Ch 4 Worksheet — Supply & Demand

Price ($)	Qd (thousand cups)	Qs (thousand cups)
$5	15	3
$7	13	5
$9	11	7
$11	9	9
$13	7	11
$15	5	13
$17	3	15

Question a

Find the market equilibrium price P* and equilibrium quantity Q*.

Equilibrium price P* ($)

Equilibrium quantity Q* (thousand cups)

Hint At equilibrium, Qd = Qs. Read down the table for the row where the two quantity columns are equal, or set 20 − P = P − 2 and solve for P.

Explanation Set Qd = Qs: 20 − P = P − 2 ⇒ 22 = 2P ⇒ P* = $11.
Then Q* = 20 − 11 = 9 (thousand cups). At $11 the table shows Qd = Qs = 9 — the market clears.

Question b

Suppose the price is set at P = $15. Is there a surplus or a shortage, and how large is it (in thousand cups)?

Shortage of 8 thousand cups Surplus of 8 thousand cups Shortage of 10 thousand cups Market is in equilibrium

Hint Above equilibrium price you get a surplus; below, a shortage. The size equals |Qs − Qd| at that price.

Explanation At P = $15: Qs = 15 − 2 = 13, Qd = 20 − 15 = 5. Since Qs > Qd, there's a surplus of 13 − 5 = 8 thousand cups.
With $15 > P* = $11, this is above equilibrium — textbook surplus territory. Sellers will cut price until the market clears back to $11.

Question c

At a price of P = $15 (from Question b), which way do we expect the market price to move, and why?

Price rises — buyers bid it up because they want more cups Price falls — sellers have unsold inventory and cut prices to move cups Price stays at $15 forever — the market has no mechanism to adjust Both supply and demand shift to close the gap

Hint Surplus = too many unsold units. What do sellers do when they can't move their inventory?

Explanation A surplus is excess supply — unsold cups pile up. Sellers compete for scarce buyers by cutting price. Price falls back toward P* = $11, which raises Qd and lowers Qs until Qs = Qd.
Option D is wrong — a mere change in price does not shift the curves; it causes movement along them.

Headline 1

"Record-setting heat wave expected to last through August."
Market: ice cream.

Demand shifts right → P ↑, Q ↑ Supply shifts right → P ↓, Q ↑ Demand shifts left → P ↓, Q ↓ Supply shifts left → P ↑, Q ↓

Hint Step 1: who does hot weather affect — ice-cream buyers or ice-cream makers? Step 2: does it make them want more or less ice cream at every price?

Explanation Hot weather changes tastes — people want ice cream more. That shifts the demand curve to the right. Along an unchanged supply curve, the new equilibrium lies up-and-to-the-right: P ↑, Q ↑.
It doesn't shift supply — the weather doesn't change the cost of making ice cream.

Headline 2

"Severe frost destroys one-third of Brazil's coffee-bean crop overnight."
Market: coffee beans.

Demand shifts left → P ↓, Q ↓ Supply shifts left → P ↑, Q ↓ Demand shifts right → P ↑, Q ↑ Supply shifts right → P ↓, Q ↑

Hint A natural shock that destroys producers' output is a classic supply-side shock, not a demand-side one.

Explanation A crop-destroying frost reduces producers' ability to supply at every price — supply shifts left. Along an unchanged demand curve, equilibrium moves up-and-to-the-left: P ↑, Q ↓.
Demand is unchanged — buyers still want the same amount of coffee at any given price; they just have to pay more to get it.

Headline 3

"Tesla slashes Model 3 price by 20%."
Market: gasoline-powered sedans (a substitute for the Model 3).

Demand for gasoline sedans shifts left → P ↓, Q ↓ Demand for gasoline sedans shifts right → P ↑, Q ↑ Supply of gasoline sedans shifts left → P ↑, Q ↓ No change — Tesla is a different market

Hint The price of a substitute changed. Remember the rule: substitute's price falls → buyers switch away from our good toward the now-cheaper substitute.

Explanation Model 3 is a substitute for gas sedans. When the substitute's price falls, buyers switch toward it and away from gas sedans — demand for gas sedans shifts left. Result: P ↓, Q ↓ in the gas-sedan market.
Supply is unchanged — gas-sedan factories can still produce the same output at the same costs.

Headline 4

"Crude oil prices plunge 30% after new pipeline opens."
Market: plastic water bottles (oil is a key input for plastic).

Demand for bottles shifts right → P ↑, Q ↑ Demand for bottles shifts left → P ↓, Q ↓ Supply of bottles shifts right → P ↓, Q ↑ Supply of bottles shifts left → P ↑, Q ↓

Hint Oil is an input in making plastic bottles. When input prices fall, what happens to the cost of producing each bottle?

Explanation Lower input prices mean bottle producers can make more cheaply at every output level — supply shifts right. Along an unchanged demand curve, the new equilibrium moves down-and-to-the-right: P ↓, Q ↑.
Demand is unchanged — buyers don't know or care about the factory's input costs; they only see the shelf price.

Question 1

The law of demand says that, holding all else constant:

as price rises, quantity demanded rises as price rises, quantity demanded falls as price rises, the demand curve shifts left as income rises, quantity demanded rises

HintThe law of demand is about the own-price effect on the same curve.

ExplanationThe law of demand: price ↑ → Qd ↓. This is a movement along a given demand curve (not a shift). Option C confuses a movement with a shift; option D is about a shift caused by income.

Question 2

Which of the following will cause the demand curve for coffee to shift right?

The price of coffee rises A news report says tea (a substitute) causes cancer The price of cream (a complement) rises sharply A new coffee-roasting technology lowers production costs

HintEliminate: own price → movement, not shift. Then pick the demand-side story.

ExplanationIf tea (a substitute) looks bad, buyers switch toward coffee — D_coffee shifts right. Option A is movement along, not a shift. Option C (complement price up) shifts demand left, not right. Option D shifts supply, not demand.

Question 3

Which of the following is a movement along the supply curve for apples (rather than a shift)?

The wage of apple pickers rises An apple-harvesting robot is invented The market price of apples rises from $2 to $3 per pound Several new apple farms open in the Midwest

HintA movement along the supply curve is caused only by the good's own price changing.

ExplanationOption C is the good's own-price change — slide along the same supply curve (change in quantity supplied). The others are classic supply shifters: input prices (A), technology (B), and number of sellers (D) — each shifts the whole curve.

Question 4

Rohan's demand for ramen noodles falls when his income rises. For Rohan, ramen is:

A normal good An inferior good A complement good A substitute good

HintNormal: income ↑ → demand ↑. Inferior: income ↑ → demand ↓.

ExplanationWhen income rises and demand falls, the good is inferior. Typical examples: instant ramen, generic-brand groceries, inter-city bus rides. Options C and D describe relationships between goods, not income effects.

Question 5

The market demand curve is P = 40 − Q and the market supply curve is P = 10 + 2Q. What is the equilibrium price?

$10 $20 $30 $40

HintSet demand price = supply price, solve for Q, then plug back to get P.

Explanation40 − Q = 10 + 2Q ⇒ 30 = 3Q ⇒ Q* = 10. Then P* = 40 − 10 = $30. (Check: supply side: 10 + 2(10) = $30. ✓)

Question 6

If the equilibrium price in a market is $30 and the government sets the price at $20 (with no legal ceiling), we expect:

A surplus, and the price to fall A shortage, and the price to rise back toward $30 A shortage, and the price to fall further below $20 Equilibrium, since the price was set by an authority

HintPrice is below equilibrium with no binding ceiling → Qd vs Qs?

ExplanationAt P = $20 < $30 = P*, quantity demanded exceeds quantity supplied → shortage. With no binding price ceiling, buyers compete for scarce units and bid the price up, pushing it back toward $30.

Question 7

A pest destroys half the apple crop. What happens in the market for oranges (a substitute for apples)?

Price of oranges ↑, quantity of oranges ↑ Price of oranges ↓, quantity of oranges ↓ Price of oranges ↑, quantity of oranges ↓ No change in the orange market

HintThe apple pest raises the price of apples. How does a higher substitute price affect demand for oranges?

ExplanationFewer apples → price of apples ↑. Since oranges are a substitute for apples, buyers switch toward oranges → demand for oranges shifts right. Along the unchanged orange-supply curve, P_oranges ↑ and Q_oranges ↑.
Nothing has happened to orange supply — only demand shifted.

Question 8

Both demand and supply for electric scooters rise at the same time (D ↑ and S ↑). What can we say about the new equilibrium?

Q definitely rises; P could rise, fall, or stay the same P definitely rises; Q could rise, fall, or stay the same Both P and Q definitely rise Both P and Q are ambiguous

HintWhen curves move in the same direction, one equilibrium variable is definite and the other depends on the relative size of the shifts.

ExplanationD ↑ alone raises P and Q. S ↑ alone lowers P and raises Q. Stacked: both shifts raise Q (so Q definitely rises). But they push P in opposite directions — which wins depends on which shift is bigger. So P is ambiguous.

Question 9

An increase in the price of a good causes the demand curve for that good to shift left.

HintClassic trap. Is the good's own price a shifter or a variable on the curve?

ExplanationFalse. A change in the good's own price causes a movement along the demand curve (a change in quantity demanded) — not a shift of the curve. Demand shifts come from income, related prices, tastes, expectations, and the number of buyers. This is the single most-tested trap in Chapter 4.

Question 10

At a price above equilibrium price, the market has a shortage.

HintAbove equilibrium: high price. Sellers want to supply a lot; buyers want to buy little.

ExplanationFalse. Above P*, Qs > Qd → that's a surplus, not a shortage. Shortages happen below the equilibrium price, where Qd > Qs.

Question 11

If sellers expect the price of a good to rise next month, the current supply curve shifts left.

HintIf you knew the price would be higher next month, would you sell more today or hoard inventory?

ExplanationTrue. Sellers who expect higher prices next month have an incentive to hold back inventory and sell it later at the higher price. That reduces today's supply at every price — today's supply curve shifts left. (Mirror rule for buyers: expecting higher prices shifts demand right today.)

Question 12

If demand shifts left and supply shifts right, equilibrium quantity definitely falls.

HintD ↓ alone → Q ↓. S ↑ alone → Q ↑. What happens when the two effects on Q point in opposite directions?

ExplanationFalse. D ↓ pushes Q down; S ↑ pushes Q up. The two effects on Q are opposite, so Q is ambiguous. What is definite is P ↓ (both shifts push price down). Rule of thumb: when shifts are in opposite directions, price is definite and quantity is the unknown.

Question 13

The market demand curve is the vertical sum of each individual buyer's demand curve.

HintAt a given price, you add up every buyer's quantity — which axis is quantity on?

ExplanationFalse. It's the horizontal sum. At each price, you add quantities (the horizontal axis) across all individual buyers. Vertical summing is used elsewhere (e.g., public goods in Ch 11), but not for ordinary market demand.

Question h

In your own words, distinguish a "change in demand" from a "change in quantity demanded." Give one concrete example of each for the market for Starbucks lattes.

Hint"Change in demand" = shift of whole curve (caused by anything other than the good's own price). "Change in quantity demanded" = movement along the same curve (caused by the own price).

Sample answer A change in demand is a shift of the entire demand curve — the curve moves left or right because of something other than the good's own price (income, tastes, related prices, expectations, number of buyers). A change in quantity demanded is a movement along a fixed demand curve, caused only by a change in the good's own price.

Change in quantity demanded (Starbucks lattes): Starbucks raises the price of a grande latte from $5 to $6. Fewer lattes are bought — we slide up the same demand curve.

Change in demand (Starbucks lattes): Dunkin' (a substitute) slashes the price of its latte by half. At every Starbucks price, fewer people buy Starbucks — the whole Starbucks demand curve shifts left.

Question i

Apples and oranges are substitutes. A pest destroys half the apple crop. Using the three-step method, explain what happens to the equilibrium price and quantity of oranges. Draw or describe the graph.

HintStep 1: the pest directly hits the apple market, not the orange market. But it raises apple prices, which indirectly affects orange demand. Step 2: substitute's price ↑ → D_orange shifts which way? Step 3: read off new P* and Q*.

Sample answer Step 1 — Which curve shifts? The pest hits apple growers, not orange growers. It raises the price of apples, which in the orange market is a substitute price. Rising substitute price shifts demand for oranges (not supply of oranges).

Step 2 — Which direction? Apples are now more expensive. Buyers substitute toward oranges. At every orange price, quantity demanded rises — demand for oranges shifts right (D₀ → D₁).

Step 3 — New equilibrium. Along an unchanged orange-supply curve, the new intersection is up-and-to-the-right of the old one. So the equilibrium price of oranges rises and the equilibrium quantity of oranges rises.

Graph: standard S and D axes. Orange supply stays put. Draw D₁ parallel to D₀ but shifted right. Mark old equilibrium E₀ and new equilibrium E₁ higher and further right on the supply curve.

Practice Worksheet

Scenario — The Bubble Tea Market on State Street

Comparative Statics — Four News Headlines

Multiple Choice

True or False

Concept Short-Answer