Chapter 2
Supply and Demand
Chapter
Outline
Challenge:
Quantities and Prices of Genetically Modified Foods
2.1 Demand
The Demand Curve
Effect of Prices on the Quantity Demanded
Effect of Other Factors on Demand
Application
: Calorie Counting
The Demand Function
Solved Problem 2.1
...
6/23/23, 6:06 AM Microeconomics 8th edition perloff solutions manual
Microeconomics 8th Edition Perloff Solutions Manual
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Chapter 2
Supply and Demand
Chapter Outline
Challenge: Quantities and Prices of Genetically Modified Foods
2.1 Demand
The Demand Curve
Effect of Prices on the Quantity Demanded
Effect of Other Factors on Demand
Application: Calorie Counting
The Demand Function
Solved Problem 2.1
Summing Demand Curves
Application: Aggregating Corn Demand Curves
2.2 Supply
The Supply Curve
Effect of Price on Supply
Effect of Other Variables on Supply
The Supply Function
Summing Supply Curves
How Government Import Policies Affect Supply Curves
Solved Problem 2.2
2.3 Market Equilibrium
Using a Graph to Determine the Equilibrium
Using Math to Determine the Equilibrium
Forces That Drive a Market to Equilibrium
2.4 Shocking the Equilibrium
Effects of a Shock to the Supply Curve
Solved Problem 2.3
Effects of a Shock to the Demand Curve
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6 Perloff • Microeconomics, Eighth Edition
2.5 Effects of Government Interventions
Policies That Shift Supply Curves
Licensing Laws
Application: Occupational Licensing
Quotas
Solved Problem 2.4
Policies That Cause the Quantity Demanded to Differ from the Quantity Supplied
Price Ceilings
Application: Venezuelan Price Ceilings and Shortages
Price Floors
Solved Problem 2.5
Why the Quantity Supplied Need Not Equal the Quantity Demanded
2.6 When to Use the Supply-and-Demand Model
Teaching Tips
This chapter reviews basic supply-and-demand concepts from the principles level. Your interactions with
the class from the first session or two should give you a good indication of how much class time to spend
on it. If it has been some time since their principles course, students may need fairly consistent prompting
to recall the basic supply-and-demand model. For example, many will remember that there is a Law of
Demand but will not remember the law itself. Encourage students in the strongest terms to read the chapter
carefully. It is well worth the time spent at this stage to make sure everyone has solid recognition of these
basic tools and concepts.
A good way to motivate the chapter is by beginning with the genetically modified food example found in
the Challenge. Try to keep the conversation focused on possible effects of entry or of the ban. Let students
brainstorm about which parties might be in favor of a ban and who would be opposed and why.
When reviewing demand, be sure students are clear on the difference between movement along the curve
and a shift of the entire curve. Two points should be helpful. First, note to them that both in Equation 2.1
and on the graph in Figure 2.1, price is the only independent variable present. Thus, only price can cause a
movement along the curve. Second, underscore the role of other variables. After compiling a list of the
factors that can shift the demand curve (once they get started, the class as a group should be able to provide
you with this list), I ask what factors are held constant along a single demand curve. Surprisingly, this question
is often greeted by a protracted silence. By realizing that it is the same factors that shift the curve when
they change, students develop a more solid understanding. The text makes this point well in Equations 2.2
and 2.3.
The introduction of demand curves and equations is a good opportunity to review the basic geometric concepts
of slope and intercept. This does not take much time, as most students can recognize slope and intercept of
a written equation, but there is sometimes a surprising lack of connection between what appears in an equation
and the resulting graph. Draw a demand curve and tell the class that the slope of this curve is
–2. Then ask the students what will happen in the graph if the slope changes to −4. Although it is likely
that several, perhaps most students will know immediately, some will not.
Rather than referring to the slope increasing or decreasing, I tend to refer to it as becoming steeper or
flatter, and thus this way I can talk about the shift in supply and demand curve slopes the same way (an
increase in slope would cause the demand curve to become flatter and the supply curve to become steeper,
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Chapter 2 Supply and Demand 7
which can be confusing for students). I try to use the simple algebra and geometry in these early chapters
to help me to gauge what portion of the class is likely to struggle when the material gets tougher.
Assigning some of the quantitative problems at the end of the chapter and collecting them (even if you do
not intend to collect homework throughout the term) is another good diagnostic. Alternatively use five
minutes of lecture time to ask students to answer two or three basic quantitative questions and collect their
responses. Assure the students that their answers will not be graded and will simply be used to gauge
comprehension. This will allow you to adjust your next lecture if necessary, and by walking around while
students are working, you can answer any basic questions they might have.
It is also valuable to discuss the inverse demand curve and the process of inversion. I usually motivate this
review by noting that this process will be needed later when formulating a total revenue equation from a
demand equation. I combine this with the discussion of the problem of the reversed axes. At this point, you
can refer back to the graph and show how to find the intercept and slope from Equation 2.3
I try to keep the discussion of supply parallel to that of demand. For factors that can shift the entire supply
curve, note that they can all be lumped together under the broader heading of costs, government rules and
regulations, and other variables (as is done in the text). The text notes that there is no “Law of Supply,”
and most students have learned this in their principles course. Be aware, however, that some principles
instructors refer to the upward slope of supply curves in the short run as the “Law of Supply.” Adopting a
uniform taxonomy and vocabulary reduces confusion. This includes uniformity with the text with respect
to symbols and upper- versus lower-case labeling.
When combining supply and demand in the discussion of equilibrium, press the students for a usable
definition of the term. You will likely receive the suggestion of “where supply equals demand.” Though
incorrect, this definition is useful in the introduction of price floors and ceilings where the quantity supplied
does not equal demanded at the equilibrium quantity. An important point regarding equilibrium solutions
of supply-and-demand problems is that they are typically stable and self-correcting. To illustrate this point,
use examples of commonly purchased items such as discounted clothing where reduced prices reflect
excess supply.
Now that students have an idea of what a market looks like in equilibrium, I might ask for examples of
markets that are not in equilibrium. This leads in to the discussion of government interventions and how
they distort the market. This is also a good place to use a news article to show students how to use graphs
to explain effects mentioned in the article.
When discussing floors and ceilings, I stress the definitions using simple graphs as illustrations. Although
it seems counterintuitive to some students that an effective floor must be above the equilibrium price and
an effective ceiling must be below, suggest that they use this as a mnemonic device. In this section, I try to
engage the class in a discussion of unintended or secondary effects of government intervention. This issue
deserves significant class discussion time. Most students have not thought much about the consequences of
ceilings and floors beyond the simple price effects. The text has a good description of the unintended
effects of price controls in Zimbabwe. A discussion on the initial reaction to the price controls, and then
the actual effect of the controls, would lead students to realize the importance of looking beyond the initial
effect and using economic models to predict outcomes.
Another good example for discussing secondary effects is rent control. On the supply side, landlords’
incentives to provide efficient levels of upkeep and safety measures in rent-controlled buildings are
distorted. On the demand side, time spent searching and undesired doubling-up reduce consumer
satisfaction. Secondary effects of floors are also worth noting. I recommend that you discuss the text’s
example of the possible negative effects of minimum wages. Again, students are likely to view minimum
wages as strictly a benefit to workers because they have not considered that job loss will mean that some
workers are harmed rather than helped by the establishment of minimums or increases in their level.
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8 Perloff • Microeconomics, Eighth Edition
These policy issues provide an opportunity to use current affairs in class. Using an article from a
newspaper or online source, I often break down the predictions in the article and use the theory learned in
class to determine their veracity.
In the section on when to use the supply-and-demand model, be sure to define and discuss transaction
costs. Most students will not be familiar with this term from principles, and it has important implications
on the functioning of thin markets and markets where there is substantial uncertainty.
At the end of the chapter, you can return to the discussion of genetically modified foods (or another
appropriate example) and use the supply and demand model to analyze the effects of entry.
Discussion Questions
1. Can you think of any reasons why the Law of Demand might not hold?
2. Would you expect most supply curves to have an upward slope? Why or why not?
3. What are some examples of markets that are competitive?
4. In which markets that would otherwise be competitive would you expect transaction costs to be
very high?
5. Can you think of situations where the government would want to take actions that cause shortages?
6. In what markets and situations would you expect that the quantity demanded would not equal
the quantity supplied?
7. Can you think of an example where a good is sold below equilibrium price without government
intervention causing excess demand? Which property of perfect competition is violated?
Additional Questions and Problems
1. Suppose you are planning to conduct a study of the running shoe market. List the factors that you
believe would cause changes in the demand for running shoes. In each case, note whether the
relationship would be positive (direct) or negative (inverse). Also list the factors that you believe
would affect the supply, again noting the nature of the relationship.
2. In each case below, identify the effect on the demand curve for steak (a normal good).
a. An increase in the price of lamb
b. A decrease in the population
c. An increase in consumer income
d. A decrease in the price of steak sauce
e. An increase in advertising by chicken producers
3. In each case below, identify the effect on the supply curve for coal.
a. The development of a new, lower cost mining technique
b. An increase in wages paid to coal miners
c. The imposition of a $2 per ton tax on coal
d. A government ban on all imports of coal
e. A new government regulation requiring air purifiers in all work areas
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