Chapter 4: Demand, Supply and Market Equilibrium
1. A close-to-home example of a market about which students may have strong negative feelings is the
used book buyback market, where the bookstore acts as a middleman between past textbook users and
2. A good illustration of a relatively unorganized market (to contrast with highly organized exchanges) is
3. Note that less organized markets (e.g., garage sales) will have higher search costs, and therefore a
higher variation in the terms of trade, than more highly organized markets.
4. Discussing whether grades are subject to the law of demand (students are willing to buy fewer As the
higher the price in terms of effort) is a good way to emphasize the generality of law of demand to areas
students wouldn t have thought of as economic.
5. Using the example of water as something people need but in fact has a large number of substitutes
for most uses (though the substitutes are not sought for or utilized when water is so cheap that it is less
6. One way to get students to illustrate the difference between need and willingness to pay, as reflected
in demand curves, is to ask them about the context in which they hear the word need used in
7. One example some students bring up as an alleged exception to the law of demand is the case of
prestige goods, where a person may buy more at a higher price. However, rather than refuting the law of
8. Include a few examples of the need to adjust for inflation, in order to focus on real, inflation-adjusted
prices as the relevant prices for supply and demand analysis.
9. A good illustration of the difference between a change in demand and a change in quantity demanded
is to ask students hich is a better way to increase demand for drinks during happy hour–lowering the
10. I have found it useful to illustrate the various demand shifters by using an extended supply and
demand story involving a single good, say, coffee. You first get students to understand the particular
story involved and then you can help them generalize by asking hat part of the coffee story is this
situation the same as? You can talk about shifts when tea (a substitute) or creamer of doughnuts
11. Remind students to beware of generalizing from their own situations to general market behavior. For
12. One offbeat illustration of complementary goods is to think of love as complementary neuroses. If
people fall in love with those who complement them, then wouldn t the same be true of their neuroses?
13. Remember to make the point that complementarities between goods need not be equally strong both
ways. It is easier for people to drink beer at a bar without eating peanuts than it is to eat peanuts at a bar
without drinking beer, which is why they don t charge for the peanuts and give the beer away.
14. There are many inferior goods examples that can be humorous to use in class. For instance, you
could ask students how many really want to go to work by going around to pick up 40 strangers of
uncertain hygiene to share the ride, to illustrate why public transportation tends to be an inferior good
15. Remind students that a good can be normal over some income ranges (e.g., the high quality,
16. A good example of the role of price expectations is to ask students why stores so often announce that
sales involve quantities that are limited or that sales will soon end (you d better get it soon before we run
17. Because most university students are far more experienced with the demand side of markets than
with the supply side, it is worth emphasizing that the law of supply has the same logic as the law of
demand, except that price is on the E(MB) side of the rule of rational choice, instead of on the E(MC) side
18. Remind students that suppliers need not be producers in all cases. People who would be consumers
19. Some students may think that the law of supply is refuted by those who work in professions where
they make less than they could elsewhere with their skills, such as many teachers. However, we need to
20. Students are so used to technological advances shifting supply to the right, they may think of that as
the only possible case. It is worth reminding them that technological changes can also reduce supply.
Two such examples are the ban on DDT on the supply of agricultural products and the ban on the
refrigerant used most commonly in refrigeration and air conditioning units.
21. Remind students that the price expectations shifts of supply are in the opposite direction from the
price expectations shifts of demand. An expected increase in the future price increases current demand
22. One way to help students understand how taxes affect supply is to get them to think of a tax as an
input called overnment permission to produce and sell. The more this input costs, just like other inputs
entrepreneurs must bear, the higher the cost of production to the supplier and supply is reduced (shifted
left).
23. This chapter begins to throw many new technical economics terms at students, making it a good time
to emphasize that economics, like every other scientific field, has a specialized language, because certain
24. An often helpful analogy to help students understand the process of adjusting toward equilibrium and
the role of comparative static equilibria in understanding the market process is to a marble in a perfectly
round-bottomed bowl. A marble placed at the exact bottom of the bowl with no momentum will tend to