Chapter 4/The Market Forces of Supply and Demand 51

Chapter 4
The Market Forces of Supply and Demand
WHATS NEW IN THE THIRD EDITION:
This chapter has been completely rearranged and reritten!
LEARNING OBJECTIVES:
By the end of this ch!te"# st$dents sho$%d $nde"stnd:
hat a competiti"e market is!
hat determines the demand for a good in a competiti"e market!
hat determines the supply of a good in a competiti"e market!
ho supply and demand together set the price of a good and the #uantity sold!
the key role of prices in allocating scarce resources in market economies!
CONTE&T AND '(R'OSE:
Chapter 4 is the $rst chapter in a three%chapter se#uence that deals ith supply and
demand and ho markets ork! Chapter 4 shos ho supply and demand for a good
determines both the #uantity produced and the price at hich the good sells! Chapter 5 ill
add precision to the discussion of supply and demand by addressing the concept of elasticity
&the sensiti"ity of the #uantity supplied and #uantity demanded to changes in economic
"ariables! Chapter ' ill address the impact of go"ernment policies on prices and #uantities
in markets!
The purpose of Chapter 4 is to establish the model of supply and demand! The model of
supply and demand is the foundation for the discussion for the remainder of this te(t! For
this reason) time spent studying the concepts in this chapter ill return bene$ts to your
students throughout their study of economics! Many instructors ould argue that this
chapter is the most important chapter in the te(t!
4
T*+ M,-.+T F/-C+S /F
S01123 ,4D D+M,4D
55 Chapter 4/The Market Forces of Supply and Demand
)E* 'OINTS:
1! +conomists use the model of supply and demand to analy6e competiti"e markets! 7n a
competiti"e market) there are many buyers and sellers) each of hom has little or no
in8uence on the market price!
5! The demand cur"e shos ho the #uantity of a good demanded depends on the price!
,ccording to the la of demand) as the price of a good falls) the #uantity demanded
rises! Therefore) the demand cur"e slopes donard!
9! 7n addition to price) other determinants of ho much consumers ant to buy include
income) the prices of substitutes and complements) tastes) e(pectations) and the
number of buyers! 7f one of these factors changes) the demand cur"e shifts!
4! The supply cur"e shos ho the #uantity of a good supplied depends on the price!
,ccording to the la of supply) as the price of a good rises) the #uantity supplied rises!
Therefore) the supply cur"e slopes upard!
5! 7n addition to price) other determinants of ho much producers ant to sell include input
prices) technology) e(pectations) and the number of sellers! 7f one of these factors
changes) the supply cur"e shifts!
'! The intersection of the supply and demand cur"es determines the market e#uilibrium!
,t the e#uilibrium price) the #uantity demanded e#uals the #uantity supplied!
:! The beha"ior of buyers and sellers naturally dri"es markets toard their e#uilibrium!
;hen the market price is abo"e the e#uilibrium price) there is a surplus of the good)
hich causes the market price to fall! ;hen the market price is belo the e#uilibrium
price) there is a shortage) hich causes the market price to rise!
<! To analy6e ho any e"ent in8uences a market) e use the supply%and%demand diagram
to e(amine ho the e"ent a=ects e#uilibrium price and #uantity! To do this e follo
three steps! First) e decide hether the e"ent shifts the supply cur"e or the demand
cur"e >or both?! Second) e decide hich direction the cur"e shifts! Third) e compare
the ne e#uilibrium ith the initial e#uilibrium!
@! 7n market economies) prices are the signals that guide economic decisions and thereby
allocate scarce resources! For e"ery good in the economy) the price ensures that supply
and demand are in balance! The e#uilibrium price then determines ho much of the
good buyers choose to purchase and ho much sellers choose to produce!
CHA'TER O(TLINE:
7! Markets and Competition
,! De$nition of +",et: -"o$! of .$ye"s nd se%%e"s of !"tic$%" -ood
o" se"/ice0
3ou may ant to pro"ide students ith e(amples of markets other than the
traditional retail store or the stock market! These include the classi$ed
ad"ertising section of a nespaper) the college Acareer ser"icesB
department through hich they can look for employment upon graduation)
or the market for mariCuana on a college campus! De sure to list the good
or ser"ice being sold) the buyers) and the sellers in each e(ample!
Chapter 4/The Market Forces of Supply and Demand 59
D! De$nition of co+!etiti/e +",et: +",et in 1hich the"e "e +ny
.$ye"s nd +ny se%%e"s so tht ech hs ne-%i-i.%e i+!ct on the
+",et !"ice0
C! CompetitionE 1erfect and /therise
1! Characteristics of a perfectly competiti"e marketE
a! The goods being o=ered for sale are all the same!
b! The buyers and sellers are so numerous that none can in8uence
the market price!
5! Decause buyers and sellers must accept the market price as gi"en)
they are often called Fprice takers!F
9! 4ot all goods are sold in a perfectly competiti"e market!
a! , market ith only one seller is called a monopoly market!
b! , market ith only a fe sellers is called an oligopoly!
c! , market ith a large number of sellers) each selling a product
that is slightly di=erent from its competitorsG products) is called
monopolistic competition!
D! ;e ill start by studying perfect competition!
77! Demand
,! The Demand Cur"eE The -elationship beteen 1rice and Huantity Demanded
1! De$nition of 2$ntity de+nded: the +o$nt of -ood tht
.$ye"s "e 1i%%in- nd .%e to !$"chse0
5! /ne important determinant of #uantity demanded is the price of the
product!
a! Huantity demanded is negati"ely related to price! This implies
that the demand cur"e is donard sloping!
b! De$nition of %1 of de+nd: the c%i+ tht# othe" thin-s
e2$%# the 2$ntity de+nded of -ood f%%s 1hen the
!"ice of the -ood "ises!
Make sure that you e(plain that) hen e discuss the relationship beteen
#uantity demanded and price) e hold all other "ariables constant! 3ou
ill need to emphasi6e this more than once to ensure that students
understand hy a change in price leads to a mo"ement along the demand
cur"e! Students may $nd the name for this type of market misleading! 3ou ill
ha"e to point out that $rms in a competiti"e market do not face head%to%
head ri"alry as in sports competitions!
54 Chapter 4/The Market Forces of Supply and Demand
9! De$nition of de+nd sched$%e: t.%e tht sho1s the
"e%tionshi! .et1een the !"ice of -ood nd the 2$ntity
de+nded0
'"ice of Ice C"e+
Cone
3$ntity of Cones
De+nded
IJ!JJ 15
J!5J 1J
1!JJ <
1!5J '
5!JJ 4
5!5J 5
9!JJ J
4! De$nition of de+nd c$"/e: -"!h of the "e%tionshi! .et1een
the !"ice of -ood nd the 2$ntity de+nded0
a! 1rice is generally dran on the "ertical a(is!
b! Huantity demanded is represented on the hori6ontal a(is!
;hen you dra the demand cur"e for the $rst time) take the time to plot
each of the points from the demand schedule! This ay) students ho
ha"e diKculty ith graphs can see the relationship beteen the demand
schedule and the demand cur"e! This is a good time to see if students
understand the >() y? coordinate system!
Figure 1
Chapter 4/The Market Forces of Supply and Demand 55
D! Market Demand Lersus 7ndi"idual Demand
1! The market demand is the sum of all of the indi"idual demands for a
particular good or ser"ice!
5! The demand cur"es are summed hori6ontally&meaning that the
#uantities demanded are added up for each le"el of price!
9! The market demand cur"e shos ho the total #uantity demanded of
a good "aries ith the price of the good) holding constant all other
factors that a=ect ho much consumers ant to buy!
C! Shifts in the Demand Cur"e
1! The demand cur"e shos ho much consumers ant to buy at any
price) holding constant the many other factors that in8uence buying
decisions!
5! 7f any of these other factors change) the demand cur"e ill shift!
a! ,n increase in demand can be represented by a shift of the
demand cur"e to the right!
b! , decrease in demand can be represented by a shift of the
demand cur"e to the left!
9! 7ncome
ALTERNATIVE CLASSROO4 E&A4'LE:
*ere is a demand schedule for M5 lead pencilsE
'"ice 3$ntity
De+nded
!J5 1JJJ
!1J <JJ
!15 'JJ
!5J 4JJ
!55 5JJ
Figure 2
Students ha"e a diKcult time understanding the di=erence beteen a
change in price >hich causes a mo"ement along the demand cur"e? and
a change in another determinant >hich shifts the demand cur"e?! 3ou ill
ha"e to emphasi6e hat is meant by Achange in #uantity demandedB and
Achange in demandB se"eral times using di=erent e(amples! The Case
Study on smoking ill help to e(plain this di=erence as ell!
Figure 3
5' Chapter 4/The Market Forces of Supply and Demand
a! The relationship beteen income and #uantity demanded
depends on hat type of good the product is!
b! De$nition of no"+% -ood: -ood fo" 1hich# othe" thin-s
e2$%# n inc"ese in inco+e %eds to n inc"ese in
de+nd0
c! De$nition of infe"io" -ood: -ood fo" 1hich# othe" thin-s
e2$%# n inc"ese in inco+e %eds to dec"ese in
de+nd0
4! 1rices of -elated Noods
a! De$nition of s$.stit$tes: t1o -oods fo" 1hich n inc"ese
in the !"ice of one -ood %eds to n inc"ese in the
de+nd fo" the othe"0
b! De$nition of co+!%e+ents: t1o -oods fo" 1hich n
inc"ese in the !"ice of one -ood %eds to dec"ese in
the de+nd fo" the othe"0
5! Tastes
'! +(pectations
a! Future 7ncome
b! Future 1rices
:! 4umber of Duyers
D! Case Study: Two Ways to Reduce the Quantity of Smoking Demanded
1! 1ublic ser"ice announcements) mandatory health arnings on
cigarette packages) and the prohibition of cigarette ad"ertising on
tele"ision are policies designed to reduce the demand for cigarettes
>and shift the demand cur"e to the left?!
5! -aising the price of cigarettes >through tobacco ta(es? loers the
#uantity of cigarettes demanded!
a! The demand cur"e does not shift in this case) hoe"er!
Figure 4
Table 1
De carefulO Students often confuse inferior goods ith hat economists
call Abads!B /ne ay to di=erentiate them is to ask students hether they
ould e"er be illing to pay for such things as pollution or garbage!
7t ould be a good idea to ork through an e(ample changing each of
these "ariables indi"idually! Students ill bene$t from the discussion as
ell as the practice draing the graphs!
Chapter 4/The Market Forces of Supply and Demand 5:
b! ,n increase in the price of cigarettes can be shon by a
mo"ement along the original demand cur"e!
9! Studies ha"e shon that a 1JP increase in the price of cigarettes
causes a 4P reduction in the #uantity of cigarettes demanded! For
teens a 1JP increase in price leads to a 15P drop in #uantity
demanded!
4! Studies ha"e also shon that a decrease in the price of cigarettes is
associated ith greater use of mariCuana! Thus) it appears that
tobacco and mariCuana are complements!
777! Supply
,! The Supply Cur"eE The -elationship beteen 1rice and Huantity Supplied
1! De$nition of 2$ntity s$!!%ied: the +o$nt of -ood tht
se%%e"s "e 1i%%in- nd .%e to se%%0
a! Huantity supplied is positi"ely related to price!
b! De$nition of %1 of s$!!%y: the c%i+ tht# othe" thin-s
e2$%# the 2$ntity s$!!%ied of -ood "ises 1hen the
!"ice of the -ood "ises0
5! De$nition of s$!!%y sched$%e: t.%e tht sho1s the
"e%tionshi! .et1een the !"ice of -ood nd the 2$ntity
s$!!%ied!
9! De$nition of s$!!%y c$"/e: -"!h of the "e%tionshi! .et1een
the !"ice of -ood nd the 2$ntity s$!!%ied0
7f you ha"e taken enough time teaching demand) students ill catch on to
supply more #uickly! *oe"er) remember that as consumers) students can
understand demand decisions more easily than supply decisions! 3ou may
ant to point out to them that they are suppliers >of their time and e=ort?
in the labor market!
,gain you ill ant to point out that e"erything else is held constant hen
e discuss the relationship beteen price and #uantity supplied! Students
should understand that a change in price causes a mo"ement along the
supply cur"e!
5< Chapter 4/The Market Forces of Supply and Demand
'"ice of Ice C"e+
Cone
3$ntity of Cones
S$!!%ied
IJ!JJ J
J!5J J
1!JJ 1
1!5J 5
5!JJ 9
5!5J 4
9!JJ 5
D! Market Supply Lersus 7ndi"idual Supply
1! The market supply cur"e can be found by summing indi"idual supply
cur"es!
5! 7ndi"idual supply cur"es are summed hori6ontally at e"ery price!
9! The market supply cur"e shos ho the total #uantity supplied "aries
as the price of the good "aries!
Figure 5
Figure 6
Chapter 4/The Market Forces of Supply and Demand 5@
C! Shifts in the Supply Cur"e
1! The supply cur"e shos ho much producers o=er for sale at any
gi"en price) holding constant all other factors that may in8uence
producersG decisions about ho much to sell!
5! ;hen any of these other factors change) the supply cur"e ill shift!
a! ,n increase in supply can be represented by a shift of the
supply cur"e to the right!
b! , decrease in supply can be represented by a shift of the supply
cur"e to the left!
9! 7nput 1rices
4! Technology
5! +(pectations
'! 4umber of Sellers
7L! Supply and Demand Together
,! +#uilibrium
1! The point here the supply and demand cur"es intersect is called the
marketGs e#uilibrium!
5! De$nition of e2$i%i."i$+: sit$tion in 1hich the !"ice hs
"eched the %e/e% 1he"e 2$ntity s$!!%ied e2$%s 2$ntity
de+nded0
Figure 7
Table 2
ALTERNATIVE CLASSROO4 E&A4'LE:
The supply schedule for M5 lead pencils is as follosE
'"ice 3$ntity S$!!%ied
!J5 4JJ
!1J 5JJ
!15 'JJ
!5J :JJ
!55 <JJ
3ou ill ant to take time to emphasi6e the di=erence beteen a Achange
in supplyB and a Achange in #uantity supplied!B
'J Chapter 4/The Market Forces of Supply and Demand
9! De$nition of e2$i%i."i$+ !"ice: the !"ice tht .%nces 2$ntity
s$!!%ied nd 2$ntity de+nded0
4! The e#uilibrium price is often called the Fmarket%clearingF price
because both buyers and sellers are satis$ed at this price!
5! De$nition of e2$i%i."i$+ 2$ntity: the 2$ntity s$!!%ied nd the
2$ntity de+nded t the e2$i%i."i$+ !"ice0
Figure 8
Students ill bene$t from seeing e#uilibrium using both a graph and a
supply%and%demand schedule! The schedule ill make it easier for
students to understand concepts such as shortages and surpluses!
Acti/ity 5 6 A 4",et E7+!%e
Ty!e : 7n%class demonstration
To!ics: 7ndi"idual demand) market demand) e#uilibrium price)
allocation
4te"i%s needed: , bag of 1epperidge Farm cookies >15 cookies?) 5 "olunteers
Ti+e: 95 minutes
C%ss %i+ittions: ;orks in large lectures or small classes ith o"er 15
students
'$"!ose
This is an e(ample of a real orld market) here real goods are e(changed for real
money! 7t is a free market) so there ill be no coercion) but participants should
think carefully about their ansers since actual trades ill take place!
Inst"$ctions
,sk for $"e "olunteers to participate in a market for 1epperidge Farm cookies!
-ead some of the package copy describing these Adistincti"ely deliciousB cookies!
;rite each "olunteerGs name on the board!
,sk the "olunteers ho many cookies they ould be illing to buy at "arious
prices! -ecord these prices and #uantities! Ni"e the "olunteers the opportunity to
re"ise their numbers) if the $gures donGt accurately re8ect their illingness to pay!
-emind them this isnGt a hypothetical e(ercise and they ill ha"e to pay real
money!
,t this point there ill be $"e indi"idual demand cur"es) hich can be graphed if
desired!
,dd the indi"idual #uantities at each price to $nd the market demand at that
price! This o"erall demand is used to $nd the market e#uilibrium! Sketch a graph
of the market demand!
Supply) in this case) is $(ed at the number of cookies in the bag! There are $fteen
cookies! 4o more can be produced) and any lefto"ers ill spoil! This gi"es a
"ertical supply cur"e in the "ery short run at H Q 15! RSketch the supply cur"e!S
Try "arious prices until the indi"idual #uantities sum to 15! This ill gi"e the
e#uilibrium price and #uantity!
Distribute the cookies and collect money from each participant!
'oints fo" disc$ssion
The demand cur"es display the typical in"erse relation beteen price and
#uantity! R-emark on any unusual patterns!S These tell us about each indi"idualGs
illingness%to%pay and re"eal information about the marginal bene$ts of additional
cookies to each consumer!
Market demand is aggregated from indi"idual demand cur"es!
Chapter 4/The Market Forces of Supply and Demand '1
'! 7f the actual market price is higher than the e#uilibrium price) there ill
be a surplus of the good!
a! De$nition of s$"!%$s: sit$tion in 1hich 2$ntity
s$!!%ied is -"ete" thn 2$ntity de+nded0
b! To eliminate the surplus) producers ill loer the price until the
market reaches e#uilibrium!
:! 7f the actual price is loer than the e#uilibrium price) there ill be a
shortage of the good!
Figure 9
'5 Chapter 4/The Market Forces of Supply and Demand
a! De$nition of sho"t-e: sit$tion in 1hich 2$ntity
de+nded is -"ete" thn 2$ntity s$!!%ied0
b! Sellers ill respond to the shortage by raising the price of the
good until the market reaches e#uilibrium!
<! De$nition of the %1 of s$!!%y nd de+nd: the c%i+ tht the
!"ice of ny -ood d8$sts to ."in- the s$!!%y nd de+nd fo"
tht -ood into .%nce0
Acti/ity 9 6 C+!$s '",in-
Ty!e : 7n%class assignment
To!ics: Demand) supply) dise#uilibrium) shortage) rationing
4te"i%s needed: , shortage of student parking on campus
Ti+e: 95 minutes
C%ss %i+ittions: ;orks in large lectures or small classes) if there is a campus
parking problem!
'$"!ose
4othing seems to generate more heated discussion than campus parking! 7f your
school has a parking shortage this assignment brings the ideas of price rationing
and resource allocation to an issue close to the studentsG hearts!
Chapter 4/The Market Forces of Supply and Demand '9
D! Three Steps to ,naly6ing Changes in +#uilibrium
1! Decide hether the e"ent shifts the supply or demand cur"e >or
perhaps both?!
Table 3
,! .! SenGs parable of the bamboo 8ute is a good introduction to this assignmentE
,n artist makes a beautiful instrument that becomes famous throughout the
country! , number of claimants arise) each of hom argues that they deser"e the
8uteE the artist ho created it) the most talented musician) the poorest) most
needy citi6en) the hardest orking musician) etc! ;ho deser"es the 8uteT
Students ill ha"e di=erent opinions on ho is most deser"ing but many ill
accept a market solution&the person ho is illing to pay the most >ho has the
highest marginal bene$t) gi"en the e(isting distribution of ealth and income?!
The allocation of campus parking spots makes a nice parallel!
Inst"$ction
,sk the class to anser the folloing #uestions! Ni"e them time to rite an
anser to a #uestion) then discuss their ansers before mo"ing to the ne(t
#uestion!
Co++on Ans1e"s nd 'oints :o" Disc$ssion
1! ;rite don three things that are true about the parking situation on campus!
5! ;hat to problems do you think are most importantT
The parking problem has to components in the eyes of most students! 1arking
permits are too e(pensi"e and there are too fe spaces!
9! ;hat policies could the administration take to resol"e these problemsT
Students ha"e many policies to alle"iate the situation! The most common
suggestion is to ban parking for freshmen! Freshmen respond ith lists of other
groups ho should be banned! ,nother popular policy ould be to open faculty
lots to student parking! 1arking fees should be loered or better yet eliminated!
1arking "iolations should ha"e loer $nes! More lots should be built! Shuttles)
mo"ing sidealks) and monorails should be installed!
Students ne"er suggest raising prices to reach a market solution!
4! ;ho needs parking the mostT
5! ;ho ould pay the most for parkingT
,sking about need and illingness to pay mo"es the discussion aay from group
prohibitionsU freshmen may be Cust as needy and e#ually able to pay!
'! 0se a supply%and%demand graph to analy6e this problem!
Many students initially ha"e diKculty graphing this problem! They ant to
illustrate that permit prices are too high) but then their graph onGt sho the
shortage! +"entually they can be con"inced that parking) hile e(pensi"e) is
actually priced too lo!
:! *o ould your policy proposals e=ect the market for parkingT
,nalysis of the "arious proposals in a supply and demand frameork shos some
popular policies) like free permits) ould aggra"ate the parking shortage! 1olicies
to restrict demand can reduce the shortage) although there ill be ineKciencies in
the resulting allocation! Duilding more parking lots isnGt a shift in the supply cur"e!
4e construction is an increase in #uantity along the e(isting supply cur"e! The
'4 Chapter 4/The Market Forces of Supply and Demand
5! Decide in hich direction the cur"e shifts!
9! 0se the supply%and%demand diagram to see ho the shift changes the
e#uilibrium price and #uantity!
,! +(ampleE , Change in Demand & the e=ect of hot eather on the market for
ice cream!
This three%step process is "ery important! Students often ant to Cump to
the end ithout thinking the change through! They should be pro"ided
ith numerous e(amples so that they can see the bene$t of analy6ing a
change in e#uilibrium one step at a time!
No through changes in supply and demand carefully! Sho students hy
the e#uilibrium price must change after one of the cur"es shifts! For
e(ample) point out that if demand rises) a shortage ill occur at the
original e#uilibrium price! This leads to an increase in price) hich causes
#uantity supplied to rise and #uantity demanded to fall until e#uilibrium is
achie"ed! The end result is an increase in both the e#uilibrium price and
e#uilibrium #uantity! ,lso point out that an increase in demand leads to an
increase in quantity supplied, not supply!
Figure 10
ALTERNATIVE CLASSROO4 E&A4'LE:
No through these e(amples of e"ents that ould shift either the demand or
supply of M5 lead pencilsE
an increase in the income of consumers
an increase in the use of standardi6ed e(ams >using opscan forms?
a decrease in the price of graphite >used in the production of pencils?
a decrease in the price of ink pens
the start of a school year
ne technology that loers the cost of producing pencils
Acti/ity ; 6 Co%d Sod
Ty!e : 7n%Class demonstration
To!ics: Demand) substitutes) and changing demand
4te"i%s needed: , teaching assistant to tally #uantities
Ti+e: 15 minutes
C%ss %i+ittions: ;orks in large classes
'$"!ose
This acti"ity demonstrates the demand cur"eGs in"erse relation beteen price and
#uantity! Students anser a series of #uestions about their illingness to pay! ,
teaching assistant collects their ansers and then sums their responses) hile the
instructor lectures on other material! To demand cur"es are found from the class
responses) one ith and one ithout a substitute good! These are shared ith the
class!
Inst"$ctions
,sk the students to anser the folloing #uestions! These are hypothetical
#uestionsU no e(change ill actually take place!
1! A,ssume 7 ha"e a cooler of ice%cold 1epsi%Cola! 7f 7 o=ered to sell you a 1epsi
for I1!5J ould you be illing to buy oneT >3es or no?B
5! A7f 7 o=ered to sell you a 1epsi for I1!JJ ould you be illing to buy oneT >3es
or no?B
9! A7f 7 o=ered to sell you a 1epsi for IJ!:5 ould you be illing to buy oneT >3es
or no?B
4! A7f 7 o=ered to sell you a 1epsi for IJ!5J ould you be illing to buy oneT >3es
or no?B
5! A7f 7 o=ered to sell you a 1epsi for IJ!55 ould you be illing to buy oneT >3es
or no?B
'! A4o assume 7 ha"e 5 coolers) one full of ice%cold 1epsi%Cola and one full of
ice%cold Coca%Cola! 7 am going to repeat my o=ers to sell 1epsi) but no
consider the a"ailability of Coke! ,ssume Coke is a"ailable as an alternati"e)
and the price of Coke is alays IJ!:5! 3ou can buy either 1epsi) or Coke) or
nothing!B
:! A7f 7 o=ered to sell you a 1epsi for I1!5J ould you be illing to buy oneT
>,nser V3esGE if you are illing to buy 1epsi! ,nser VnoG if you ould buy the
Coke at IJ!:5 or if you ould buy nothing!?B
<! A7f 7 o=ered to sell you a 1epsi for I1!JJ ould you be illing to buy oneT
>,nser V3esGE if you are illing to buy 1epsi! ,nser VnoG if you ould buy the
Coke at IJ!:5 or if you ould buy nothing!?B
@! A7f 7 o=ered to sell you a 1epsi for IJ!:5 ould you be illing to buy oneT
>,nser V3esGE if you are illing to buy 1epsi! ,nser VnoG if you ould buy the
Coke at IJ!:5 or if you ould buy nothing!?B
1J! A7f 7 o=ered to sell you a 1epsi for IJ!5J ould you be illing to buy oneT
>,nser V3esGE if you are illing to buy 1epsi! ,nser VnoG if you ould buy the
Coke at IJ!:5 or if you ould buy nothing!?B
11! A7f 7 o=ered to sell you a 1epsi for IJ!55 ould you be illing to buy oneT
>,nser V3esGE if you are illing to buy 1epsi! ,nser VnoG if you ould buy the
Coke at IJ!:5 or if you ould buy nothing!?B
Collect the studentsG responses and ha"e your assistant add the number of AyesB
"otes for each #uestion!
'oints fo" Disc$ssion
0se the $rst 5 #uestions to dra a demand cur"e for 1epsi! More students ill be
illing to buy 1epsi as its price decreases!
0se #uestions ' through 1J to dra a second demand cur"e for 1epsi! This
demand cur"e shos the impact of loering the price of a substitute good! >The
price of Coke as essentially in$nite for the $rst #uestions) and it has dropped to
Chapter 4/The Market Forces of Supply and Demand '5
D! Shifts in Cur"es "ersus Mo"ements ,long Cur"es
1! , shift in the demand cur"e is called a Fchange in demand!F , shift in
the supply cur"e is called a Fchange in supply!F
+mphasi6e that students should not think about the cur"es shifting AupB
and AdonB but rather think about the cur"es shifting ArightB and AleftB >or
AoutB and AinB?! 1oint out that an increase in demand >or supply? is an
increase in the #uantity demanded >supplied? at e"ery price! Thus) it is
#uantity that is getting larger! -e"ie the same principle ith a decrease
in demand >or supply?!
'' Chapter 4/The Market Forces of Supply and Demand
5! , mo"ement along a $(ed demand cur"e is called a Fchange in
#uantity demanded!F , mo"ement along a $(ed supply cur"e is called
a Fchange in #uantity supplied!F
+! +(ampleE , Change in Supply & the e=ect of a hurricane that destroys part of
the sugar%cane crop and dri"es up the price of sugar!
F! In the ews: !othe" atu"e Shifts the Supply Cu"#e
1! 4espaper articles about speci$c industries can gi"e students practice
understanding the things that a=ect supply and demand!
5! This is an article from The ew $o"k Times that describes the e=ect of
a free6e on the citrus market!
N! +(ampleE , Change in Doth Supply and Demand&the e=ect of both hot
eather and an earth#uake hich destroys se"eral ice cream factories on the
market for ice cream!
*! Summary
1! ;hen an e"ent shifts the supply or demand cur"e) e can e(amine the
e=ects on the e#uilibrium price and #uantity!
5! Table 4 reports the end results of these shifts in supply and demand!
7t ould helpful to students if you dre all four graphs >increase in
demand) decrease in demand) increase in supply) and decrease in supply?
on the board at the same time! Students ill be able to see that the end
result of each of these four shifts is uni#ue! 1oint out to students that they
can use these graphs to e(plain e"ents going on in markets around them!
For e(ample) point out changes in gasoline prices seen during the past
se"eral years! Then ask students hat could ha"e led to these changes in
price! Make sure that they reali6e that they ould need to kno the e=ect
on e#uilibrium #uantity to determine the ultimate cause!
Figure 11
Make sure that you e(plain to students that to possible outcomes might
result) depending on the relati"e si6es of the shifts in the demand and
supply cur"es! Thus) if they do not kno the relati"e si6es of these shifts)
the end e=ect on either e#uilibrium price or e#uilibrium #uantity ill be
ambiguous! Teach students to take each change one at a time and to dra
them on separate graphs!
Figure 12
Table 4
Acti/ity < 6 S$!!%y nd De+nd A"tic%e
Ty!e : Take%home assignment
To!ics: Shifts in supply or demand) changing e#uilibrium
C%ss %i+ittions: ;orks in any class
'$"!ose
This assignment is an e(cellent discriminator! Students ho ha"e diKculty ith it
often need remedial help! ,lloing students to correct errors and then resubmit
the assignment can be orthhile since it is fundamental to their understanding
of ho markets ork!
Inst"$ctions
Ni"e the students the folloing assignmentE
Find an article in a recent nespaper or maga6ine illustrating a change in price or
#uantity in some market! ,naly6e the situation using economic reasoning!
1! *as there been an increase or decrease in demandT Factors that could shift
the demand cur"e include changes in preferences) changes in income)
changes in the price of substitutes or complements) or changes in the
number of consumers in the market!
5! *as there been an increase or decrease in supplyT Factors that could shift
the supply cur"e include changes in costs of materials) ages) or other
inputsU changes in technologyU or changes in the number of $rms in the
market!
9! Dra a supply%and%demand graph to e(plain this change! De sure to label
your graph and clearly indicate hich cur"e shifts!
,sk students to turn in a copy of the article along ith their e(planation! ;arn
students to a"oid ad"ertisements since they contain little information! They
should be ary of commodity and $nancial markets unless they ha"e a good
understanding of the particular market! Markets for ordinary goods and ser"ices
are most easily analy6ed!
'oints fo" Disc$ssion
Most changes ill only shift one cur"e&either supply or demand&not both!
-emind students that price changes ill not cause either cur"e to shift! >Dut
shifting either cur"e ill change price!?
+#uilibrium points are not $(ed! They change hen supply or demand changes!
1rices ill not necessarily return to pre"ious le"els nor ill #uantities!
-emind the class of the fundamental relationsE
1! 7ncreases in demand cause price and #uantity to increase!
5! 7ncreases in supply cause price to decrease and #uantity to increase!
9! Decreases in demand cause decreases in price and #uantity!
4! Decreases in supply cause price increases and #uantity decrease!
Chapter 4/The Market Forces of Supply and Demand ':
L! ConclusionE *o 1rices ,llocate -esources
,! The model of supply and demand is a poerful tool for analy6ing markets!
D! Supply and demand together determine the price of the economyGs goods and
ser"ices!
1! These prices ser"e as signals that guide the allocation of scarce
resources in the economy!
'< Chapter 4/The Market Forces of Supply and Demand
5! 1rices determine ho produces each good and ho much of each good
is produced!
SOL(TIONS TO TE&T 'ROBLE4S:
3$ic, 3$i==es
1! , market is a group of buyers >ho determine demand? and a group of sellers >ho
determine supply? of a particular good or ser"ice! , competiti"e market is one in
hich there are many buyers and many sellers of an identical product so that each
has a negligible impact on the market price!
5! *ereGs an e(ample of a demand schedule for pi66aE
'"ice of 'i== S%ice N$+.e" of 'i== S%ices
De+nded
I J!JJ 1J
J!55 @
J!5J <
J!:5 :
1!JJ '
1!55 5
1!5J 4
1!:5 9
5!JJ 5
5!55 1
5!5J J
The demand cur"e is graphed in Figure 1!
Make a big deal about ho ell prices ser"e to allocate resources to their
highest "alued uses! For e(ample) suppose that consumers de"elop an
increased taste for corn and corn products! This leads to an increase in
the demand for corn) pushing the price up! This increased price pro"ides
incenti"es to producers to produce more corn! Thus) it is price that signals
our ants and desires! This is one reason hy markets are generally the
best ay to organi6e economic acti"ity!
Chapter 4/The Market Forces of Supply and Demand '@

:i-$"e 5
+(amples of things that ould shift the demand cur"e include changes in income)
prices of related goods like soda or hot dogs) tastes) e(pectations about future
income or prices) and the number of buyers!
, change in the price of pi66a ould not shift this demand cur"eU it ould only lead
us to mo"e from one point to another along the same demand cur"e!
9! *ere is an e(ample of a supply schedule for pi66aE
'"ice of 'i== S%ice N$+.e" of 'i== S%ices
S$!!%ied
I J!JJ J
J!55 1JJ
J!5J 5JJ
J!:5 9JJ
1!JJ 4JJ
1!55 5JJ
1!5J 'JJ
1!:5 :JJ
5!JJ <JJ
5!55 @JJ
5!5J 1JJJ
The supply cur"e is graphed in Figure 5!
:J Chapter 4/The Market Forces of Supply and Demand
:i-$"e 9
+(amples of things that ould shift the supply cur"e include changes in prices of
inputs like tomato sauce and cheese) changes in technology like more eKcient pi66a
o"ens or automatic dough makers) changes in e(pectations about the future price of
pi66a) or a change in the number of sellers!
, change in the price of pi66a ould not shift this supply cur"eU it ould only mo"e
from one point to another along the same supply cur"e!
4! 7f the price of tomatoes rises) the supply cur"e for pi66a shifts to the left because of
the increased price of an input into pi66a production) but there is no e=ect on
demand! The shift to the left of the supply cur"e causes the e#uilibrium price to rise
and the e#uilibrium #uantity to decline) as Figure 9 shos!
7f the price of hamburgers falls) the demand cur"e for pi66a shifts to the left because
the loer price of hamburgers ill lead consumers to buy more hamburgers and less
pi66a) but there is no e=ect on supply! The shift to the left of the demand cur"e
causes the e#uilibrium price to fall and the e#uilibrium #uantity to decline) as Figure
4 shos!
Chapter 4/The Market Forces of Supply and Demand :1
:i-$"e ;

:i-$"e <
3$estions fo" Re/ie1
1! , competiti"e market is a market in hich there are many buyers and many sellers of
an identical product so that each has a negligible impact on the market price! /ther
types of markets include monopoly) in hich there is only one seller) oligopoly) in
hich there are a fe sellers that do not alays compete aggressi"ely) and
:5 Chapter 4/The Market Forces of Supply and Demand
monopolistically competiti"e markets) in hich there are many sellers) each o=ering
a slightly di=erent product!
5! The #uantity of a good that buyers demand is determined by the price of the good)
income) the prices of related goods) tastes) e(pectations) and the number of buyers!
9! The demand schedule is a table that shos the relationship beteen the price of a
good and the #uantity demanded! The demand cur"e is the donard%sloping line
relating price and #uantity demanded! The demand schedule and demand cur"e are
related because the demand cur"e is simply a graph shoing the points in the
demand schedule!
The demand cur"e slopes donard because of the la of demand&other things
e#ual) hen the price of a good rises) the #uantity demanded of the good falls!
1eople buy less of a good hen its price rises) both because they cannot a=ord to
buy as much and because they sitch to purchasing other goods!
4! , change in consumersW tastes leads to a shift of the demand cur"e! , change in
price leads to a mo"ement along the demand cur"e!
5! Since 1opeye buys more spinach hen his income falls) spinach is an inferior good for
him! Since he buys more spinach) but the price of spinach is unchanged) his demand
cur"e for spinach shifts out as a result of the decrease in his income!
'! The #uantity of a good that sellers supply is determined by the price of the good)
input prices) technology) e(pectations) and the number of sellers!
:! , supply schedule is a table shoing the relationship beteen the price of a good
and the #uantity a producer is illing and able to supply! The supply cur"e is the
upard%sloping line relating price and #uantity supplied! The supply schedule and
the supply cur"e are related because the supply cur"e is simply a graph shoing the
points in the supply schedule!
The supply cur"e slopes upard because hen the price is high) suppliersW pro$ts
increase) so they supply more output to the market! The result is the la of supply&
other things e#ual) hen the price of a good rises) the #uantity supplied of the good
also rises!
<! , change in producersW technology leads to a shift in the supply cur"e! , change in
price leads to a mo"ement along the supply cur"e!
@! The e#uilibrium of a market is the point at hich the #uantity demanded is e#ual to
#uantity supplied! 7f the price is abo"e the e#uilibrium price) sellers ant to sell more
than buyers ant to buy) so there is a surplus! Sellers try to increase their sales by
cutting prices! That continues until they reach the e#uilibrium price! 7f the price is
belo the e#uilibrium price) buyers ant to buy more than sellers ant to sell) so
there is a shortage! Sellers can raise their price ithout losing customers! That
continues until they reach the e#uilibrium price!
1J! ;hen the price of beer rises) the demand for pi66a declines) because beer and pi66a
are complements and people ant to buy less beer! ;hen e say the demand for
pi66a declines) e mean that the demand cur"e for pi66a shifts to the left as in Figure
5! The supply cur"e for pi66a is not a=ected! ;ith a shift to the left in the demand
cur"e) the e#uilibrium price and #uantity both decline) as the $gure shos! Thus the
#uantity of pi66a supplied and demanded both fall! 7n sum) supply is unchanged)
Chapter 4/The Market Forces of Supply and Demand :9
demand is decreased) #uantity supplied declines) #uantity demanded declines) and
the price falls!
:i-$"e >
11! 1rices play a "ital role in market economies because they bring markets into
e#uilibrium! 7f the price is di=erent from its e#uilibrium le"el) #uantity supplied and
#uantity demanded are not e#ual! The resulting surplus or shortage leads suppliers
to adCust the price until e#uilibrium is restored! 1rices thus ser"e as signals that
guide economic decisions and allocate scarce resources!
'"o.%e+s nd A!!%ictions
1! a! Cold eather damages the orange crop) reducing the supply of oranges! This
can be seen in Figure ' as a shift to the left in the supply cur"e for oranges!
The ne e#uilibrium price is higher than the old e#uilibrium price!
:i-$"e ?
b! 1eople often tra"el to the Caribbean from 4e +ngland to escape cold
:4 Chapter 4/The Market Forces of Supply and Demand
eather) so demand for Caribbean hotel rooms is high in the inter! 7n the
summer) feer people tra"el to the Caribbean) since northern climes are more
pleasant! The result) as shon in Figure :) is a shift to the left in the demand
cur"e! The e#uilibrium price of Caribbean hotel rooms is thus loer in the
summer than in the inter) as the $gure shos!
:i-$"e @
c! ;hen a ar breaks out in the Middle +ast) many markets are a=ected! Since
much oil production takes place there) the ar disrupts oil supplies) shifting
the supply cur"e for gasoline to the left) as shon in Figure <! The result is a
rise in the e#uilibrium price of gasoline! ;ith a higher price for gasoline) the
cost of operating a gas%gu66ling automobile) like a Cadillac) ill increase! ,s a
result) the demand for used Cadillacs ill decline) as people in the market for
cars ill not $nd Cadillacs as attracti"e! 7n addition) some people ho already
on Cadillacs ill try to sell them! The result is that the demand cur"e for
used Cadillacs shifts to the left) hile the supply cur"e shifts to the right) as
shon in Figure @! The result is a decline in the e#uilibrium price of used
Cadillacs!
:i-$"e A :i-$"e B
Chapter 4/The Market Forces of Supply and Demand :5
5! The statement that Fan increase in the demand for notebooks raises the #uantity of
notebooks demanded) but not the #uantity supplied)F in general) is false! ,s Figure
1J shos) the increase in demand for notebooks results in an increased #uantity
supplied! The only ay the statement ould be true is if the supply cur"e as a
"ertical line) as shon in Figure 11!
:i-$"e 5C
:i-$"e 55
:' Chapter 4/The Market Forces of Supply and Demand
9! a! 7f people decide to ha"e more children >a change in tastes?) they ill ant
larger "ehicles for hauling their kids around) so the demand for mini"ans ill
increase! Supply onWt be a=ected! The result is a rise in both price and
#uantity) as Figure 15 shos!
:i-$"e 59
b! 7f a strike by steelorkers raises steel prices) the cost of producing a mini"an
rises >a rise in input prices?) so the supply of mini"ans decreases! Demand
onWt be a=ected! The result is a rise in the price of mini"ans and a decline in
the #uantity) as Figure 19 shos!
Chapter 4/The Market Forces of Supply and Demand ::
:i-$"e 5;
c! The de"elopment of ne automated machinery for the production of mini"ans
is an impro"ement in technology! The reduction in $rmsW costs results in an
increase in supply! Demand isnWt a=ected! The result is a decline in the price
of mini"ans and an increase in the #uantity) as Figure 14 shos!
:i-$"e 5<
d! The rise in the price of sport utility "ehicles a=ects mini"an demand because
sport utility "ehicles are substitutes for mini"ans >that is) there is a rise in the
price of a related good?! The result is an increase in demand for mini"ans!
Supply is not a=ected! 7n e#uilibrium) the price and #uantity of mini"ans both
rise) as Figure 15 shos!
e! The reduction in peoplesW ealth caused by a stock%market crash reduces their
income) leading to a reduction in the demand for mini"ans) since mini"ans are
likely a normal good! Supply isnGt a=ected! ,s a result) both price and
#uantity decline) as Figure 15 shos!
:< Chapter 4/The Market Forces of Supply and Demand
:i-$"e 5>
4! Technological ad"ances that reduce the cost of producing computer chips represent a
decline in an input price for producing a computer! The result is a shift to the right in
the supply of computers) as shon in Figure 1'! The e#uilibrium price falls and the
e#uilibrium #uantity rises) as the $gure shos!
:i-$"e 5?
Since computer softare is a complement to computers) the loer e#uilibrium price
of computers increases the demand for softare! ,s Figure 1: shos) the result is a
rise in both the e#uilibrium price and #uantity of softare!
:i-$"e 5@
Chapter 4/The Market Forces of Supply and Demand :@
Since typeriters are substitutes for computers) the loer e#uilibrium price of
computers reduces the demand for typeriters! ,s Figure 1< shos) the result is a
decline in both the e#uilibrium price and #uantity of typeriters!
:i-$"e 5A
5! a! ;hen a hurricane in South Carolina damages the cotton crop) it raises input
prices for producing seatshirts! ,s a result) the supply of seatshirts shifts
to the left) as shon in Figure 1@! The ne e#uilibrium has a higher price and
loer #uantity of seatshirts!
:i-$"e 5B
<J Chapter 4/The Market Forces of Supply and Demand
b! , decline in the price of leather Cackets leads more people to buy leather
Cackets) reducing the demand for seatshirts! The result) shon in Figure 5J)
is a decline in both the e#uilibrium price and #uantity of seatshirts!
:i-$"e 9C
c! The e=ects of colleges re#uiring students to engage in morning calisthenics in
appropriate attire raises the demand for seatshirts) as shon in Figure 51!
The result is an increase in both the e#uilibrium price and #uantity of
seatshirts!
:i-$"e 95
Chapter 4/The Market Forces of Supply and Demand <1
d! The in"ention of ne knitting machines increases the supply of seatshirts!
,s Figure 55 shos) the result is a reduction in the e#uilibrium price and an
increase in the e#uilibrium #uantity of seatshirts!
:i-$"e 99
'! , temporarily high birth rate in the year 5JJ5 leads to opposite e=ects on the price of
babysitting ser"ices in the years 5J1J and 5J5J! 7n the year 5J1J) there are more 5%
year olds ho need sitters) so the demand for babysitting ser"ices rises) as shon in
Figure 59! The result is a higher price for babysitting ser"ices in 5J1J! *oe"er) in
the year 5J5J) the increased number of 15%year olds shifts the supply of babysitting
ser"ices to the right) as shon in Figure 54! The result is a decline in the price of
babysitting ser"ices!
:i-$"e 9; :i-$"e 9<
<5 Chapter 4/The Market Forces of Supply and Demand
:! Since ketchup is a complement for hot dogs) hen the price of hot dogs rises) the
#uantity demanded of hot dogs falls) thus reducing the demand for ketchup) causing
both price and #uantity of ketchup to fall! Since the #uantity of ketchup falls) the
demand for tomatoes by ketchup producers falls) so both price and #uantity of
tomatoes fall! ;hen the price of tomatoes falls) producers of tomato Cuice face loer
input prices) so the supply cur"e for tomato Cuice shifts out) causing the price of
tomato Cuice to fall and the #uantity of tomato Cuice to rise! The fall in the price of
tomato Cuice causes people to substitute tomato Cuice for orange Cuice) so the
demand for orange Cuice declines) causing the price and #uantity of orange Cuice to
fall! 4o you can see clearly hy a rise in the price of hot dogs leads to a fall in price
of orange CuiceO
:i-$"e 9>
<! a! Cigars and cheing tobacco are substitutes for cigarettes) since a higher price
for cigarettes ould increase the demand for cigars and cheing tobacco!
b! ,n increase in the ta( on cigarettes leads to increased demand for cigars and
cheing tobacco! The result) as shon in Figure 55 for cigars) is a rise in both
the e#uilibrium price and #uantity of cigars and cheing tobacco!
c! The results in part >b? shoed that a ta( on cigarettes leads people to
substitute cigars and cheing tobacco for cigarettes hen the ta( on
cigarettes rises! To reduce total tobacco usage) policymakers might also ant
to increase the ta( on cigars and cheing tobacco) or pursue some type of
public education program!
@! Huantity supplied e#uals #uantity demanded at a price of I' and #uantity of <1
pi66as >Figure 5'?! 7f price ere greater than I') #uantity supplied ould e(ceed
#uantity demanded) so suppliers ould reduce their price to gain sales! 7f price ere
less than I') #uantity demanded ould e(ceed #uantity supplied) so suppliers could
raise their price ithout losing sales! 7n both cases) the price ould continue to
adCust until it reached I') the only price at hich there is neither a surplus nor a
shortage!
Chapter 4/The Market Forces of Supply and Demand <9
:i-$"e 9?
1J! a! 7f the price of 8our falls) since 8our is an ingredient in bagels) the supply cur"e
for bagels ould shift to the right! The result) shon in Figure 5:) ould be a
fall in the price of bagels and a rise in the e#uilibrium #uantity of bagels!
:i-$"e 9@
Since cream cheese is a complement to bagels) the fall in the e#uilibrium
price of bagels increases the demand for cream cheese) as shon in Figure
5<! The result is a rise in both the e#uilibrium price and #uantity of cream
cheese! So) a fall in the price of 8our indeed raises both the e#uilibrium price
of cream cheese and the e#uilibrium #uantity of bagels!
<4 Chapter 4/The Market Forces of Supply and Demand
:i-$"e 9A
;hat happens if the price of milk fallsT Since milk is an ingredient in cream
cheese) the fall in the price of milk leads to an increase in the supply of cream
cheese! This leads to a decrease in the price of cream cheese >Figure 5@?)
rather than a rise in the price of cream cheese! So a fall in the price of milk
could not ha"e been responsible for the pattern obser"ed!
:i-$"e 9B
b! 7n part >a?) e found that a fall in the price of 8our led to a rise in the price of
cream cheese and a rise in the e#uilibrium #uantity of bagels! 7f the price of
8our rose) the opposite ould be trueU it ould lead to a fall in the price of
Chapter 4/The Market Forces of Supply and Demand <5
cream cheese and a fall in the e#uilibrium #uantity of bagels! Since the
#uestion says the e#uilibrium price of cream cheese has risen) it could not
ha"e been caused by a rise in the price of 8our!
;hat happens if the price of milk risesT From part >a?) e found that a fall in
the price of milk caused a decline in the price of cream cheese) so a rise in the
price of milk ould cause a rise in the price of cream cheese! Since bagels
and cream cheese are complements) the rise in the price of cream cheese
ould reduce the demand for bagels) as Figure 9J shos! The result is a
decline in the e#uilibrium #uantity of bagels! So a rise in the price of milk
does cause both a rise in the price of cream cheese and a decline in the
e#uilibrium #uantity of bagels!
:i-$"e ;C
<' Chapter 4/The Market Forces of Supply and Demand
11! a! ,s Figure 91 shos) the supply cur"e is "ertical! The constant #uantity
supplied makes sense because the basketball arena has a $(ed number of
seats no matter hat the price!
:i-$"e ;5
b! Huantity supplied e#uals #uantity demanded at a price of I<! The e#uilibrium
#uantity is <)JJJ tickets!
c!
'"ice 3$ntity De+nded 3$ntity S$!!%ied
I 4 14)JJJ <)JJJ
< 11)JJJ <)JJJ
15 <)JJJ <)JJJ
1' 5)JJJ <)JJJ
5J 5)JJJ <)JJJ
The ne e#uilibrium price ill be I15) hich e#uates #uantity demanded to
#uantity supplied! The e#uilibrium #uantity is <)JJJ tickets!
Chapter 4/The Market Forces of Supply and Demand <:
15! The e(ecuti"es are confusing changes in demand ith changes in #uantity
demanded! Figure 95 shos the demand cur"e prior to the marketing campaign >D1?)
and after the campaign >D5?! The marketing campaign increased the demand for
champagne) as shon) leading to a higher e#uilibrium price and #uantity! The
in8uence of the higher price on demand is already re8ected in the outcome! 7t is
impossible for the scenario outlined by the e(ecuti"es to occur!
:i-$"e ;9
19! +#uilibrium occurs here #uantity demanded is e#ual to #uantity supplied! ThusE
Q
d
Q Q
s

1)'JJ X 9JJ1 Q 1)4JJ Y :JJ1
5JJ Q 1)JJJ1
1 Q IJ!5J
Q
d
Q 1)'JJ X 9JJ>J!5J? Q 1)'JJ X 'J Q 1)54J
Q
s
Q 1)4JJ Y :JJ>J!5J? Q 1)4JJ Y 14J Q 1)54J!
The e#uilibrium price of a chocolate bar is IJ!5J and the e#uilibrium #uantity is 1)54J
bars!
14! , perfectly competiti"e market is a market here there are many buyers and sellers
of an identical product! 4o buyer or seller has the ability to in8uence the price of the
product!
4o) ice cream is probably not a "ery good e(ample of a perfectly competiti"e market!
+ach competitor sells a product that may taste di=erently or may come in a di=erent
"ariety of 8a"ors! The market for ice cream is better characteri6ed as a
monopolistically competiti"e market!