chapter 3 - basic elements of supply and demand
DESCRIPTION
'Economics', Samuelson and Nordhaus, Part 1: Basic Concepts, Chapter 3: Basic Elements of Supply and DemandTRANSCRIPT
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CHAPTER 3: BASIC ELEMENTS OF SUPPLY AND DEMAND
What is a cynic? A man who knows the price of everything and the value of nothing.
Oscar Wilde
SUMMARY
1. The analysis of supply and demand shows how a market mechanism solves the three
problems of what, how, and for whom. A market blends together demands and
supplies. Demand comes from consumers who are spreading their dollar votes among
available goods and services, while businesses supply the goods and services with the
goal of maximizing their profits.
A. The Demand Schedule
2. A demand schedule shows the relationship between the quantity demanded and the
price of a commodity, other things held constant. Such a demand schedule, depicted
graphically by a demand curve, holds constant other things like family incomes, tastes,
and the prices of other goods. Almost all commodities obey the law of downward-
sloping demand, which holds that quantity demanded falls as a goods price rises. This
law is represented by a downward-sloping demand curve.
3. Many influences lie behind the demand schedule for the market as a whole: average
family incomes, population, the prices of related goods, tastes, and special influences.
When these influences change, the demand curve will shift.
B. The Supply Schedule
4. The supply schedule (or supply curve) gives the relationship between the quantity of
a good that producers desire to sell other things constant and that goods price.
Quantity supplied generally responds positively to price, so the supply curve is
upward-sloping.
5. Elements other than the goods price affect its supply. The most important influence
is the commoditys production cost, determined by the state of technology and by
input prices. Other elements in supply include the prices of related goods, government
policies, and special influences.
C. Equilibrium of Supply and Demand
6. The equilibrium of supply and demand in a competitive market occurs when the forces
of supply and demand are in balance. The equilibrium price is the price at which the
quantity demanded just equals the quantity supplied. Graphically, we find the
equilibrium at the intersection of the supply and demand curves. At a price above the
equilibrium, producers want to supply more than consumers want to buy, which
results in a surplus of goods and exerts downward pressure on price. Similarly, too low
a price generates a shortage, and buyers will therefore tend to bid price upward to the
equilibrium.
7. Shifts in the supply and demand curves change the equilibrium price and quantity. An
increase in demand, which shifts the demand curve to the right, will increase both
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equilibrium price and quantity. An increase in supply, which shifts the supply curve to
the right, will decrease price and increase quantity demanded.
8. To use supply-and-demand analysis correctly, we must (a) distinguish a change in
demand or supply (which produces a shift of a curve) from a change in the quantity
demanded or supplied (which represents a movement along a curve); (b) hold other
things constant, which requires distinguishing the impact of a change in a commoditys
price from the impact of changes in other influences; and (c) look always for the
supply-and-demand equilibrium, which comes at the point where forces acting on
price and quantity are in balance.
9. Competitively determined prices ration the limited supply of goods among those who
demand them.
CONCEPTS FOR REVIEW
Supply-and-demand analysis, demand schedule or curve, DD, law of downward-sloping
demand, influences affecting demand curve
Supply schedule or curve, SS, influences affecting supply curve, equilibrium price and quantity
Shifts of supply and demand curves, all other things held constant, rationing by prices
FURTHER READING AND INTERNET WEBSITES
Further Reading
Supply-and-demand analysis is the single most important and useful tool in microeconomics.
Supply-and-demand analysis was developed by the great British economist Alfred Marshall in
Principle of Economics. To reinforce your understanding, you might look in textbooks on
intermediate microeconomics. Two good references are Hal R. Varian, Intermediate
Microeconomics: A Modern Approach, and Edwin Mansfield and Gary Yohe, Microeconomics:
Theory and Applications.
A recent survey of the economic issues in immigration is in George Borjas, Heavens Door:
Immigration Policy and the American Economy.
Websites
Websites in economics are proliferating rapidly, and it is hard to keep up with all the useful
sites. A good place to start is always www.rfe.org. Another useful starting point for Internet
resources in economics can be found at http://www.oswego.edu/~economic/econweb.htm
You can examine a study of the impact of immigration on American society from the National
Academy of Sciences, The New Americans (1997), at www.nap.edu. This site provides free
access to over 1000 studies from economics and the other social and natural sciences.
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QUESTIONS FOR DISCUSSION
1. a. Define carefully what is meant by a demand schedule or curve. State the law of
downward-sloping demand. Illustrate the law of downward-sloping demand with two
cases from your own experience.
The demand schedule shows the relationship between the market price of a good and
the quantity demanded of that good, other things held constant.
For example, the demand schedule for a box of cornflakes could look like this:
(1) (2)
Price Quantity demanded
($ per box) (millions of boxes per year)
P Q
A 5 9
B 4 10
C 3 12
D 2 15
E 1 20
Demand Schedule for Cornflakes
The demand curve is the graphical representation of the demand schedule.
The law of downward-sloping demand is: When the price of a commodity is raised (and
other things are held constant), buyers tend to buy less of the commodity. Similarly, when
the price is lowered, other things being constant, quantity demanded increases.
Two examples from my personal experience: When a store drastically reduces prices of
food (such as pastries or chocolate) just before its best before date, I will buy more of
these than I normally would.
Another example was when the Financial Times offered a cheap years subscription
online, I decided to buy it, whereas I would not have subscribed at full price.
0
1
2
3
4
5
6
0 5 10 15 20 25Pri
ce o
f co
rnfl
akes
(d
olla
rs p
er b
ox)
Quantity of cornflakes (millions of boxes per year)
Demand Curve for Cornflakes
D
D
-
b. Define the concept of a supply schedule or curve. Show that an increase in supply
means a rightward and downward shift of the supply curve. Contrast this with the
rightward and upward shift of the demand curve implied by an increase in demand.
The supply schedule shows the relationship between the market price of a commodity
and the quantity of that commodity that producers are willing to produce and sell, other
things held constant.
For example, the supply schedule for a box of cornflakes could look like this:
(1) (2)
Price Quantity supplied
($ per box) (millions of boxes per year)
P Q
A 5 18
B 4 16
C 3 12
D 2 7
E 1 0
Supply Schedule for Cornflakes
The supply curve is the graphical representation of the supply schedule.
If there is an increase in supply, then the quantity supplied at each price will increase. A
new schedule, with quantity supplied increased by 5 million boxes per year at each price,
is:
0
1
2
3
4
5
6
0 5 10 15 20Pri
ce o
f co
rnfl
akes
(d
olla
rs p
er b
ox)
Quantity of cornflakes (millions of boxes per year)
Supply Curve for Cornflakes
S
S
-
(1) (2) (3)
Price Quantity supplied Quantity supplied
($ per box) (millions of boxes per year) (millions of boxes per year)
P Q Q'
A 5 18 23
B 4 16 21
C 3 12 17
D 2 7 13
E 1 0 5
Supply Schedule for Cornflakes
This gives the supply curves:
The solid curve SS, is the original supply curve. The dashed curve SS, is the new, shifted,
supply curve. The supply curve has shifted to the right (and looks as if it has shifted
downwards).
If instead, demand had increased, the quantity demanded at each price will increase. A
new schedule, with quantity demanded increased by 5 million boxes per year at each
price, is:
(1) (2) (3)
Price Quantity demanded Quantity demanded
($ per box) (millions of boxes per year) (millions of boxes per year)
P Q Q'
A 5 9 14
B 4 10 15
C 3 12 17
D 2 15 20
E 1 20 25
Demand Schedule for Cornflakes
0
1
2
3
4
5
6
0 5 10 15 20 25Pri
ce o
f co
rnfl
akes
(d
olla
rs p
er b
ox)
Quantity of cornflakes (millions of boxes per year)
Supply Curve for Cornflakes
S
S
S'
S'
-
This gives the demand curves:
The solid curve DD, is the original demand curve. The dashed curve DD, is the new,
shifted, demand curve. The demand curve has shifted to the right (and looks as if it has
shifted upwards).
2. What might increase the demand for hamburgers? What would increase the supply?
What would inexpensive frozen pizzas do to the market equilibrium for hamburgers?
To the wages of teenagers who work at McDonalds?
An increase in demand for hamburgers (as opposed to an increase in quantity demanded
due to a change in price) could be caused by:
An increase in average incomes. As peoples incomes increase, they will spend more
on hamburgers.
An increase in population. More people will buy more hamburgers, even if each
person does not buy any more hamburgers than before.
An increase in the price and availability of related goods. If the price of fried chicken
increases, people will substitute more hamburgers.
A change in tastes or preferences. The arrival of fast food chains will change peoples
preferences for food, meaning people will buy more hamburgers.
A change in special influences. An effective advertising campaign or celebrity
endorsement makes people want more hamburgers.
An increase in supply of hamburgers (as opposed to an increase in quantity supplied due
to a change in price) could be caused by:
An improvement in technology. More efficient ovens mean that hamburgers can be
produced at lower cost.
A reduction in input prices. A reduction in the cost of beef and wheat would mean
hamburgers could be produced more cheaply.
0
1
2
3
4
5
6
0 5 10 15 20 25 30Pri
ce o
f co
rnfl
akes
(d
olla
rs p
er b
ox)
Quantity of cornflakes (millions of boxes per year)
Demand Curve for Cornflakes
D
D
D'
D'
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A reduction in prices of related goods. A reduction in the price of fried chicken would
reduce the profitability of producing fried chicken, and produces will shift production
to hamburgers.
A change in government policy. Relaxing regulations on food safety and public health,
removing quotas and tariffs on imported beef and wheat, reducing the minimum
wage would all increase the supply of hamburgers.
A change in special influences. Expectations of strong future demand and prices for
hamburgers will increase their supply.
Inexpensive frozen pizzas will attract consumers to demand more frozen pizzas and
therefore less hamburgers. The demand for hamburgers will decrease, and the demand
curve will shift leftwards. Assuming no change in supply, the price of hamburgers and the
quantity demanded will decrease. The demand for teenagers to work at McDonalds will
decrease, and so will their wages.
3. Explain why the price in competitive markets settles down at the equilibrium
intersection of supply and demand. Explain what happens if the market price starts out
too high or too low.
Consider the supply and demand schedules of cornflakes (as discussed in Question 1):
(1) (2) (3)
Price Quantity supplied Quantity demanded
($ per box) (millions of boxes per year) (millions of boxes per year)
P Q Q
A 5 18 9
B 4 16 10
C 3 12 12
D 2 7 15
E 1 0 20
Combining Supply and Demand for Cornflakes
0
1
2
3
4
5
6
0 5 10 15 20 25Pri
ce o
f co
rnfl
akes
(d
olla
rs p
er b
ox)
Quantity of cornflakes (millions of boxes per year)
Supply and Demand Curves for Cornflakes
S
SD
D
E
Surplus
Shortage
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At the market equilibrium the quantity demanded equals the quantity supplied. There is
no tendency for prices to rise or fall at the equilibrium. Looking at the above table, we
see that at $3 a box, 12 million boxes of cornflakes are supplied and 12 million boxes are
demanded. All supply and demand orders are filled, the books are cleared of orders,
and demanders and suppliers are satisfied.
The same thing can be seen by looking at the supply and demand curves. Where the
demand curve DD and supply curve SS intersect at point E - the quantity demanded
equals the quantity supplied. At E, we can see the equilibrium price is $3 (see where a
horizontal line from E intersects the vertical axis) and the equilibrium quantity is 12
million boxes per year (see where a vertical line from E intersects the horizontal axis).
Now, imagine the market price starts out too high at $5. This can be seen towards the
top of the curves diagram. Here we see that the quantity supplied (18 million boxes) is
greater than the quantity demanded (9 million boxes). There is a surplus of cornflakes.
Cornflakes will pile up on the supermarket shelves. In order to sell these, the supermarket
will start cutting prices. As prices decrease, the quantity demanded will increase (we will
move along the demand curve DD as shown by the arrows) but the quantity supplied will
be reduced (we will move along the supply curve SS as shown by the arrows). Eventually
the price will reduce to the equilibrium price at E.
Now, imagine the market price starts out too low, at $2. This can be seen towards the
bottom of the curves diagram. Here we see that the quantity demanded (15 million
boxes) is greater than the quantity supplied (7 million boxes). There is a shortage of
cornflakes. Long queues will form at the supermarket for cornflakes. Buyers will bid up
their prices in order to get the scarce cornflakes. As prices increase, the quantity
demanded will decrease (we will move along the demand curve DD as shown by the
arrows) but the quantity supplied will increase (we will move along the supply curve SS
as shown by the arrows). Eventually the price will increase to the equilibrium price at E.
4. Explain why each of the following is false:
a. A freeze in Brazils coffee-growing region will lower the price of coffee.
A freeze in Brazils coffee-growing region will reduce the supply of coffee. The supply
curve will shift to the left, as less coffee is supplied at each price. Assuming that the
demand for coffee remains the same, the equilibrium price will be higher, not lower, than
before, as shown below.
(N.B. Price on the vertical axis is denoted by P. Quantity on the horizontal axis is denoted
by Q. Demand curves are denoted DD. Supply curves are denoted by SS. E represents the
intersection of the two curves, which gives the equilibrium price and quantity. An
apostrophe, , is suffixed to the D, S, or E to indicate a shifted curve or equilibrium. The
bold red arrows indicate the change in price and quantity due to a shifted curve)
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b. Protecting American textile manufacturers from Chinese clothing imports will
lower clothing prices in the United States.
Protecting America from Chinese clothing imports will reduce the supply of clothing in
the United States, increasing, not decreasing, price, as in 4.a.
c. The rapid increase in college tuitions will lower the demand for college.
A rise in college tuitions (fees) will reduce the quantity of college tuition demanded. But
this is not the same as a reduction in demand. We have here a movement along the
demand curve, as the quantity demanded responds to a change in price. If the demand
was to change, this would be a shift of the demand curve, as one of the elements
underlying the demand curve (such as average incomes, population, prices of related
goods, tastes or special influences) would have changed.
P
Q
D
DS
S'
S'
S
E
E'
Quantity
Pri
ce
P
Q
D
D
Pri
ce
Quantity
E
E'
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In fact, the increase in college tuitions will be a reduction on the supply of college tuition
at each price. The reasoning, and curves, will be as in 4.a. The supply curve, shifted to the
left to SS, will intersect with the original demand curve DD at a higher price and lower
quantity demanded but the demand will not have changed (DD has not shifted.)
d. The war against drugs, with increased interdiction of imported cocaine, will lower
the price of domestically produced marijuana.
The war against drugs, by reducing imports of cocaine, will lead to a reduction in the
supply of cocaine. The same reasoning and curves as in 4.a. applies to cocaine in this
instance.
Marijuana is a related good of cocaine, so as the price of cocaine increases, so the price
of domestically produced marijuana will be higher.
The war against drugs has made drugs a very lucrative commodity.
5. The following are four laws of supply and demand. Fill in the blanks. Demonstrate each
law with a supply-and-demand diagram.
a. An increase in demand generally raises price and raises quantity demanded.
The demand curve shifts rightwards, from DD to DD, as a greater quantity is demanded
at each price. The supply curve SS remains where it is. The equilibrium, given by the
intersection of the supply and demand curves, moves from E to E. E is clearly at a higher
price and higher quantity than E (it is higher up on the vertical P axis and further along on
the horizontal Q axis). The bold red arrows indicate the change in price and quantity due
to the new equilibrium. The price is raised and the quantity is raised.
P
Q
S
S
D
D
D'
D'
E
E'
Pri
ce
Quantity
-
b. A decrease in demand generally lowers price and lowers quantity demanded.
The demand curve shifts leftwards, from DD to DD, as a lesser quantity is demanded at
each price. The supply curve SS remains where it is. The equilibrium, given by the
intersection of the supply and demand curves, moves from E to E. E is clearly at a lower
price and lower quantity than E (it is lower down on the vertical P axis and nearer in on
the horizontal Q axis). The bold red arrows indicate the change in price and quantity due
to the new equilibrium. The price is lowered and the quantity is lowered.
c. An increase in supply generally lowers prices and raises quantity demanded.
The supply curve shifts rightwards, from SS to SS, as a greater quantity is supplied at
each price. The demand curve DD remains where it is. The equilibrium, given by the
intersection of the supply and demand curves, moves from E to E. E is clearly at a lower
P
Q
S
S
D
D
D'
D'
E
E'
Pri
ce
Quantity
P
Q
S
S
D
D
E
E'
Pri
ce
Quantity
S'
S'
-
price and higher quantity than E (it is lower down on the vertical P axis and further along
on the horizontal Q axis). The bold red arrows indicate the change in price and quantity
due to the new equilibrium. The price is lowered and the quantity is raised.
d. A decrease in supply generally raises price and lowers quantity demanded.
The supply curve shifts leftwards, from SS to SS, as a lesser quantity is supplied at each
price. The demand curve DD remains where it is. The equilibrium, given by the
intersection of the supply and demand curves, moves from E to E. E is clearly at a higher
price and lower quantity than E (it is higher up on the vertical P axis and nearer in on the
horizontal Q axis). The bold red arrows indicate the change in price and quantity due to
the new equilibrium. The price is raised and the quantity is lowered.
6. For each of the following, explain whether quantity demanded changes because of a
demand shift or a price change, and draw a diagram to illustrate your answer.
a. As a result of decreased military spending, the price of Army boots falls.
Army boots are purchased by military spending, i.e. military spending provides the
demand for Army boots. Decreased military spending decreases demand for Army boots
this is a demand shift
P
Q
S
S
D
D
E
E'
Pri
ce
Quantity
S'
S'
-
(See 5.b. for a fuller explanation of a decrease in demand)
which leads to a fall in price.
b. Fish prices fall after the pope allows Catholics to eat meat on a Friday.
Meat is a close substitute for fish. If meat is allowed to be eaten on a Friday, Catholics
will substitute meat for fish (not necessarily because of price effects, but because the
special influence of the pope had prevented people from indulging their tastes for meat).
The demand for fish will be reduced due to a demand shift. The reasoning, and the curves,
will be the same as in 6.a. The price of fish falls.
c. An increase in gasoline taxes lowers the consumption of gasoline.
An increase in gasoline taxes will raise the price of gasoline. Due to the law of downward-
sloping demand, an increase in price will lower the quantity demanded, because of a price
change. Consumption of gasoline will be reduced.
P
Q
S
S
D
D
D'
D'
E
E'
Pri
ce
Quantity
P
Q
D
D
Pri
ce
Quantity
E
E'
-
d. After the Black Death struck Europe in the fourteenth century, wages rose.
The Black Death reduced the supply of labourers (economics has a very dry way of
describing millions of deaths!)
(See 5.d. for a fuller explanation of a decrease in supply)
which will have raised the price of the labourers, i.e. wages rose (if you survived!). Note:
only supply shifted, not demand. Quantity demanded changed because of a price change,
caused by a supply shift altering the equilibrium price.
7. Examine the graph for the price of gasoline in Figure 3-1, page 46. Then, using a supply-
and-demand diagram, illustrate the impact of each of the following on price and
quantity demanded:
P
Q
S
S
D
D
E
E'
Pri
ce
Quantity
S'
S'
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a. Improvements in transportation lower the costs of importing oil into the United
States in the 1960s.
Improvements in transportation reduced the costs of production both improved
technology and reduced input prices. This will have increased the supply of gasoline
(See 5.c. for a fuller explanation of an increase in supply)
which will have lowered the price of gasoline and raised the quantity demanded. This
helps to explain why gasoline prices fell in the 1960s.
b. After the 1973 war, oil producers cut oil production sharply.
A cut in oil production led to a decrease in gasoline supply, as oil is an input to gasoline
and its scarcity would have increased input prices
(See 5.d. for a fuller explanation of a decrease in supply)
P
Q
S
S
D
D
E
E'
Pri
ce
Quantity
S'
S'
P
Q
S
S
D
D
E
E'
Pri
ce
Quantity
S'
S'
-
which would have raised the price and lowered quantity demanded. This helps explain
why gasoline prices rose substantially in the first oil shock after 1973.
(N.B. The price of oil rising due to a cut in its production is also explained in the above
diagram.)
c. After 1980, smaller automobiles get more miles per gallon.
An increase in miles per gallon mean that motorists need less gasoline for their driving.
This reduced the demand for gasoline
(See 5.b. for a fuller explanation of a decrease in demand)
which would have lowered price and lowered quantity demanded. This helps explain
why the gasoline price fell sharply after 1980.
d. A record-breaking cold winter in 1995-1996 unexpectedly raises the demand for
heating oil.
Heating oil is a related good of gasoline; both use oil as an input and will use similar
production techniques it is an alternative output of the production process. If the
demand for heating oil increased
P
Q
S
S
D
D
D'
D'
E
E'
Pri
ce
Quantity
-
(See 5.a. for a fuller explanation of an increase in demand)
its price would have been raised. As the price of heating oil rose, gasoline producers
would have seen that they could have increased their profits if they switched production
away from gasoline and onto heating oil. The supply of gasoline would have been
reduced
(See 5.d. for a fuller explanation of a decrease in supply)
and this would have raised its price and lowered the quantity demanded. This helps to
explain the spike in gasoline price in 1995-1996.
e. A global economic recovery in 1999-2000 leads to a sharp upturn in oil prices.
The global economic recovery would have increased average incomes. People would
choose to take more holidays, buy more goods and services all of which would have
increased the demand for gasoline
P
Q
S
S
D
D
D'
D'
E
E'
Pri
ce
Quantity
P
Q
S
S
D
D
E
E'
Pri
ce
Quantity
S'
S'
-
(See 5.a. for a fuller explanation of an increase in demand)
which would have raised the price and raised the quantity demanded. This helps explain
the rapidly rising gasoline price in the early 2000s.
8. Examine Figure 3-3 on page 49. Does the price-quantity relationship look more like a
supply curve or a demand curve? Assuming that the demand curve was unchanged over
this period, trace supply curves for 1972 and 2000 that would have generated the (P,Q)
pairs for those years. Explain what forces might have led to the shift in the supply curve.
The above chart is downward-sloping so it looks more like a demand curve.
P
Q
S
S
D
D
D'
D'
E
E'P
rice
Quantity
-
Assuming a constant demand curve, the supply curves that would have generated the
(P,Q) pairs would look something like this:
(N.B. The graph uses a logarithmic scale so curves look straight)
The forces that might have led to the shift in the supply curve are:
The technology available to make computers has improved drastically. The amount
of transistors and other devices that can be placed on a given area of silicon has
increased hugely (Moores Law states that transistor density has doubled every two
years). The use of software to design products, and machinery to automate the
production process has increased. The amount of output that can be produced from
a given amount of inputs has increased hugely due to technological advancement
(which the availability of computers has itself driven). This will have increased supply.
Inputs prices will have reduced. Production will have been outsourced to areas where
labour costs are much lower, such as China. Computer components will be cheaper,
due to the same forces of technological advancement and reduced input prices. This
will have increased supply.
Prices of related goods, such as typewriters, will have fallen. This will have increased
supply.
Government policy, for instance in providing funding for research for advanced
technology (often for military purposes) and for technical education, will have
increased the technological advancement that has driven increased supply.
Special influences, such as the spirit of innovation, and the appeal of icons such as
Bill Gates, Steve Jobs and Silicon Valley, has helped increase the supply of talent into
the computing industry. Expectations of future technological advancement, such as
Moores Law, has had an important influence, as has expectations of future demand
Bill Gates vision of A computer on every desk and in every home. These have
helped increase supply.
0.1
1
10
100
1000
0.0001 0.001 0.01 0.1 1 10 100 1000 10000
D
D
S
S
S'
S'
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9. From the following data, plot the supply and demand curves and determine the
equilibrium price and quantity:
Quantity Quantity
Price demanded supplied
($ per box) (pizzas per semester) (pizzas per semester)
10 0 40
8 10 30
6 20 20
4 30 10
2 40 0
0 125 0
Supply and Demand for Pizzas
What would happen if the demand for pizzas tripled at each price? What would occur
if the price were initially set at $4 per pizza?
Plotting the supply and demand schedule given above gives:
We can see that the equilibrium price is $6 per pizza, while the equilibrium quantity is
20 pizzas per semester. Tripling the demand for pizzas at each price:
Quantity Quantity
Price demanded supplied
($ per box) (pizzas per semester) (pizzas per semester)
10 0 40
8 30 30
6 60 20
4 90 10
2 120 0
0 375 0
Supply and Demand for Pizzas
0
2
4
6
8
10
12
0 20 40 60 80 100 120 140
Pri
ce (
$ p
er p
izza
)
Quantity (pizzas per semester)
Supply and Demand for Pizzas
D
DS
S
E
-
The new equilibrium price is $8 per pizza, and the new equilibrium quantity is 30 pizzas
per semester.
If the price was initially set at $4 per pizza (in either case), there will be a shortage of
pizzas (the demand curves are further along the horizontal quantity axis than the supply
curves at this price). There are more pizzas demanded than are being supplied. Queues
will form for pizzas. Consumers will bid up their prices for pizzas in order to obtain the
scarce goods. The increasing price will encourage production and discourage
consumption of pizzas with increasing price, the quantity supplied increases while the
quantity demanded decreases. There will be movement up and along the curves until the
equilibrium price is reached.
0
2
4
6
8
10
12
0 50 100 150 200 250 300 350 400
Pri
ce (
$ p
er p
izza
)
Quantity (pizzas per semester)
Supply and Demand for Pizzas
D, D'
DS
S
E
D'
E'