Economic Problems and

how they may be solved

Lecture 3.3

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Questions from the previous
lecture(s)
❖Ceteris paribus = other things being equal or held
constant.

❖Helps us understand relationships between variables.

❖↑P → ↓Qd, (income, T&P, NoB)

❖↑CSG → ↑Teenage pregnancy (ignorant about contraceptives)

❖ The whole point is to try to discover the effects of a variable

without being confused or distracted by other variables.

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What we learned last week…

❖Circular flows
❖Demand

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Supply
❖Def: quantities of a product that will be
supplied at various prices, during a certain
time period, ceteris paribus.

❖Law of supply: there is a positive

relationship
between the price of a product and the
quantity supplied.

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Supply Function
Price of product Quantity supplied
10 0
50 5
90 10
130 15

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Supply Graph
P S

130

90

50
10
0 5 10 15 Q

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Supply equation
❖Y = a + bX or
❖P = a + bQ
❖a = ?
❖b = ∆P / ∆Q
❖P = 10 + 8Q

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Movement along the curve or
change in the quantity supplied
❖Refers to the effect of a change in price
❖If the price of the product changes, there
will, ceteris paribus, only be a movement
along the given supply curve.
❖The supply curve itself will not move!

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Movement along the curve

P S
130

90

0 10 15 Q

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Shift or change in supply curve

❖Refers to situations where the supply curve itself will shift.

❖Other factors (except price) that influence supply can cause
the supply curve to shift.

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Change in supply
S

-
+

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Factors that cause the supply
curve to shift
1. Technology

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Factors that cause the supply
curve to shift
2. Productivity

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Factors that cause the supply
curve to shift
3. Production factor prices

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Constructing the Market: put S&D
together
❖Demand = Supply
❖Equilibrium price
❖Equilibrium quantity

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 P
Excess
S
Supply
PH
a b
Equilibrium!
PE

c d
PL
D
Excess
Demand
0 QE Q

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 Lets shift the demand

An increase in demand will, ceteris paribus, result in an increase in

the equilibrium price and quantity. A decrease in demand will,
ceteris paribus, result in a decrease in the equilibrium price and
quantity.

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Lets shift the supply
An increase in supply will, ceteris paribus, result in a
decrease in the equilibrium price and an increase in the
equilibrium quantity. A decrease in supply will, ceteris
paribus, result in an increase in the equilibrium price and a
decrease in the equilibrium quantity.

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Simultaneous shifts
❖Increase in supply & demand
❖Decrease in supply & demand
❖Decrease in supply & increase in demand
❖Increase in supply & decrease in demand

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What happens when the govt interferes with
the laws of demand and supply?

Maximum Prices
❖Government intervention
❖Aim: To protect consumers
❖When effective?

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Maximum Price
P

E
PE

f g
PMax
D

0 Q
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Minimum prices

❖Government intervention
❖Aim: To protect producers
❖When effective?

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Minimum price
P
S
PMin
h i
PE E

0 Q

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Answer the following questions
in the chat box
1. Which best expresses the law of demand?
A. A higher price reduces demand
B. A lower price reduces demand
C. A higher price reduces quantity demanded
D. A lower price shifts the demand curve to the right

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Answer the following questions
in the chat box
2. If the quantity supplied of oranges exceeds the quantity
demanded:
A. there is a shortage of oranges
B. market forces will cause the price to fall
C. market forces will cause the price to rise
D. the market is in equilibrium

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Answer the following questions
in the chat box
3. Over the last several months, the price of a particular good has
fallen while its quantity has increased. This could have been
caused by:
A. a simultaneous increase in demand and decrease in
supply
B. an increase in supply
C. an increase in demand
D. a decrease in demand

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Answer the following questions
in the chat box

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Answer the following questions
in the chat box

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Answer the following questions
in the chat box

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Answer the following questions
in the chat box

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Answer the following questions
in the chat box

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Answer the following questions
in the chat box

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Answer the following questions
in the chat box

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Answer the following questions
in the chat box

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Answer the following questions
in the chat box

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Answer the following questions
in the chat box

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Answer the following questions
in the chat box

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Answer the following questions
in the chat box

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 19. An increase in the price of butter, a
substitute good, would be most likely to cause
A a rightward shift of the demand curve for
margarine
B a leftward shift of the demand curve for
margarine
C the quantity of margarine demanded to increase
D the quantity of margarine demanded to
decrease

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