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CHAPTER 3
Demand, Supply, and Market Equilibrium
A. Short-Answer, Essays, and Problems
1. Explain what is meant by a competitive market.
2. Define “demand.”
3. State the law of demand and explain why the other-things-equal assumption is critical to it.
4. Give three explanations for the law of demand.
5. Sue’s Shoe Shop is having a sale on shoes. The first pair of shoes is full price, the second is 25% off, and
the third is 50% off. Describe how this sale relates to individual demand and marginal utility.
6. Suppose a producer sells 1000 units of a product at $5 per unit one year, 2000 units at $8 the next year, and
3000 units at $10 the third year. Is this evidence that the law of demand is violated? Explain.
7. Suppose the price of beef fell dramatically as the price of feed grain decreased. Use the income effect and
the substitution effect to explain why there was an increase in the quantity of beef purchased.
8. The demand schedules of three individuals (Tom, Dick, and Harry) are shown. If they are the only three
buyers of DVDs, complete the market demand schedule for DVDs. Graphically, is the market demand for
a product the horizontal or vertical sum of the individual demand schedules?
Quantity demanded,
DVDs
Price
Tom
Dick
Harry
Total
$15.00
1
4
0
_____
13.00
3
5
1
_____
11.00
6
6
5
_____
9.00
10
7
10
_____
7.00
15
8
16
_____
9. List five basic determinants of market demand that could cause demand to decrease.
10. List five basic determinants of market demand that could cause demand to increase.
11. Differentiate between a normal (superior) and an inferior good.
12. Explain how the prices of related goods also affect demand.
13. Give examples of two substitute goods and two complementary goods. In each case explain why the goods
are substitutes or complements.
14. What effect should each of the following have upon the demand for DVDs in a competitive market?
Explain your reasoning in each case.
15. Evaluate how the following situations will affect the demand curve for iPods.
16. What effect should each of the following have on the demand for gasoline in a competitive market? State
what happens to demand. Explain your reasoning in each case and relate it to a demand determinant.
17. What is the difference between a change in demand and a change in quantity demanded?
18. Define “supply.”
19. Describe and give a reason for the law of supply.
20. List six basic determinants of market supply.
21. Newspaper item: “Due to lower grain prices, consumers can expect retail prices of choice beef to begin
dropping slightly this spring with pork becoming cheaper after midsummer,” the Agriculture Department
predicted. “This reflects increasing supply,” the department said. Does the statement use the term
“supply” correctly? What effects might this announcement have on consumer demand? Explain.
22. Suppose the U.S. Congress is considering passing an excise tax that would increase the price of a pack of
cigarettes by $1.00. What would be the likely effect of this change on the demand and supply of cigarettes?
What is likely to happen to cigarette prices and the quantity consumed if the tax bill is enacted?
23. What is the difference between a change in supply and a change in quantity supplied?
24. What effect will each of the following have upon the supply of television sets in a competitive market?
Explain your reasoning in each case.
25. What effect will each of the following most likely have on the supply of corn in a competitive market?
State what happens to supply. Explain your reasoning in each case and relate it to a supply determinant.
26. Economist Jones defines an increase in supply as a decrease in the prices needed to ensure various amounts
of a good being offered for sale. Economist Brown defines an increase in supply as an increase in the
amounts that producers will offer at various possible prices. Economist Cole defines an increase in supply
as an increase in the amount firms will offer in the market which is caused by an increase in the price of the
product. Which, if any, of these is defining an increase in supply correctly? Explain.
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27. Assuming no government intervention, describe the market behavior that should result if the price of a
product is below its equilibrium price; then describe the behavior that should occur if the price is above its
equilibrium price.
28. Describe in words how one can recognize the market equilibrium point in a graph of a demand schedule
and a supply schedule.
29. Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes
and indicate for each axis the units being used to measure price and quantity. Then answer the questions.
Price
Quantity demanded
(bushels of oats)
Quantity supplied
(bushels of oats)
$1.50
10,000
40,000
1.40
15,000
35,000
1.30
20,000
30,000
1.20
25,000
25,000
1.10
30,000
20,000
1.00
35,000
15,000
(a) Give the equilibrium price and quantity for oats.
(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the
supply and demand curves to the price and quantity axes.
(c) If the Federal government decided to support the price of oats at $1.40 per bushel, tell whether there
would be a surplus or shortage and how much it would be.
(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as
the shortage or surplus.
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30. Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes
and indicate for each axis the units being used to measure price and quantity. Then answer the questions.
Price
Quantity demanded
(bushels of wheat)
Quantity supplied
(bushels of wheat)
$4.20
125,000
230,000
4.00
150,000
220,000
3.80
175,000
210,000
3.60
200,000
200,000
3.40
225,000
190,000
3.20
250,000
180,000
3.00
275,000
170,000
(a) Give the equilibrium price and quantity for wheat.
(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the
supply and demand curves to the price and quantity axes.
(c) If the Federal government decided to support the price of wheat at $4.00 per bushel, tell whether there
would be a surplus or shortage and how much it would be.
(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as
the shortage or surplus.
31. Is demand more important than supply in determining equilibrium price and quantity in a competitive
market? Explain.
32. (Consider This) Depict graphically, then discuss the change in equilibrium for the following situation: Uber
experiences increased demand for ride-sharing services during New York’s New Year’s Eve Celebration.
33. (Consider This) Graphically analyze the effect of Uber entering into the market for taxi services. In most
cities taxi drivers face fixed fares and are unable to adjust their price. Discuss the effect this will have on
34. What is productive efficiency and how does it differ from allocative efficiency?
35. What are the conditions necessary to produce neither an “underallocation” nor “overallocation” of
resources?
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36. In the space below each of the following, indicate the effect [increase (+), decrease (−)] on equilibrium
price (P) and equilibrium quantity (Q) of each of these changes in demand and/or supply.
P Q
(a) Increase in demand, supply constant ________ ________
(b) Increase in supply, demand constant ________ ________
(c) Decrease in demand, supply constant ________ ________
(d) Decrease in supply, demand constant ________ ________
37. In the spaces below each of the following, indicate the [increase (+), decrease (−), or indeterminant (?)]
on equilibrium price (P) and equilibrium quantity (Q) of each of these changes in demand and/or supply.
P Q
(a) Increase in demand, increase in supply ________ ________
(b) Increase in demand, decrease in supply ________ ________
(c) Decrease in demand, decrease in supply ________ ________
(d) Decrease in demand, increase in supply ________ ________.
38. In each case below, indicate the effect [increase (+); decrease (−); indeterminant (ind)] upon equilibrium
price (P) and equilibrium quantity (Q) and illustrate the change graphically. Where you believe the effect
is indeterminant, two graphical illustrations may be necessary to demonstrate your point.
P Q
(a) Increase in demand, supply constant ________ ________
(b) Decrease in supply, demand constant ________ ________
(c) Decrease in demand, decrease in supply ________ ________
(d) Decrease in demand, increase in supply ________ ________
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39. Given the products below and the events that affect them, indicate what happens to demand or supply, and
the equilibrium price and quantity in a competitive market. Identify the determinant of demand or supply
that causes the shift.
40. Given the products below and the events that affect them, indicate what happens to demand or supply, and
the equilibrium price and quantity in a competitive market. Identify the determinant of demand or supply
that causes the shift.
41. Given the products below and the events that affect them, indicate what happens to demand, supply,
equilibrium quantity, and equilibrium price in a competitive market. Identify the determinant of demand
and supply that causes the shifts.
42. Given the products below and the events that affect them, indicate what happens to demand, supply,
equilibrium quantity, and equilibrium price in a competitive market. Identify the determinant of demand
and supply that causes the shifts.
43. (Consider This) Suppose a salsa manufacturers sells 1 million bottles of salsa at $4 a bottle in year 1; 2
million bottles at $5 in year 2; and 3 million bottles at $6 in year 3. Do these data show that the law of
demand does not hold? Explain.
44. What is a price ceiling and what are its economic effects?
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45. Use data in the table below to explain the economic effects of a price ceiling at $6, at $5, and at $4.
Price
Quantity
demanded
Quantity
supplied
$7.00
4500
4500
6.00
5000
3500
5.00
5500
2500
4.00
6000
1500
46. Use economic analysis to explain why tenants in New York City who are covered by rent-controlled laws
47. The city government recently implemented a price ceiling on the amount landlords can charge for rent.
Your friend then complains “This will decrease the quantity of apartments supplied.” Evaluate this
48. What is a price floor and what are its economic effects?
49. In the debate over passing a bill providing a minimum guaranteed price for corn, a congressman argued,
“Minimum guaranteed prices always cause a disruption of the natural equilibrium of a market, ultimately
50. Use data in the following table to explain the economic effects of a price floor at $8, at $9, and at $10.
Explain the economic effects.
Price
Quantity
demanded
Quantity
supplied
$10.00
3000
7500
9.00
3500
6500
8.00
4000
5500
7.00
4500
4500
51. “Government–set prices undermine the rationing function of competitive prices.” Explain carefully in
terms of both price ceilings and price floors.
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52. Answer the following questions based on the supply and demand diagram below.
53. (Last Word) Currently the federal U.S. government aims to make college more affordable by offering
54. (Last Word) Rather than subsidizing federal student loans for students, how might the U.S. government use
the supply of higher education to reduce the cost of attending college?
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B. Answers to Short-Answer, Essays, and Problems
1. Explain what is meant by a competitive market.
2. Define “demand.”
3. State the law of demand and explain why the other-things-equal assumption is critical to it.
4. Give three explanations for the law of demand:
5. Sue’s Shoe Shop is having a sale on shoes. The first pair of shoes is full price, the second is 25% off, and
the third is 50% off. Describe how this sale relates to individual demand and marginal utility.
6. Suppose a producer sells 1000 units of a product at $5 per unit one year, 2000 units at $8 the next year, and
3000 units at $10 the third year. Is this evidence that the law of demand is violated? Explain.
No. The law of demand shows the relationship between price and quantity demanded. In general, as price
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7. Suppose the price of beef fell dramatically as the price of feed grain decreased. Use the income effect and
the substitution effect to explain why there was an increase in the quantity of beef purchased.
The income effect predicts that the quantity of beef purchased will rise when beef prices fall because
8. The demand schedules of three individuals (Tom, Dick, and Harry) are shown. If they are the only three
buyers of DVDs, complete the market demand schedule for DVDs. Graphically, is the market demand for
a product the horizontal or vertical sum of the individual demand schedules?
Quantity demanded,
DVDs
Price
Tom
Dick
Harry
Total
$15.00
1
4
0
_____
13.00
3
5
1
_____
11.00
6
6
5
_____
9.00
10
7
10
_____
7.00
15
8
16
_____
The market demand is the horizontal sum of the individual schedules.
Quantity demanded,
DVDs
Price
Tom
Dick
Harry
Total
$15.00
1
4
0
5
13.00
3
5
1
9
11.00
6
6
5
17
9.00
10
7
10
27
7.00
15
8
16
39
9. List five basic determinants of market demand that could cause demand to decrease.
10. List five basic determinants of market demand that could cause demand to increase.
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11. Differentiate between a normal (superior) and an inferior good.
12. Explain how the prices of related goods also affect demand.
13. Give examples of two substitute goods and two complementary goods. In each case explain why the goods
are substitutes or complements.
The pair of substitute goods given should correspond to the explanation that they are substitutes because
14. What effect should each of the following have upon the demand for DVDs in a competitive market?
Explain your reasoning in each case.
(a) the development of Blue-Ray Discs that compete with DVDs
(b) an increase in population and incomes
(c) a substantial increase in the number and quality of DVD players
(d) consumer expectations of substantial price increases in DVDs
15. Evaluate how the following situations will affect the demand curve for iPods.
(a) Income statistics show that income of 18–25-year-olds have increased by 10 percent over the last year.
(b) Efforts of music artists wanting greater protection of their music result in more stringent enforcement
of copyrights and the shutdown of numerous illegal downloading sites.
(c) Believing that it has significant control of the market for portable digital music players, Apple decides
to raise the price of iPods with the goal of increasing profits.
(d) The price of movie tickets decreases.
16. What effect should each of the following have on the demand for gasoline in a competitive market? State
what happens to demand. Explain your reasoning in each case and relate it to a demand determinant.
(a) an increase in the number of cars
(b) the economy moves into a recession
(c) an increase in the price of car insurance, taxes, maintenance
(d) consumer expectations of substantial price increases in gasoline
17. What is the difference between a change in demand and a change in quantity demanded?
18. Define “supply.”
19. Describe and give a reason for the law of supply.
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20. List six basic determinants of market supply.
21. Newspaper item: “Due to lower grain prices, consumers can expect retail prices of choice beef to begin
dropping slightly this spring with pork becoming cheaper after midsummer,” the Agriculture Department
predicted. “This reflects increasing supply,” the department said. Does the statement use the term
“supply” correctly? What effects might this announcement have on consumer demand? Explain.
The announcement does use the term “supply” correctly because the drop in price predicted is a result of
lower resource (grain) prices. This means that producers of beef and pork will lower prices for each
quantity on the existing supply schedule assuming “all other things remain equal.”
22. Suppose the U.S. Congress is considering passing an excise tax that would increase the price of a pack of
cigarettes by $1.00. What would be the likely effect of this change on the demand and supply of cigarettes?
What is likely to happen to cigarette prices and the quantity consumed if the tax bill is enacted?
23. What is the difference between a change in supply and a change in quantity supplied?
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24. What effect will each of the following have upon the supply of television sets in a competitive market?
Explain your reasoning in each case.
(a) an increase in the price of electronic equipment used in producing television sets
(b) a decline in the number of firms producing television sets
(c) a large new tariff on imported TV sets
(d) new inexpensive satellite dishes which make televisions more popular among consumers
(a) This should decrease the supply because a higher price must be charged for each quantity due to the
25. What effect will each of the following most likely have on the supply of corn in a competitive market?
State what happens to supply. Explain your reasoning in each case and relate it to a supply determinant.
(a) the development of an improved corn seed that resists drought conditions
(b) an increase in the price of soybeans which can also be planted on land used for growing corn
(c) an increase in government payments for growing corn
(d) an increase in the price of fertilizer
26. Economist Jones defines an increase in supply as a decrease in the prices needed to ensure various amounts
of a good being offered for sale. Economist Brown defines an increase in supply as an increase in the
amounts that producers will offer at various possible prices. Economist Cole defines an increase in supply
as an increase in the amount firms will offer in the market which is caused by an increase in the price of the
product. Which, if any, of these is defining an increase in supply correctly? Explain.
Economists Brown and Jones are both correct. Brown recognizes that a shift in supply means greater
27. Assuming no government intervention, describe the market behavior that should result if the price of a
product is below its equilibrium price; then describe the behavior that should occur if the price is above its
equilibrium price.
If the price of a product is below its equilibrium price, the quantity demanded will be greater than the
28. Describe in words how one can recognize the market equilibrium point in a graph of a demand schedule
and a supply schedule.
29. Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes
and indicate for each axis the units being used to measure price and quantity. Then answer the questions.
Price
Quantity demanded
(bushels of oats)
Quantity supplied
(bushels of oats)
$1.50
10,000
40,000
1.40
15,000
35,000
1.30
20,000
30,000
1.20
25,000
25,000
1.10
30,000
20,000
1.00
35,000
15,000
(a) Give the equilibrium price and quantity for oats.
(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the
supply and demand curves to the price and quantity axes.
(c) If the Federal government decided to support the price of oats at $1.40 per bushel, tell whether there
would be a surplus or shortage and how much it would be.
(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as
the shortage or surplus.
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30. Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes
and indicate for each axis the units being used to measure price and quantity. Then answer the questions.
Price
Quantity demanded
(bushels of wheat)
Quantity supplied
(bushels of wheat)
$4.20
125,000
230,000
4.00
150,000
220,000
3.80
175,000
210,000
3.60
200,000
200,000
3.40
225,000
190,000
3.20
250,000
180,000
3.00
275,000
170,000
(a) Give the equilibrium price and quantity for wheat.
(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the
supply and demand curves to the price and quantity axes.
(c) If the Federal government decided to support the price of wheat at $4.00 per bushel, tell whether there
would be a surplus or shortage and how much it would be.
(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as
the shortage or surplus.
31. Is demand more important than supply in determining equilibrium price and quantity in a competitive
market? Explain.
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32. (Consider This) Depict graphically, then discuss the change in equilibrium for the following situation: Uber
experiences increased demand for ride-sharing services during New York’s New Year’s Eve Celebration.
33. (Consider This) Graphically analyze the effect of Uber entering into the market for taxi services. In most
cities taxi drivers face fixed fares and are unable to adjust their price. Discuss the effect this will have on
demand for traditional taxi drivers.
34. What is productive efficiency and how does it differ from allocative efficiency?
35. What are the conditions necessary to produce neither an “underallocation” nor “overallocation” of
resources?