2

SUPPLY AND DEMAND I: HOW MARKETS WORK

Figure 1 Catherine’s Demand Schedule and Demand
Curve

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South-Western
 Figure 3 Shifts in the Demand Curve

Price of
Ice-Cream
Cone

Increase
in demand

Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of
Ice-Cream Cones
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Table 1 Variables That Influence Buyers

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Figure 5 Ben’s Supply Schedule and Supply Curve

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 Figure 7 Shifts in the Supply Curve

Price of
Ice-Cream Supply curve, S3
Supply
Cone
curve, S1
Supply
Decrease curve, S2
in supply

Increase
in supply

0 Quantity of
Ice-Cream Cones
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Table 2 Variables That Influence Sellers

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 QUIZ

A change in which of the following will NOT shift the demand

curve for Maggie?
a. the price of Yippee
b. the price of Maggie
c. the income of Maggie consumers

Movie tickets and Netflix services are substitutes. If the price of film
streaming increases, what happens in the market for movie tickets?
a. The supply curve shifts to the left.
b. The supply curve shifts to the right.
c. The demand curve shifts to the left.
d. The demand curve shifts to the right.

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 Practice I
In each of the following examples, determine (i) the market in
question; (ii) whether a shift in demand or supply occurred,
the direction of the shift, and what induced the shift; and (iii)
the effect of the shift on the equilibrium price and the
equilibrium quantity.
a. As the price of gasoline fell in the United States during the 1990s,
more people bought large cars.
b. As technological innovation has lowered the cost of recycling used
paper, fresh paper made from recycled stock is used more frequently.
c. When a local cable company offers cheaper on-demand films, local
movie theaters have more unfilled seats.

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 Figure 8 The Equilibrium of Supply and Demand

Price of
Ice-Cream
Cone Supply

Equilibrium price Equilibrium

€ 2.00

Equilibrium Demand
quantity

0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
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Figure 9 Markets Not in Equilibrium

(a) Excess Supply

Price of
Ice-Cream Supply
Cone Surplus
€ 2.50

2.00

Demand

0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones

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Equilibrium

• Surplus
• When price > equilibrium price, then quantity
supplied > quantity demanded.
• There is excess supply or a surplus.
• Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.

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 Shifts in equilibrium

End : the hot weather increases both the price of ice cream and the quantity of ice
cream sold

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 Figure 10 How an Increase in Demand Affects the
Equilibrium
Price of
Ice-Cream 1. Hot weather increases
Cone the demand for ice cream . . .

Supply

€ 2.50 New equilibrium

2.00
2. . . . resulting Initial
in a higher
equilibrium
price . . .
D

0 7 10 Quantity of
3. . . . and a higher Ice-Cream Cones
quantity sold.
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End: As a result of the sugar price increase, the price of ice cream rises, and the
quantity of ice cream sold falls.

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 Figure 11 How a Decrease in Supply Affects the Equilibrium

Price of
Ice-Cream 1. An increase in the
Cone price of sugar reduces
the supply of ice cream. . .
S2
S1

New
€ 2.50 equilibrium

2.00 Initial equilibrium

2. . . . resulting
in a higher
price of ice
cream . . . Demand

0 4 7 Quantity of
3. . . . and a lower Ice-Cream Cones
quantity sold.
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End: As a result of the sugar price increase, the price of ice cream rises, and the
quantity of ice cream sold falls.

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Table 4 What Happens to Price and Quantity When Supply
or Demand Shifts?

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Practice 2

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Practice 3

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