CHAPTER 3

Supply, Demand, and Price: The Theory

Chapter 3 begins our discussion of one of the cornerstones of economics: supply and
demand analysis. In this chapter, the author focuses on the theory of consumer demand and
supply, describing the basics of supply and demand, the importance of understanding these
concepts, and the various factors that affect the decisions of consumers and producers. The
theory portion of the chapter concludes by combining supply and demand in the market,
introducing the concepts of equilibrium and disequilibrium, and discussing the
consequences of surpluses and shortages. The rest of the chapter provides applications for
the theory of supply and demand introduced in this chapter.

 CHAPTER OBJECTIVES
Upon completing this chapter, your students should be able to:
1. Define demand, supply, the law of demand, and the law of supply.
2. Identify the factors that can change demand.
3. Identify the factors that can change supply.
4. Explain how equilibrium price and quantity are determined in a market.
5. Work with supply and demand to predict prices.
6. Identify and discuss the effects of price ceilings and price floors.

 KEY TERMS
• demand • complements
• law of demand • own price
• demand schedule • supply
• demand curve • law of supply
• normal good • supply curve
• inferior good • supply schedule
• substitutes • subsidy
• surplus (excess supply) • disequilibrium
• shortage (excess demand) • equilibrium
• equilibrium price (market-clearing price) • price ceiling
• equilibrium quantity • tie-in sale
• disequilibrium price • price floor

33
34 Chapter 3

 CHAPTER OUTLINE

I. DEMAND—Demand revolves around the concept of a purchaser’s willingness and

ability to buy a particular good/service. We distinguish between quantity demanded
—the amount of a good that individuals are willing and able to buy at a particular
price at a particular time—and demand, which is the quantity demanded at all prices
during a specific time period.
A. The Law of Demand—The law of demand holds that as the price of a good
rises, the quantity demanded of the good falls, and as the price of a good falls, the
quantity demanded of the good rises, ceteris paribus. That is, the price of a good
and the quantity demanded of that good are inversely related, ceteris paribus.
B. Absolute vs. Relative Prices—Prices of goods can be measured in two ways. The
absolute price is the money price ($3). The relative price is the price of one good
measured in terms of another (e.g., the burrito price of a taco is 1/2 burrito/taco).
1. The relative price of good X in terms of Y is calculated by dividing the
absolute price of good X by the absolute price of good Y.
C. Quantity Demanded and Price—Quantity demanded falls as price rises. One
reason is relative price changes. When the price of one good rises, ceteris paribus,
consumers will substitute lower-priced goods. The second reason is because of
diminishing marginal utility.
1. Diminishing Marginal Utility—As a person consumes more of a good, the
additional utility of consuming more will eventually decrease. This means that
to encourage additional consumption, price must fall.
D. Representing Demand
1. The Demand Schedule—a numerical tabulation of the quantity demanded of
a good at different prices. (See Exhibit 1a.)
2. The Demand Curve—the graphical representation of the relationship
between the quantity demanded of a good and the price of the good. (See
Exhibit 1b.)
E. The Individual and Market Demand Curves—An individual demand curve
represents the price-quantity demanded combinations for a single buyer, such as
Smith or Jones. The market demand curve represents the price-quantity
demanded combinations for all buyers of a particular good. It is the summation of
all of the individual demand curves for a particular item. (See Exhibit 2.)
F. Determinants of Demand—There are certain determinants of demand. These
are:
1. Income—As a person’s income rises, her ability to purchase a given good
also rises; as income falls, ability to purchase falls. However, demand
requires both ability and willingness to buy. The actual effect of a change in
income on demand depends upon whether the good in question is considered
“normal” or “inferior” by the consumer.
Supply, Demand, and Price: The Theory 35

a. Normal Goods—A normal good is one that is consumed voluntarily,

and for which demand will rise as income rises and fall as income falls. In
this most prevalent case, an increase in income will shift the demand curve to
the right, and a decrease will shift the demand curve to the left. (See Exhibit
3.)
b. Inferior Goods—An inferior good is one for which
demand will fall as income rises and rise as income falls.
2. Preferences—People’s preferences affect their willingness to buy a good at
any given price. A change in preferences in favor of a good will increase
demand (shift the demand curve to the right). A change away from the good
will do the opposite.
3. Prices of Related Goods
a. Substitutes—Two goods are considered substitutes if they
satisfy similar needs or desires, such as butter and margarine. If the price
of a good rises, the demand for its substitute(s) will rise; if the price of a
good falls, the demand for its substitute(s) will fall. (See Exhibit 4a.)
b. Complements—Two goods are complements if they are
consumed jointly, such as hamburger meat and hamburger buns. If the
price of a good rises, the demand for its complement(s) will fall; if the
price of a good falls, the demand for its complement(s) will rise. (See
Exhibit 4b.)
4. Number of Buyers—The demand for a good in a particular area is related to
the number of buyers in that area. If the number of buyers increases, demand
will increase (shifting the demand curve to the right). If the number of buyers
decreases, demand will fall (shifting the demand curve to the left).
5. Price Expectations—Finally, expectations about future price movements
will affect consumer demand. If prices are expected to rise, current demand
will increase. If prices are expected to fall, current demand will decrease.
G. Change in Demand vs. Change in Quantity Demanded—A change in
demand refers to a shift in the demand curve brought about by a change in any of
the nonprice determinants of demand mentioned above. (See Exhibit 5a.) A
change in quantity demanded refers to a movement along a single demand
curve in response to a change in the own price of the good. (See Exhibit 5b.)
II. SUPPLY—Supply revolves around the concept of a producer’s willingness and
ability to provide a particular good/service. Quantity supplied is the amount of a
good that producers are willing and able to sell at a particular price at a particular
time, and supply is the quantity supplied at all prices during a specific time period.
A. The Law of Supply—The law of supply holds that as the price of a good rises,
the quantity supplied of the good rises, and as the price of a good falls, the
quantity supplied of the good falls, ceteris paribus. That is, the price of a good
and the quantity demanded of that good are directly related, ceteris paribus.
B. The Supply Curve—The supply curve is the graphical representation of the
relationship between the quantity supplied of good X and the price of good X. In
many cases, the supply curve is upward sloping, indicating that quantity supplied
will increase as price increases. (See Exhibit 7.) However, in some cases the
supply curve is vertical, suggesting that supply is fixed regardless of price. The
reason for such a situation may be that it takes time to produce additional output,
36 Chapter 3

such as the theater example in Exhibit 8a, or that no more of the good can be
produced, as in Exhibit 8b.
Supply, Demand, and Price: The Theory 37

C. The Individual and Market Supply Curves—An individual supply curve

represents the price-quantity supplied combinations for a single producer, such as
Brown or Alberts in Exhibit 9a. The market supply curve represents the price-
quantity supplied combinations for all producers of a particular good. It is the
summation of all of the individual supply curves for a particular item. (See
Exhibit 9b.)
D. Determinants of Supply—Much as in the case of demand, a number of factors
affect supply.
1. Prices of Relevant Resources—All goods and services require resources—
inputs such as labor, capital, land, etc.—in their production. If the price of an
input rises, the supply curve of good X will shift to the left, indicating that
less will be produced at any given price. If the price of an input falls, the
supply curve of good X will shift to the right.
2. Technology—In Chapter 2 we said that an advance in technology refers to
the ability to produce more output with a fixed amount of resources. Under
such circumstances, the per-unit cost of production falls, shifting the supply
curve to the right.
3. Number of Sellers—The supply of a good in a particular area is related to
the number of sellers in that area. If the number of sellers increases, supply
will increase (shifting the supply curve to the right). If the number of sellers
decreases, supply will decrease (shifting the supply curve to the left).
4. Price Expectations—If the price of a good is expected to be higher in the
future, producers may cut back on current production in order to sell more at
the high price in the future (i.e., supply curve shifts left). If prices are
expected to fall, current production will increase, shifting the supply curve to
the right.
5. Taxes and Subsidies—Some taxes increase per-unit costs, leading to a
leftward shift in the supply curve for the affected good(s). Some subsidies
reduce per-unit costs, leading to a rightward shift in the supply curve for the
affected good(s). Removing the tax or subsidy in question would, logically,
have the opposite effect.
6. Government Restrictions—Quotas, licensing, and other efforts to restrict
supply will shift the supply curve to the left (and possibly make them vertical
over some or all of the relevant range). Removing/relaxing such restrictions
will increase supply, leading to a rightward shift in the supply curve.
E. Change in Supply vs. Change in Quantity Supplied—A change in
supply refers to a shift in the supply curve brought about by a change
in any of the nonprice determinants of supply mentioned above. (See
Exhibit 11a.) A change in quantity supplied refers to a movement
along a single supply curve in response to a change in the own price of
the good. (See Exhibit 11b.)

III. PUTTING SUPPLY AND DEMAND TOGETHER

A. Supply and Demand: The Auction Model—The notion of supply and demand
that has been handed down through the years functions much like an auction. As
Exhibit 12 and the corresponding discussion in the text relate, buyers and sellers
“bid” prices up and down until the quantity supplied at a particular auction price
exactly equals the quantity demanded at that same price. There is one price at
38 Chapter 3

which quantity supplied equals quantity demanded, and the market is always
working toward that point.
Supply, Demand, and Price: The Theory 39

B. Equilibrium—That blissful price, where quantity supplied just equals quantity

demanded, is called the equilibrium (or “market-clearing”) price, and the
general condition is called equilibrium (identified by point E in Exhibit 13).
C. Disequilibrium—Any price at which quantity supplied and quantity demanded
are not equal is a disequilibrium price, and the general condition is called
disequilibrium.
1. Surplus/Excess Supply—If the quantity supplied at a given price is greater
than the quantity demanded at that price, a surplus exists, and the market
price must be lowered in order to eliminate any “excess” supply. (In Exhibit
12, a surplus exists at $6.00, $5.00, and $4.00.)
2. Shortage/Excess Demand—If the quantity demanded at a given price is
greater than the quantity supplied at that price, a shortage exists, and the
market price must rise in order to eliminate any “excess” demand. (In Exhibit
12, a shortage exists at $1.25 and $2.25.)
3. Moving to Equilibrium—If a surplus exists, price must fall in order to
entice additional quantity demanded and reduce quantity supplied until the
surplus is eliminated. (See Exhibit 13.) If a shortage exists, price must rise in
order to entice additional supply and reduce quantity demanded until the
shortage is eliminated. (See Exhibit 13.)
D. Consumers’ and Producers’ Surplus—Consumers’ and producers’ surpluses
are discussed in terms of their relationships to equilibrium.
1. Consumers’ surplus—is the highest price a buyer is willing to pay minus
the price actually paid. Graphically, consumers’ surplus is the triangular area
under the demand curve, but above the equilibrium price.
2. Producers’ surplus—is the difference between the equilibrium price and the
lowest price the seller would accept.
3. At equilibrium, the values of consumers’ and producers’ surpluses are
maximized—That is, no other price of exchange would yield larger values
for these two numbers.
E. Changes in Equilibrium Price and Quantity—Equilibrium price and quantity
are determined by the interaction of supply and demand. A change in supply, or
demand, or both, will necessarily change the equilibrium price, quantity, or both,
unless the change in supply and demand perfectly offset one another so that
equilibrium remains the same (highly unlikely). Exhibit 16 illustrates eight
different cases of changing equilibrium price and/or quantity.

IV. PRICE CONTROLS—The market is not always allowed to operate freely, and thus
the ability of price to properly execute the tasks we just discussed is restricted. There
are two principal forms of price control: price ceilings and price floors.
A. Price Ceilings—A price ceiling is a government-mandated maximum price
above which legal trades cannot be made. If the price ceiling is set below the
“natural” equilibrium price for the market in question, any or all of the following
may arise:
1. Shortages—At any price below equilibrium, the quantity demanded will
exceed the quantity supplied, thus a shortage occurs. (See Exhibit 17.)
Furthermore, the natural tendency of the market to correct for the shortage by
raising price is thwarted by the ceiling; thus any shortage will likely be
sustained.
40 Chapter 3

2. Fewer Exchanges—At any price other than the equilibrium price, the
quantity sold will always be the lesser of quantity supplied and quantity
demanded, since you cannot sell what won’t be bought, nor can you buy what
is not for sale. As long as the supply curve is not vertical, the quantity of
goods sold will be less with a ceiling than would have been true at the
equilibrium price.
3. Nonprice Rationing Devices—Since a price ceiling creates a shortage, and
price is no longer capable of fully rationing the distribution of the good,
nonprice rationing devices, such as “first-come, first-served” or ration
stamps, will likely develop.
4. Buying and Selling at a Prohibited Price—Price ceilings often give rise to
black markets. Consumers who are willing to pay a price above the ceiling, to
be assured of getting the good, can arrange illicit transactions.
5. Tie-in Sales—Price ceilings often prompt the use of tie-in sales, where one
good may be purchased only if another good is purchased with it. For
example, to evade rent control, many landlords require potential tenants to
rent furniture (uncontrolled price) along with their (price-controlled)
apartment.
B. Price Ceilings and the Distortion of Incentives and Information—Price
ceilings distort normal economic incentives, often prompting consumers to prefer
higher prices to lower prices, if the lower price carries with it all of the potential
disruption of a price ceiling. Furthermore, price ceilings distort information by
making the availability of the price-controlled good seem greater than it actually
is, since low price is supposed to be an indicator of relatively greater availability.
C. Price Floors—A price floor is a government-mandated minimum price below
which legal trades cannot be made. If a price floor is set above the equilibrium
price, the following two effects arise:
1. Surpluses—At any price above equilibrium, the quantity supplied will
exceed the quantity demanded, thus a surplus occurs. (See Exhibit 18.)
Furthermore, the natural tendency of the market to correct for the surplus by
lowering price is thwarted by the floor; thus, any surplus will likely be
sustained.
2. Fewer Exchanges—At any price other than the equilibrium price, the
quantity sold will always be the lesser of quantity supplied and quantity
demanded, since you cannot sell what won’t be bought, nor can you buy what
is not for sale. As long as the demand curve is not vertical, the quantity of
goods sold will be less with a floor than would have been true at the
equilibrium price.

V. INTERNET APPLICATIONS

Students visit the following Internet sites in the chapter: WWW.ATTWS.COM,

w3.access.gpo.gov/eop, stats.bls.gov, www.century21.com.
Supply, Demand, and Price: The Theory 41

 ANSWERS TO CHAPTER QUESTIONS

1. True or false? As the price of oranges rises, the demand for oranges falls ceteris
paribus. Explain your answer.
False. There is a big difference between the terms demand and quantity demanded.
Quantity demanded refers to the amount of a good consumers are willing and able to
buy at a particular price. Demand refers to the demand curve, depicting the quantity
demanded at all possible prices. The statement holds that a change in the price of
oranges can shift the demand curve for oranges. In fact, while a number of factors may
shift the demand curve, a good’s own price is not one of them. The only thing that a
good’s own price can change is quantity demanded. This change is represented by a
movement along the existing demand curve.

2. “The price of a bushel of wheat was $3.00 last month and is $3.70 today. The
demand curve for wheat must have shifted rightward between last month and
today.” Discuss.
Not necessarily. Both supply and demand determine price. It is possible that price rose
due to a rightward shift in the demand curve for wheat (see Exhibit 15), but it is also
possible that the price rose due to a leftward shift in the supply curve of wheat (see
Exhibit 15). A number of different combinations of supply and demand changes can
raise price, and the suggested explanation is only one of them.

3. “Some goods are bought largely because they have ‘snob appeal.’ For example,
the residents of Palm Beach gain prestige by buying expensive items. In fact, they
won’t buy some items unless they are expensive. The law of demand, which holds
that people buy more at lower prices than at higher prices, obviously doesn’t hold
for Palm Beachers. In short, the following rule applies in Palm Beach: high prices,
buy; low prices, don’t buy.” Discuss.
Maybe Palm Beachers do buy only expensive items, but this only means that they have
a preference for expensive items—perhaps because there is some “snob appeal”
associated with the item. The law of demand does not rule out such a preference. The
relevant question is whether Palm Beachers buy more or fewer high-priced items as the
prices of these items rise even further, ceteris paribus. That is, even though they may
all prefer $45,000 Lexus LS400s to $25,000 Mazda 929s, will they continue to buy
even more Lexuses if their price rises to $50,000? If the law of demand holds true, the
answer should be “No.”

4. “The price of T-shirts keeps rising and rising, and people keep buying more and
more. T-shirts must have an upward-sloping demand curve.” Identify the error.
This problem was discussed in Exhibit 6. People may observe higher prices and
higher sales, but the higher prices do not cause the higher sales. Look back at
Exhibit 6a. Price is higher at B than at A, as is quantity demanded. Does this mean
the demand curve is upward sloping? Not at all. Point A is on one demand curve,
and Point B is on another.

5. Predict what would happen to the equilibrium price of marijuana if it were

legalized.
The production, sale, and purchase of marijuana are currently illegal. Some people
probably do not buy marijuana at present because it is illegal. We would expect the
42 Chapter 3

legalization of marijuana to increase the number of buyers, shifting the demand

curve to the right. Using the same logic, we would expect the number of sellers to
increase, shifting the supply curve to the right as well. If the demand curve for
marijuana shifts rightward more than the supply curve shifts rightward, the
equilibrium price of marijuana rises. If the demand curve shifts rightward by less
than the supply curve shifts rightward, then the equilibrium price of marijuana
would fall. Many people feel that legalization would likely increase supply by more
than it increases demand, causing equilibrium price to be lower than at present.

6. Compare the ratings for television shows with prices for goods. How are ratings
like prices? How are ratings different from prices? (Hint: How does rising
demand for a particular television show manifest itself?)
Television ratings are similar to prices in that they reflect consumer demand for the
product. That is, if consumers like the show, the ratings will most likely be high, if
consumers do not like the show, ratings will likely be low. Furthermore, only those
who can afford to watch the show are counted in the ratings; thus, ratings reflect both
the willingness and, to some extent, the ability to “consume” television.
The most striking departure lies in the fact that ratings do not translate into a price
to be paid by the television consumer. For instance, it doesn’t cost any more to watch
“The Simpsons” than it does to watch reruns of “Mr. Ed” on Nick at Nite. The
interesting twist is that those ratings do affect the price to advertisers of hawking their
wares to the viewing public, but the viewer is not directly affected. (It might also be
interesting here to consider cable television and pay-per-view events.)
Ratings are tied directly to the price of advertisements. Contracts with the network
price ads based on the ratings of the television program. Therefore, the ratings are in
effect the price of the ad to the advertiser.

7. Do you think the law of demand holds for criminal activity? Do potential
criminals “buy” less (more) crime, the higher (lower) the “price” of crime, ceteris
paribus? Explain your answer.
Except for genuine sociopaths and persons whose mental capacity is either temporarily
or permanently impaired, a reasonable argument can be made that many criminals—and
certainly “professional” criminals—take into account the likelihood of being caught and
punished when they decide whether to commit a given crime. Given that assumption, if
we consider the expected punishment—that is, the likelihood of being punished
multiplied by the cost of punishment to the would-be criminal—to be the “price” of
crime, it seems reasonable that the greater the perceived cost, the less crime most
criminals will “buy.”

8. Many movie theaters charge a lower admission price for the first show on weekday
afternoons than for a weeknight or weekend show. Explain why.
If theater owners are rational, then it must be because they perceive a surplus of
seats for early shows. There are two reasons. First, the physical number of available
viewers is lower, because much of the viewing public is working or in school during
the early show—thus, the number of buyers is lower than at “prime” times. Second,
those potential viewers who are available at the early show are likely to have less
money to spend, since a large portion of them would probably be either children or
nonwage earners—thus, the income level of the average potential viewer is low.
Both of these causes suggest that the quantity of seats supplied will greatly exceed
the quantity of seats demanded at the full ticket price. Therefore, a rational theater
owner faced with a surplus of seats does the only logical thing: he cuts the price.
Supply, Demand, and Price: The Theory 43

9. A Dell computer is a substitute for a Compaq computer. What happens to the

demand for Compaqs and the quantity demanded of Dells, as the price of a Dell
falls?
As the price of a Dell falls, the quantity demanded of Dells rises (that is, we move from
one point on the demand curve for Dells to another point on the same curve), and the
demand falls for Compaqs (that is, the demand curve for Compaqs shifts to the left).
10. Describe how each of the following will affect the demand for personal computers:
(a) a rise in incomes (assuming computers are a normal good); (b) a lower
expected price for computers; (c) cheaper software; (d) computers become simpler
to operate.
(a) raise demand
(b) lower current demand
(c) software is a complement to computers; cheaper software would increase the
demand for computers
(d) if computers become easier to operate, we’d expect that peoples’ preferences
would become more favorable toward computers and the demand for computers
would rise

11. Describe how each of the following will affect the supply of personal computers:
(a) a rise in wage rates; (b) an increase in the number of sellers of computers; (c) a
tax placed on production of computers; (d) a subsidy placed on the production of
computers.

(a) supply decreases when resource prices rise; (b) supply increases; (c) supply
decreases; (d) supply increases

12. The law of demand specifies an inverse relationship between price and quantity
demanded, ceteris paribus. Is the “price” in the law of demand “absolute price” or
“relative price”? Explain your answer.

Either, since we employ the ceteris paribus condition.

13. Use the law of diminishing marginal utility to explain why demand curves slope
downward.

As people consume more of a good, eventually they get less utility (satisfaction) from
consuming another unit of the good. As they value each additional unit less, they will
be willing to pay less for each additional unit. The lower willingness to pay equates to a
demand curve that has higher quantities associated with lower prices.

14. Explain how the market moves to equilibrium in terms of shortages and surpluses
and in terms of maximum buying prices and minimum selling prices.

If a shortage exists, the market price is below the minimum selling price for many
producers. Consumers will compete for the limited quantity of the good that is available
and they will bid up the price until the market price reaches equilibrium. If a surplus
exists, the market price is above the maximum buying price of many consumers. Sellers
will compete for the few consumers by lowering their prices until the market price
reaches equilibrium.
44 Chapter 3
Supply, Demand, and Price: The Theory 45

15. Identify what happens to equilibrium price and quantity in each of the following
cases:

(a.) demand rises and supply is constant – equilibrium price rises and quantity rises

(b.) demand falls and supply is constant – equilibrium price falls and quantity falls

(c.) supply rises and demand is constant – equilibrium price falls and quantity rises

(d.) supply falls and demand is constant – equilibrium price rises and quantity falls

(e.) demand rises by the same amount that supply falls – equilibrium price rises and
quantity is unchanged

(f.) demand falls by the same amount that supply rises – equilibrium price falls and
quantity is unchanged

g. demand falls by less than supply rises – equilibrium price falls and quantity falls

h. demand rises by more than supply rises – equilibrium price rises and quantity
rises

i. demand rises by less than supply rises – equilibrium price falls and quantity rises

j. demand falls by more than supply falls – equilibrium price falls and quantity falls

k. demand falls by less than supply falls – equilibrium price rises and quantity falls

 WORKING WITH NUMBERS AND GRAPHS

1. If the absolute price of good X is $10 and the absolute price of good Y is $14, then
what is the relative price of good X in terms of Y and the relative price of good Y
in terms of good X?

Relative Price of X in terms of Y = 10/14

Relative Price of Y in terms of X = 14/10

2. Price is $10, quantity supplied is 50 units, and quantity demanded is 100 units.
For every $1 rise in price, quantity supplied rises by 5 units and quantity
demanded falls by 5 units. What is the equilibrium price and quantity?

At a price of $15, quantity supplied would be 75 units and quantity demanded

would also be 75 units.

3. Draw a diagram that shows a larger increase in demand than the decrease in
supply.

See Exhibit 19(g).

46 Chapter 3

4. Draw a diagram that shows a smaller increase in supply than increase in demand.

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5. At equilibrium in the following figure, what area(s) does consumers’ surplus

equal? Producers’ surplus?

Consumers’ surplus: A + B + C + D + E
Producers’ surplus: F + G + H + I + J

6. At what quantity in the figure above is the maximum buying price equal to the
minimum selling price?

50

7. Diagrammatically explain why there are no exchanges in the area where the
supply curve is above the demand curve.

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At the selected quantity, the minimum selling price is P2, the maximum buying
price is P1, so no exchanges will occur.
Supply, Demand, and Price: The Theory 47

8. In the following figure, can the movement from point 1 to point 2 be explained by
a combination of an increase in the price of a substitute and a decrease in the price
of non-labor resources? Explain your answer.

Yes. Demand increases when the price of a substitute rises, and supply increases
when resource prices fall. As long as the demand shift is greater than the supply
shift, point 2 is possible.

9. The demand curve is downward sloping, the supply curve is upward sloping, and
the equilibrium quantity is 50 units. Show on a graph that the difference between
the maximum buying price and minimum selling price is greater at 25 units than
at 33 units.
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At 25 units, the difference is P2 – P1. At 50 units, the difference is 0. Since 33

units is between 25 and 50 units, the difference will be closer to 0 (smaller) than
at 25 units.

10. Diagrammatically show and explain why a price ceiling that is above the
equilibrium price will not prompt a tie-in sale.
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In this market, all buyers and sellers exchange below the price ceiling at the
equilibrium price. Therefore, the ceiling has no effect on the market.
48 Chapter 3

 ANSWERS TO SELECTED INTERNET APPLICATIONS

Many of the answers to questions will vary by the location of the students or the date they
do the exercise. However, the following data may be useful:

1. France has higher unemployment, lower earnings, and higher taxes, all of which should
encourage people to do their own home repairs as their opportunity costs are lower.

2. An ocean front city such as San Diego has a limited amount of land at any given
distance from the sea. Land prices will therefore be very high near to the ocean, and
decline as we move inland. An inland city can expand in all directions, and so land
prices will be low around the periphery of the city, and housing prices in general should
be lower.

 LECTURE SUPPLEMENTS
Becker, Gary. “Housing Projects and Rent Control Should Crumble.” Business Week,
August 4, 1997, p. 20.
Becker examines the issues of rent control in New York and government-sponsored housing
projects in general and compares them to a system of vouchers to assist the poor in finding
affordable housing. Becker concludes the market system will work better for the needy if
the government gives them vouchers good for rent payments in the location of their
choosing.

Grover, Ronald, and Elizabeth Lesly. “Unfortunately, Elvis Is Dead.” Business Week,
September 1, 1997, pp. 34–35.
This article talks about the changing fortunes of music industry companies based on the
evolving tastes of music buyers. The numbers can be used to demonstrate the relative
importance of price and taste in this industry. It provides information about how the
industry compensates, including cost-cutting measures and pricing.

Becker, Gary. “Working Women’s Staunchest Allies: Supply and Demand.” In Gary
Becker, The Economics of Life, McGraw-Hill, 1996, pp. 129–130.
Becker argues that the market, not the government, is the best hope for equality in the labor
market between men and women. He provides some statistics to back up his propositions
and attempts to show that intervention to help one group of women will not help all (and
cannot be gender neutral).

Carey, John. “In This Drug War, Consumers Are the Casualties.” Business Week,
August 25, 1997, p. 46.
Consumers prefer to buy generic drugs because of their lower price. Drug companies fighting in
the courts to legally prevent generics or arguing with the regulators to prevent their certification
as acceptable for human use. This results in lessened competition and higher prices.
Supply, Demand, and Price: The Theory 49

Internet Sites
Try these for some examples of issues your students see today:
http://cnnfn.com
http://www.wsj.com
http://www.businessweek.com
http://www.dismal.com
Market simulation program at http://www.frbsf.org in its economic education section.