Chapter 5: Markets in Motion and Price Controls
1. Reinforce to students that while the actual details and speed with which markets adjust may vary (e.g.
organized exchanges with price adjusting almost instantaneously, compared with less organized markets
2. There are several good ways to illustrate the invisible hand of the market. A discussion of I, Pencil
which shows that nobody on earth knows every aspect of what it takes to make a product even as
apparently simple as a pencil is one. Another is to get students to discuss the question: How many
people are involved in feeding or clothing you?
3. It is important to emphasize to students that supply and demand is not just a large set of diagrams to
memorize and keep straight. Students who view it that way will have a difficult time, as those diagrams
get quite a workout in principles courses. Get students to see it as an organized way–a filing system–of
4. It is worth emphasizing to students that predicting the actual adjustment path in a particular market in
response to a particular change is far more difficult than the stylized results of our standard comparative
statics models, as it involves many more variables and all sorts of dynamic issues. The comparative
statics models are only a starting point for discussing such issues, not the final word.
5. While the book focuses primarily on the price and output results of the various supply and demand
cases, the stage is set for professors who want to extend the discussion to begin introducing what
6. It is important to remind students that the analytical and predictive power of supply and demand (and
elasticity extensions) is not just in its ability to predict what will happen in a particular market when a
7. An excellent place to find good classroom material about the interrelationships among markets is the
commentary in the Wall Street Journal Commodities section. You can often see discussed there how a
8. Emphasize to students that when supply and demand both shift, we add up direction of effects
for prices and quantities, where the direction of change of one variable will be known and the direction of
change of the other variable depending on the relative magnitudes of the supply and demand curve shifts.
9. A good supply and demand application is why exports tend to be predominantly higher quality variants
of products--the transportation costs add relatively less to the cost of a more expensive product than a
less expensive product, making the more expensive variant relatively cheaper export markets than at
home (You might extend this to asking whether the best Florida orange juice, Washington apples,
Belgian chocolate, etc. is sold, as well as produced, in Florida, Washington, or Belgium, respectively).
10. Since American college students have had limited experience with the effects of price ceilings and
floors, a useful way to help them through the analysis is to use a series of guided questions using a
familiar good (I like to use bread), that once it is asked, students can reason to (or be led to reason to) the
11. Especially at state universities, you can show that many of students frustrations can be viewed as
12. Use the rock concert scalper illustration to emphasize how hard it is to successfully underprice goods
on purpose, because the arbitrage profits created by such an attempt lead others to undermine such a
strategy.
13. It is an interesting twist on the rent control discussion to add that maximum rent control can also be
14. Make sure students see that the minimum wage is not the only example of a price floor. For
instance, show them that many of the effects of union wages (discussed later in the text) and the Davis–
Bacon prevailing wage law are similar.
15. Make sure students recognize that price floors and price ceilings have the exact opposite effects in
16. Remind students that in the case of price ceilings, price and opportunity cost (including search costs)
17. Note that the increased search costs which raise the opportunity costs of finding rental housing under
rent control are not borne by those who are already renters in that location (who are the ones who get to
18. Emphasize to students that the effects of price floors when the government buys up the surplus (like
traditional agricultural price supports), which is that of an increase in demand facing sellers (both price
19. When finished with the material through chapter 5, you may find it useful to give students (in addition
to emphasizing the need to practice the many problems in the study guide) what I call a brief supply and
demand question sampler, which shows them some of the major kinds of questions they should be able
to answer at this point. One version if this is given here:
a) Which of the following will shift demand (supply) right?
The answer would have to be a change in one of the demand (supply) curve shifters that shifts it to the
b) Which of the following would in(de)crease price but de(in)crease the equilibrium quantity traded?
The answer would have to be something that would de(in)crease supply, because only that would result
in the price and quantity changes given. Alternatively, any question involving both price and quantity
moving in the same direction would have to be caused by a shift in demand (an in(de)crease in demand
would in(de)crease both price and quantity.
c) If A and B are substitutes, a reduced price of A would do what in the B market?
d) A decrease in both supply and demand would have what result?
Both effects would reduce the equilibrium quantity traded, but effects on price (and therefore total
revenue) are ambiguous, unless you know which shift was of greater magnitude (the effects of the larger
shift will dominate the net result). Remember, in any question where both curves shift, you simply add up
the effects the each shift would cause alone, where one variable will always be determinate, but the other
will be indeterminate unless you know about the relative magnitude of the shifts.
e) What would happen if a major existing source of tin was to disappear?
There are a huge number of questions that could be asked from this information:
1) Since the supply of tin was reduced, we know that the results in the tin market will be those of a
follow.
5) In any situation where the total revenue of producers can be determined, so can the direction the
demand curves for normal and inferior goods shift in areas specialized to producing that good (total
revenue of producers is also total income).
f) Which of the following would increase total revenue of X producers?
The answer could be any of three cases: