think he or she is getting ripped off with a too-high price. It is simply the point
where each is willing to deal.
7. Show the effect of a shift in demand and supply on equilibrium and quantity. A shift in
demand that moves the demand curve to the right causes equilibirum price to rise and
equilibrium quantity to rise. A shift in supply that moves the supply curve to the left
causes equilibrium price to rise and equilibrium quantity to fall.
8. State the limitations of supply and demand analyses. The two major limitations are that
other things don’t remain constant, and the fallacy of composition, which is the false
assumption that what is true for a part will also be true for the whole.
WHAT’S NEW? Revisions to This Edition
Chapters 4 and 5 are revised to make the book easier to use in macro splits. The problem with
the previous organization was that some macro professors want a lot of micro foundations, while
others want only a little. The fourth edition organization had the material all macro professors
wanted spread between Chapters 4 and 5. In this edition, the chapters are reorganized so that
Chapter 4 presents the basics of supply and demand, including the effect of shifting demand and
supply curves and the limitations of supply and demand analysis, while Chapter 5 further
develops micro concepts with applications. Discussion of consumer and producer surplus moved
to Chapter 7.
DISCUSSION STARTERS: Get Your Class Rolling
1. Even though there exist organ donation banks for life-saving organs, there still exists an acute
shortage of organs for transplant. The tragic death of Football Hall of Fame Chicago Bears
running back Walter Payton, who waited for months for a liver transplant, brought this to the
attention of the general public in a dramatic way. Some people have argued for the
development of a market for these organs to eliminate the shortage. What do you think?
2. Do you think medical care ought to be a service allocated in the market like any other good or
service where those who are willing and able to pay the prevailing market price will receive it,
while those who are either unwilling or unable to pay the current market price will not receive
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Chapter 4: Supply and Demand
it? Or, do you think that medical services should be allocated by some other means? If so, by
what means?
TIPS FOR TEACHING LARGE SECTIONS
Deriving Supply and Demand: Shaved Heads and a Clean Room
When introducing the concepts of supply and demand, it is often useful to derive specific
supply and demand curves using information obtained from the students in your class. In the
class prior to introducing supply and demand, ask students to answer two questions
(anonymously) on a piece of paper: 1) How much would you have to be paid to be willing to
shave your head? (We used to ask how much you would have to be paid to come to class in your
underwear or nude. We decided shaved heads were somehow more realistic, in a hypothetical
kind of way.) And 2) How much would you be willing (and able) to pay me to clean your room?
Before the next class period, use this information to derive the supply curve for shaved heads and
the demand curve for your cleaning services. Present this information numerically and
graphically using a handout or overhead. For instance, for the supply curve, the numerical
information you will want to present is the exact number of people willing to shave their head at
each specific price given and then also show the cumulative total at each price as you raise the
price. (See table below.) Then graph the price with the cumulative total associated with each
price to show the supply curve. Since students are asked to think of their threshold values that
would induce them to supply the product or demand a product, they generally gain a clearer
understanding of how similar choices for many other individuals can culminate in market supply
and demand.
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Chapter 4: Supply and Demand
Supply Schedule for Shaved Heads (from a class with 55 students)
$ amount willing and able to pay
# supplied at that exact price
$0
$4
$10
$20
$25
$50
$75
$100
$150
$200
$235
$237
$250
400
500
550
600
1,000
1,500
2,000
5,000
6,000
10,000
40,000
50,000
100,000
500,000
1 million
4 million
10 million
More than 10 million
1
4
1
1
1
4
1
4
1
3
1
1
1
1
4
1
1
4
1
1
1
1
2
1
1
1
1
6
1
1
2
Cumulative total
Supplied at that price
1
5
6
7
8
12
13
17
18
21
22
23
24
25
29
30
31
35
36
37
38
39
41
42
43
44
45
51
52
53
55
Graphing the results of the first and third column will depict the supply curve. When students
see the wide variation in how much people must be paid to shave their heads, it provides a
starting point for discussion of the subjectivity of opportunity costs for producers and helps
students understand why prices must rise to induce more producers to provide their product. We
usually spend quite a bit of time talking about what the costs of shaving one’s head might be and
why there is so much variation across producers.
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Chapter 4: Supply and Demand
Demand for Clean Rooms (from a class with 55 students)
$ amount willing and able to pay
# demanded at that exact price
$50
$40
$35
$30
$25
$20
$15
$10
$5
$3
$2
$1
$0
2
1
1
6
3
8
3
10
10
1
2
2
6
Cumulative total
Demanded at that price
2
3
4
10
13
21
24
34
44
45
47
49
55
Graphing the first and third columns will depict the demand curve.
Deriving Supply and Demand: Shaved Heads and a Clean Room
When introducing the concepts of supply and demand, it is often useful to derive specific
supply and demand curves using information obtained from the students in your class. In the
class prior to introducing supply and demand, ask students to answer two questions
(anonymously) on a piece of paper: 1) How much would you have to be paid to be willing to
shave your head? And 2) How much would you be willing (and able) to pay me to clean your
room? Before the next class period, use this information to derive the supply curve for shaved
heads and the demand curve for your cleaning services. Present this information numerically and
graphically using a handout or overhead. For instance, for the supply curve, the numerical
information you will want to present is the exact number of people willing to shave their head at
each specific price given and then also show the cumulative total at each price as you raise the
price. Then graph the price with the cumulative total associated with each price to show the
supply curve. Since students are asked to think of their threshold values that would induce them
to supply the product or demand a product, they generally gain a clearer understanding of how
similar choices for many other individuals can culminate in market supply and demand.
ON THE WEB: Integrating New Media into the Classroom
http://www.taxadmin.org is the Web site of Washington-based Federation of Tax Admnistrators.
This is an educational-advocacy group. It has links to state tax forms, publications, tax
rates/surveys, and electronic tax administration. Politics: neutral.
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Chapter 4: Supply and Demand
http://ebay.com is the Web site of eBay, the quintessential supply/demand auction site. It is
difficult to imagine what isn’t auctioned here -- categories include everything from toys and
coins to farm equipment and houses. Politics: commercial.
STUDENT STUMBLING BLOCKS: Common Areas of Difficulty
Changes in quantity supplied and demanded versus changes in supply and demand: An InClass Review
Students often have difficulty differentiating between change in quantity demanded and change
in demand; and change in quantity supplied and change in supply. Here are some additional
exercises that can be worked out on the board or on the overhead.
1. The rental price of a video movie falls. What happens to the demand for movie-theater
tickets? (a) Draw a graph for the cassette-rental market and (b) another for the movie-ticket
market. Demonstrate each of the following:
a. Change in quantity demanded for video movies.
b. Change in demand for movie theater tickets.
Price
Price
1
2
D1
Quantity of video cassettes
D2
Quantity of movie tickets
2. The price of VCRs falls. (a) Show the effect of this on a demand curve, and (b) show in
another graph how this affects the demand for rented video movies.
a. Change in quantity demanded for video players.
b. Change in demand for rental of video movies.
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Chapter 4: Supply and Demand
Price
Price
1
D2
2
D1
Quantity of video cassette players
Quantity of video cassettes
3. The price of hospital care increases. (a) Show the effect of this on demand, and (b) show in
another graph its cause: higher wages for nurses.
a. Change in quantity of hospital care demanded.
b. Change in supply for hospital care.
Price
S2
Price
S1
2
1
Quantity of hospital
care
Quantity of hospital care
4. The price of a personal computer goes down. (a) Show the effect of this on demand, and (b)
show in another graph its cause: better technology makes them less costly.
a. Change in quantity of personal computers demanded.
b. Change in supply for personal computers.
Price
Price
S1
S2
1
2
Quantity of personal computers Quantity of personal computers
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Chapter 4: Supply and Demand
TIES TO THE TOOLS: Bringing the Boxes into the Classroom
Knowing the Tools: Six Things to Remember When Considering a Demand Curve.
This is a good summing-up device after the demand curve has been introduced.
Knowing the Tools: Six Things to Remember When Considering a Supply Curve.
This is a good summing-up device after the supply curve has been introduced.
Beyond the Tools: The Supply and Demand for Children
Farm families, especially in developing nations, have many more children than urban families.
According to Gary Becker, this is because the cost of a farm child is lower than the cost of a city
child.
LECTURE OUTLINE: A Map of the Chapter
I. Demand.
A. The law of demand (Chapter Objective 1a).
1. Quantity demanded rises as price falls, other things constant. Thus, there is an inverse
relationship between price and quantity demanded. Alternatively, quantity demanded
falls as prices rise, other things constant. Again, there is an inverse relationship between
price and quantity demanded.
2. What accounts for the law of demand? People tend to substitute for goods whose price
has gone up (Chapter Objective 2).
B. The demand curve: The demand curve is a graphic representation of the law of demand
(Chapter Objective 1b). See Figure 4-1.
1. As the price goes up, the quantity demanded goes down. Thus, the demand curve slopes
down and to the right.
2. The slope tells us that quantity demanded varies indirectly -- in the opposite direction -with price.
C. Other things constant. Other things constant means that all other factors that affect the
analysis are assumed to remain constant, whether they actually remain constant or not.
These may include changing tastes, prices of other goods, even the weather.
D. Shifts in demand versus movements along a demand curve (Chapter Objective 3).
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Chapter 4: Supply and Demand
1. Demand refers to a schedule of quantities of a good that will be bought per unit of time
at various prices, other things constant (Figure 4-3b). Graphically, it refers to the entire
demand curve.
2. Quantity demanded refers to a specific amount that will be demanded per unit of time
at a specific price (Figure 4-3a). Graphically, it refers to a specific point on the demand
curve.
3. A movement along a demand curve is the graphical representation of the effect of a
change in price on the quantity demanded. See Figure 4-2a.
4. A shift in demand is the graphical representation of the effect of anything other than
price on demand. The original curve will move to the right or to the left. See Figure 42b.
E. Shift factors of demand are those that cause shifts in the demand curve to the right or left.
These include (but are not limited) to the following:
1. A rise in income will increase demand for goods.
2. When the prices of substitute goods fall, you will consume less of the good whose price
has not changed.
3. There is no accounting for taste. A change in taste will change demand with no change
in price.
4. If a consumer expects his income to rise, he may consume more now. If he expects
prices to fall in the future, he may put off purchases today.
5. When taxes such as sales taxes are levied on consumers,their costs go up and that
dampens demand. When consumers a given a sales-tax holiday, their costs decrease
thereby increasing demand.
F. To derive a demand curve from a demand table, each point on the demand table is plotted
on a graph and connect the points (Chapter Objective 1b). The demand curve graphically
conveys the same information that is on the demand table. It also represents the maximum
price that people will pay for various quantities of a good – consumers will happily pay
less. See Figure 4-3.
G. A market demand curve is the horizontal sum of all individual demand curves. This is
determined by adding the individual demand curves of all the demanders (see Figure 4-4a
and b. In the real world, however, sellers do not add up individual demand curves but
estimate total market demand for their product which becomes smooth and downward
sloping. This is based on two phenomena:
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1. At lower prices, existing demanders buy more.
2. At lower prices, new demanders enter the market.
II. Supply.
A. Individuals control the factors of production -- resources or inputs, necessary to produce
goods or services. These individuals supply factors of production to intermediaries or
firms. The analysis of the supply of produced goods has two parts:
1. An analysis of the supply of the factors of production to households and firms.
2. An analysis of why firms transform those factors of production into usable goods and
services.
B. The law of supply (Chapter Objective 4a).
1. Quantity supplied rises as price rises, other things constant. Thus, there is a direct
relationship between price and quantity supplied. Quantity supplied falls as price falls,
other things constant. Again, there is a direct relationship between price and quantity
supplied.
2. The law of supply is accounted for by two factors:
a. Firms arrange their activities in order to supply more of a good to the market,
substituting production of that good for the production of other goods, and vice
versa.
b. Assuming firms’ costs are constant, a higher price means higher profits.
C. The supply curve is the graphic representation of the law of supply (see Figure 4-5). The
supply curve slopes upward to the right. It tells us that the quantity supplied varies directly
-- in the same direction -- with the price.
D. Shifts in supply versus movements along a supply curve (Chapter Objective 5).
1. Supply refers to a schedule of quantities a seller is willing to sell per unit of time at
various prices, other things constant.
2. If the amount supplied is affected by anything other than a change in price, that is by a
shift factor of supply, there will be a shift in supply -- the graphic representation of the
effect of a change in a factor other than price on supply. See Figure 4-6b.
3. Quantity supplied refers to a specific amount that will be supplied at a specific price.
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Chapter 4: Supply and Demand
4. Changes in price causes changes in quantity supplied; such changes are represented by a
movement along a supply curve -- the graphic representation of the effect of a change
in price on the quantity supplied. See Figure 4-6a.
E. Shift factors of supply are those factors that cause shifts in the entire supply curve to the
left or right.
1. Changes in the prices of inputs used in the production of a good: If costs go up, then
profits go down, and the incentive to supply also goes down. If costs go up
substantially, the firm may even shut down.
2. Changes in technology: Technology makes costs go down, profits go up, thus the
incentive to supply also goes up. This is especially true when technology replaces labor.
3. Changes in suppliers’ expectations: In the expectation of a future price rise, the supplier
may store today’s production for an expected windfall later. In the expectation of a
future price fall, the supplier may sell off more of his inventory today.
4. Changes in taxes and subsidies to suppliers: If taxes go up, costs will also go up, and
profits will go down, leading suppliers to reduce output. If government subsidies go up,
costs will go down, and profits will go up, leading suppliers to increase output.
5. A shift in supply versus a movement along the supply curve (see Exhibit 4-6).
F. From a supply table to a supply curve (Chapter Objective 4b): In order to derive a supply
curve from a supply table, each point in the supply table is plotted on a graph and connect
the points connected (Figure 4-7).
1. The supply curve represents the set of minimum prices an individual seller will accept
for various quantities of a good.
2. Competing suppliers’ entry into the market places a limit on the price any supplier can
charge.
G. Individual and market supply curves: The market supply curve is the horizontal sum of
individual supply curves. The law of supply is based on two phenomena:
1. At higher prices, existing suppliers supply more.
2. At higher prices, new suppliers enter the market.
H. Equilibrium is a concept in which opposing dynamic forces pushing cancel each other
out.
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Chapter 4: Supply and Demand
1. In supply and demand analysis, equilibrium means that the upward pressure on price is
exactly offset by the downward pressure on price (Chapter Objective 6).
2. Equilibrium price is the price toward which the invisible hand drives the market.
3. Equilibrium quantity is the amount bought and sold at the equilibrium price.
4. Equilibrium isn’t a state of the world, it’s a characteristic of the model used to look at
the world. Nor is it inherently good or bad -- but simply a state in which dynamic
pressures offset each other.
I. Supply and demand come together to determine equilibrium quantity and equilibrium price.
1. If the quantity supplied is greater than quantity demanded (excess supply), prices tend to
fall (Chapter Objective 7).
2. If quantity demanded is greater than quantity supplied (excess demand), prices tend to
rise.
a. The larger the difference between quantity demanded and quantity supplied, the
greater the pressure for prices to rise (if there is excess demand) or fall (if there is
excess supply).
b. When quantity demanded equals quantity supplied, prices have no tendency to
change and the market is in equilibrium.
3. Price adjusts until the market is in equilibrium. This is shown in Figure 4-8.
a. The greater the difference between quantity supplied and quantity demanded, the
more pressure there is for prices to rise or fall.
b. When quantity supplied equals quantity demanded, the market is in equilibrium.
J. Political and social forces and equilibrium.
1. Up to this point, equilibrium has been discussed as a framework of analysis. In the real
world it is quite different.
2. If social and political forces are included in a real-world analysis, they would provide a
counter pressure to the dynamic forces of supply and demand.
K. Shifts in supply and demand: Changes in supply and demand will change equilibrium
price and quantity.
1. A shift in demand (Figure 4-9a) that moves the demand curve to the right causes
equilibrium price to rise and equilibrium quantity to rise.
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Chapter 4: Supply and Demand
2. A shift in supply (Figure 4-9b) that moves the supply curve to the left causes
equilibrium price to rise and equilibrium quantity to fall.
L. The limitations of supply and demand analysis (Chapter Objective 8): It is not enough to
be able to explain what happens when supply or demand curves shift. It is necessary to
understand the assumptions underlying the analysis.
1. Other things don’t remain constant. Supply/demand analysis is the first step to analysis,
not the complete analysis.
a. Sometimes supply and demand are interconnected.
b. Deciding on whether the effects are significant to consider requires a knowledge of
the structure of the economy since all actions have ripple or feedback effects.
c. When one analyzes goods that are a large percentage of the entire economy, the
other-things-constant assumption is likely not to hold true.
2. The fallacy of composition is the false assumption that what is true for a part will also
be true for the whole.
a. Thousands of small effects taken together add up to a large effect.
b. When analyzing the aggregate, small effects that can be put aside in micro can add
up, and hence cannot be forgotten.
c. Small effects comprise microeconomics while large effects comprise
macroeconomics.
CHAPTER SUPPLEMENTS: Other Classroom Aids to Use
 Classic Readings in Economics: "Rent Control: An Example of Price Fixing," pp. 18-19.
Bertrand de Jouvenel described rent controls in 1948 Paris.
 Economics: An Honors Companion, pp. 135-139, "Supply and Demand."
 Classic Readings in Economics: "The Price System in Microcosm: A P.O.W. Camp," pp. 917. R. A. Radford recounts his experiences in a German prisoner-of-war camp during World
War II.
 Experiments in Teaching and in Understanding Economics, pp. 15-19: A Double
Auction Market Experiment
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Chapter 4: Supply and Demand
POP QUIZ
NAME:__________________________________
COURSE: ________________________________
1. An increase in demand:
a. causes the demand curve to shift to the left.
b. means consumers are willing and able to buy more at any price.
c. creates a surplus at the original price.
d. could be caused by an increase in the price of a complementary good.
2. Which of the following would cause an increase in the demand for a good?
a. A decrease in price.
b. An increase in consumer tastes for the good.
c. A decrease in the price of a substitute good.
d. Consumers expect the price of the good to fall in the near future.
3. The law of supply:
a. states that as the price rises, buyers will purchase less.
b. states that as the price rises, sellers will supply a greater quantity.
c. is applicable in only a few markets.
d. is reflected as a downward sloping curve.
4. An increase in supply:
a. will cause the supply curve to shift to the left.
b. could be caused by a decrease in the price of a necessary factor of production.
c. means sellers will produce less at any price.
d. will cause the quantity demanded to fall.
5. The law of demand states that:
a. there is an inverse relationship between the price and quantity demanded.
b. there is a direct relationship between the price and quantity demanded.
c. as income rises, quantity demanded also rises.
d. a decrease in price will increase demand.
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Chapter 4: Supply and Demand
6. If at some price the quantity supplied exceeds the quantity demanded, then:
a. a surplus exists and the price will fall over time as sellers competitively bid down the price.
b. a shortage exists and the price will rise over time as buyers competitively bid up the price.
c. the price is below equilibrium.
d. equilibrium will be reestablished as the demand curve shifts to the left.
7. Which of the following would most likely increase the demand for hot dog buns?
a. An increase in the price of wheat used in the production of the buns.
b. A decrease in the number of consumers of hot dog buns.
c. A decrease in the price of hot dogs.
d. A decrease in the price of hot dog buns.
8. Compared to last year, more television sets are being bought while the selling price has risen.
This could have caused by:
a. an exception to the law of demand.
b. an increase in supply.
c. an increase in demand.
d. a decrease in supply.
9. If we observe the price of a good or service rising, then this could have been caused by:
a. an increase in demand.
b. an increase in supply.
c. a temporary surplus.
d. a small increase in demand accompanied with a huge increase in supply.
10. One of the main limitations of supply and demand analysis is:
a. that other things are not assumed to remain constant.
b. the fallacy of composition.
c. the idea that supply and demand are not interrelated.
d. the belief that there are no ripple or feedback effects possible in the marketplace.
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Chapter 4: Supply and Demand
ANSWERS TO POP QUIZ
1. b 2. b 3. b 4. b 5. a 6. a 7. c 8. c 9. a 10. b
CASE STUDIES: Real-World Cases of Textbook Concepts
Case Study 4-1: A Raw Deal in Lettuce
Over half of the nation’s lettuce comes from three California areas: the Imperial Valley in the
southeastern corner of the state, the area centered around Huron in Fresno County, and the area
around Salinas in Monterey County. The Imperial Valley harvests in the late fall, Huron in the
spring, and Salinas in the late spring and summer. Arizona, because of its warm weather, ships
lettuce during the winter months.
In early 2002, the following events converged to bring the highest lettuce prices (about $3 per
head) for Californians in 15 years:

Unusually cold winter weather stunted Arizona’s lettuce crop.

The cold, to a lesser extent, also hit the Imperial Valley.

At the same time, the East Coast had an unusually mild winter, which kept shipping routes
open and demand for lettuce high.

According Department of Agriculture officials, about 6 percent less lettuce was planted at
this time than in the year before.

In about four weeks, it was expected that Arizona’s stunted crops would recover and at the
same time, Huron’s fields would be ready for harvest, resulting in a double harvest.
Source: “Shortage Drives Lettuce Price Up, Sacramento Bee, March 15, 2002, p. D2 (Reprinted
from the Associated Press).
Questions:
1. Does the case describe shifts of supply, shifts of demand, or both?
2. What would you label the shift factors of demand?
3. What would you label the shift factors of supply?
4. How would you graph these?
5. According to the article, what is likely to happen one month following publication of the
article?
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Chapter 4: Supply and Demand
Case Study 4-2: Eliminating Traffic Jams

Peak-hour traffic jams have become so horrific, some governments are beginning to look at a
market solution to the problem. This is what economists call a tragedy-of-the-commons
problem.

In Southern California, drivers are being charged premiums to travel in underused car pool
lanes.

Singapore, Norway, and France are managing traffic with various tolls.

Peak surcharges are being studied for roads and bridges around New York, San Francisco,
Los Angeles, and other cities.
Congestion pricing, as this traffic-control strategy is called, isn’t that radical. Peak prices are
used to ration such things as Super Bowl tickets, opening night at the opera or a rock concert,
airline tickets at Thanksgiving, and hotel rooms in Cancun. Why not roads?

Tollbooths would be required – millions of them. Besides their costs, they would slow up
traffic even more.

In every public poll taken, responders hate the idea. “Lexus lanes” would accommodate the
well-heeled while Joe Sixpack couldn’t afford it. The biggest fans of congestion pricing
concede it could worsen inequality and “destroy what Joan Didion called America’s only
community – the free road may be the last thing that rich and poor share equally.”

Varying tolls may not reduce congestion. Maine Turnpike officials found that knocking off
as much as $1.60 off the Saturday morning tolls didn’t clear the Friday night backup.
But there is another side to the story.

With new technology, road authorities can now hand out credit-card-size transponders that
could be mounted on dashboards, and pay tolls to overhead computers as they whiz by. No
delays for toll booths.

A ten-mile stretch of privately-owned highway in Orange County, California, has been a great
success. Studies have shown that by removing themselves from the freeway, the tollpayers
are making the non-tollpayers’ commutes faster too.
Who knows? This may be one of those invisible-hand deals that benefits all – faster commutes
all round, cleaner air, financial reward for road investors, and savings for taxpayers.
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Chapter 4: Supply and Demand
Sources: Kim Clark, “How to Make Traffic Jams a Thing of the Past,” Fortune, March 31, 1997,
p. 34, and “The Road Less Traveled Is Private and Expensive,” Los Angeles Times, August 16,
2002.
Questions:
1. Is the problem here one of supply, or demand, or both?
2. Is this a shift-factor problem or a quantity-supplied or quantity-demanded problem?
3. Do you agree that market-based pricing equilibrium would make everyone happy?
4. How would you graph this?
5. Does the article imply a consumer surplus or a producer surplus without tolls?
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Chapter 4: Supply and Demand