Supply, Demand, and Equilibrium

… a core topic in Economic Analysis and Atlas102

Topic description

This topic explores the basic microeconomic principles of supply, demand, and market equilibrium.

The treatment of this topic on the Atlas follows almost precisely that in Chapter 2, Supply, Demand, and Equilibrium of the open access Principles of Microeconomics course offered by Tyler Cowen and Alex Tabarrok at the Marginal Revolution University online education platform (http://www.mruniversity.com/courses/principles-economics-microeconomics, accessed 20 April 2016).

Topic learning outcome

Appropriately utilize and interpret results of applying to the analysis of public policy and management problems the basic principles of supply, demand and market equilibrium, including following core concepts.

Core concepts associated with this topic

Budget Constraint Change in Demand vs. Change in Quantity Demanded Change in Supply vs. Change in Quantity Supplied Consumer Surplus

Diminishing Returns Demand Curve Demand Curve Shifts Gains from Trade Marginal Rate of Substitution Market Equilibrium

Normal Good vs. Inferior Good Producer Surplus Supply Curve Supply Curve Shifts

Other (non-core) concepts

These concepts were not used directly in the MRU lessons but have been identified from courses and have short descriptions on the Old Atlas. Some may be added to the core and be elaborated in a page in this Atlas.

Diminishing Marginal Rate of Substitution Diminishing Technical Rate of Substitution Engel Curve Extensive Margin Giffen Good Income Elasticity of Demand

Income Offer Curve Indifference Curve Inferior Good Inverse Demand Function Law of Demand Luxury Good

Necessary GoodNet Demand Ordinary Good Perfect Complements Perfect Substitutes Short Run Industry Supply

Readings

We believe that this topic and its core concepts can be mastered to the MPP/MPA level by watching and re-watching the 71 minutes of MRU course videos listed below (all accessed 20 April 2016) and doing the 28 sample questions associated with these video segments and reproduced at the bottom of this page and repeated on the appropriate concept pages.

Atlas core concept pages above.

The Demand Curve, at http://www.mruniversity.com/courses/principles-economics-microeconomics/demand-curve-shifts-definition (4 minutes).

The Supply Curve, at http://www.mruniversity.com/courses/principles-economics-microeconomics/supply-curve-definition-example (3 minutes).

The Equilibrium Price, at http://www.mruniversity.com/courses/principles-economics-microeconomics/equilibrium-price-supply-demand-example (5 minutes).

A Deeper Look at the Demand Curve, at http://www.mruniversity.com/courses/principles-economics-microeconomics/demand-curve-consumer-surplus-definition (8 minutes).

The Demand Curve Shifts, at http://www.mruniversity.com/courses/principles-economics-microeconomics/demand-curve-shifts (14 minutes).

A Deeper Look at the Supply Curve, at http://www.mruniversity.com/courses/principles-economics-microeconomics/supply-curve-producer-surplus-definition (7 minutes).

The Supply Curve Shifts, at http://www.mruniversity.com/courses/principles-economics-microeconomics/supply-curve-shift (12 minutes).

Exploring Equilibrium, at http://www.mruniversity.com/courses/principles-economics-microeconomics/equilibrium-supply-demand (6 minutes).

Does the Equilibrium Model Work, at http://www.mruniversity.com/courses/principles-economics-microeconomics/does-equilibrium-model-work (8 minutes).

Supply and Demand Terminology, at http://www.mruniversity.com/courses/principles-economics-microeconomics/supply-demand-definition (at 4 minutes).

Textbook readings in MPP and MPA courses 

University of Toronto: PPG-1002

Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 6. New York, NY: WW Norton & Company, 2010. Chapter 6

Carleton Unversity: PADM-5111

Frank, Robert, Ian Parker, and Igela Alger. Microeconomics and Behaviour, 5th Canadian Edition. New York: McGraw-Hill, 2013. Chapters 1 and 2

Harvard Kennedy School: API-101

Pindyck, Robert S. and Daniel L. Rubinfeld. Microeconomics, 8th Edition. Prentice-Hall, 2012. Chapter 1 and 2

NYU Wagner: GP-1018

Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. . Chapter 3

Johnson-Shoyama: JS-805

Krugman, Paul, Robin Wells, and Anthony Myatt. Microeconomics: 1st Canadian Edition. London: Worth Publishers, 2006. Chapters 3 and 5

Ford School of Public Policy: Public Policy 555

Pindyck, Robert S., and D. Rubinfeld. Microeconomics, 7th edition. Upper Saddle River: Patience-Hall, 2007. Chapter 2

George Washington: PPPA-6003

Mankiw, N. Gregory. Principles of Microeconomics, 6th edition. Mason: South-Western College Publishers, 2011. Chapter 2 Appendix and Chapter 4

Wheelan, Charles. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton & Company, 2010. Chapter 1

American: PAUD-630

Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapter 3

UCLA: PLC-201

Goolsbee, Austan, Steven Levitt, and Chad Syverson. Microeconomics. New York:  Worth Publishers, 2013. Chapter 2

Rutgers: Economics in Public Policy

Pindyck, Robert S., and D. Rubinfeld. Microeconomics, 7th edition.  Upper Saddle River: Patience-Hall, 2007. Chapter 1

Concept comprehension questions (from MRU Practice Questions for Chapter 2)

AQ102.02.01. When the price of a good increases the quantity demanded ____.

a. decreases

b. increases

c. stays the same

AQ102.02.02. When will people search harder for substitutes for oil? 

a. when the price of oil is low

b. when the price of oil is high

c. people are not incentivized to search for substitutes for oil

AQ102.02.03. Your roommate just bought an iPod for $200. She would have been willing to pay $500 for a machine that could store and replay that much music. How much consumer surplus does your roommate enjoy from the iPod?

a. $200

b. $300

c. $500

AQ102.02.03. What should happen to the “demand for speed” (measured by the average speed on highways) once airbags are included on cars?

a. The demand for speed increases

b. The demand for speed decreases

c. The demand for speed stays the same

AQ102.02.03. Along a supply curve, if the price of oil falls, what will happen to the quantity of oil supplied?

a. it will decrease

b. it will increase 

c. it will not change

AQ102.02.04. If the price of cars falls, are carmakers likely to make ___________.

a. more cars

b. fewer cars

c. the same amount of cars

AQ102.02.05. The economist Bryan Caplan recently found a pair of $10 arch supports that saved him from the pain of major foot surgery. As he stated on his blog (econlog.econlib.org), he would have been willing to pay $100,000 to fix his foot problem, but instead he only paid a few dollars. How much consumer surplus did Bryan enjoy from this purchase?

a. $10

b. $10,000

c. $99,990 

AQ102.02.06.1 If the sales tax was 5 percent on this product, how much revenue did the government raise when Bryan bought his arch supports?

a. 50 cents

b. $5 

c. $50

AQ102.02.06.2 If the government could have taxed Bryan based on his willingness to pay rather than on how much he actually paid, how much sales tax would Bryan have had to pay?

a. $50

b. $500

c. $5,000

AQ102.02.07. Michael is an economist. He loves being an economist so much that he would do it for a living even if he only earned $30,000 per year. Instead, he earns $80,000 per year. (Note: This is the average salary of new economists with a Ph.D. degree.) How much producer surplus does Michael enjoy?

a. $30,000

b. $50,000

c. $80,000

AQ102.02.08. When supply falls, what happens to quantity demanded in equilibrium?

a. Quantity demanded increases

b. Quantity demanded decreases

c. A change in supply has no effect on quantity demanded

AQ102.02.09.1 If oil executives read in the newspaper that massive new oil supplies have been discovered under the Pacific Ocean but will likely only be useful in 10 years, what is likely to happen to the supply of oil today?

a. The supply of oil will rise today

b. The supply of oil will fall today

c. There will be no change in the supply of oil

AQ102.02.09.2 If oil executives read in the newspaper that new solar-power technologies have been discovered but will likely only become useful in 10 years, what is the likely equilibrium impact on the price and quantity of oil today?

a. The price of oil will increase, the quantity of oil will decrease

b. The price of oil will decrease, the quantity of oil will increase

c. The price and quantity of oil will decrease

d. The price and quantity of oil will increase

AQ102.02.09.3 If we learn today about promising future energy sources, today’s price of energy will _______ and today’s quantity of energy will __________. 

a. rise, fall

b. fall, rise

c. rise, rise

AQ102.02.10. If the price in a market is above the equilibrium price, this creates ___________.

a. a shortage

b. a surplus

c. neither a shortage nor a surplus

AQ102.02.11. When the price is above the equilibrium price, greed (in other words, self-interest) tends to _________.

a. push the price down

b. push the price up

c. have no effect on price

AQ102.02.12. Jon is on eBay, bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, who is Jon competing with?

a. The seller of the graphic novel

b. The other bidders 

c. eBay’s stakeholders

AQ102.02.13. Now, Jon is in Japan, trying to get a job as a full-time translator; he wants to translate English TV shows into Japanese and vice versa. He notices that the wage for translators is very low. Who is the “competition” that is pushing the wage down?

a. Businesses who hire translators

b. Other translators

c. Prospective clients

AQ102.02.14. Jules wants to purchase a Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn’t get many opportunities for tasty burgers). How large are the potential gains from trade if Jules and Vincent agree to make this trade? In other words, what is the sum of producer and consumer surplus if the trade happens?

a. $3

b. $4

c. $5

AQ102.02.15. If the trade takes place at $4, how much producer surplus goes to Vincent? How much consumer surplus goes to Jules?

a. $1 goes to Vincent, $4 goes to Jules

b. $4 goes to Vincent, $1 goes to Jules

c. $2 goes to Vincent, $3 goes to Jules

AQ102.02.16. If the trade takes place at $7, how much producer surplus goes to Vincent? How much consumer surplus goes to Jules?

a. $1 goes to Vincent, $4 goes to Jules

b. $4 goes to Vincent, $1 goes to Jules

c. $2 goes to Vincent, $3 goes to Jules

AQ102.02.17. What happened in Vernon Smith’s lab?

a. The price and quantity were close to equilibrium but gains from trade were far from the maximum.

b. The price and quantity were far from equilibrium and gains from trade were far from the maximum.

c. The price and quantity were far from equilibrium but gains from trade were close to the maximum.

d. The price and quantity were close to equilibrium and gains from trade were close to the maximum.

AQ102.02.18. When demand increases, what happens to price and quantity in equilibrium?

a. Price increases and quantity decreases

b. Price decreases and quantity increases

c. Price and quantity both increase

d. Price and quantity both decrease

AQ102.02.19. When supply increases, what happens to price and quantity in equilibrium?

a. Price increases and quantity decreases

b. Price decreases and quantity increases

c. Price and quantity both increase

d. Price and quantity both decrease

AQ102.02.20. When supply decreases, what happens to price and quantity in equilibrium?

a. Price increases and quantity decreases

b. Price decreases and quantity increases

c. Price and quantity both increase

d. Price and quantity both decrease

AQ102.02.21. When demand decreases, what happens to price and quantity in equilibrium?

a. Price increases and quantity decreases

b. Price decreases and quantity increases

c. Price and quantity both increase

d. Price and quantity both decrease

AQ102.02.22. What’s the best way to think about the rise in oil prices in the 1970s, when wars and oil embargoes wracked the Middle East?

a. A rise in demand

b. A fall in demand

c. A rise in supply

d. A fall in supply

AQ102.02.23. What’s the best way to think about the rise in oil prices in the last 10 years, as China and India have become richer: Was it a rise in demand, a fall in demand, a rise in supply, or a fall in supply?

a. A rise in demand

b. A fall in demand

c. A rise in supply

d. A fall in supply

Page created by: Ian Clark, last modified on 16 May 2016.

Image: Minute 0.37 of MRU Video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/equilibrium-price-supply-demand-example, accessed 19 April 2016.