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ECON101: Principles of Microeconomics

Unit 2: Supply and Demand   This unit will first introduce you the ceteris paribus assumption, which is crucial to building correlations between economic variables.  When using ceteris paribus, we assume that all variables – with the exception of those in explicit consideration – will remain constant.  We will then examine the supply and demand models and the resulting market equilibrium that occurs where the supply curve and the demand curve intersect.  We will also look at what causes movements along the curve and the set of factors that cause the curves to shift, affecting both price and quantity, before discussing the meaning and significance of elasticity.

Next, we will take a look at what happens when a market fails to produce a reasonable equilibrium.  This situation typically occurs when either the market is not competitive or complete, or its participants are ill-informed.  We will evaluate various ways in which the government can address these failures and begin to understand the intricate relationship between government and economics.

Unit 2 Time Advisory
This unit should take approximately 18.5 hours to complete.

☐    Introduction: 2 hours*

☐    Subunit 2.1: 5 minutes

☐    Subunit 2.2: 1 hour

☐    Subunit 2.3: 2 hours

☐    Subunit 2.4: 4 hours

☐    Subunit 2.5: 1.5 hours

☐    Subunit 2.6: 4 hours**

☐    Assessments: 3 hours

☐    Unit Review: 1 hour

*Note: The video lectures are 60 minutes each.
**Note: The video lecture is 60 minutes long.

Unit2 Learning Outcomes
Upon successful completion of this unit, the student will be able to: - Analyze and apply the mechanics of demand and supply for individuals, firms, and the market. - Determine equilibrium in the market under various situations that either cause movements or shifts in demand and supply. - Apply the concept of elasticity as a measure of responsiveness to various variables. - Analyze how the market can be manipulated through price controls or quantity controls.

  • Web Media: The Federal Reserve Bank of St. Louis’ “Economic Lowdown Video Companion Series” Link: The Federal Reserve Bank of St. Louis’ “Economic Lowdown Video Companion Series” (Flash)

    Instructions: Please click on the links to episodes 1–3, and watch all three episodes for an overview of supply and demand. The material is available as an audio podcast or as visual media.

    Watching all three episodes and pausing to take notes should take approximately 30 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

2.1 The Ceteris Paribus Assumption   Note: The Latin phrase “ceteris paribus” means “all other things remaining equal.”  Because there are multiple factors influencing any one variable, we apply this assumption in order to segregate the effect that one factor has on the variable in the question, keeping all other factors unchanged.  In other words, if we want to examine the effect of one (independent) variable on another (dependent) variable, we need to ensure through the ceteris paribus assumption that the effect of other independent variables on the dependent variable is constant.  We will encounter this term quite often in Demand and Supply Models.

  • Reading: AmosWeb’s “Ceteris Paribus” Link: AmosWeb’s “Ceteris Paribus” (HTML)
     
    Instructions: Please click on the link above to learn the formal definition of ceteris paribus.  As a practice exercise, identify a variable and list the multiple factors that may be influencing it.  For example, say you are planning to request an increase in your salary.  What are the factors that influence your salary?  Do you think you can attribute the change in your salary to any one of these factors if all of the factors influencing it were simultaneously changing?

    Reading this article should take approximately 5 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

2.2 Demand   - Reading: Principles of Microeconomics: “Chapter 3, Section 1: Demand” Link: Principles of Microeconomics: “Chapter 3, Section 1: Demand” (PDF)

 Instructions: Read this section to learn about the theory of
demand.  Use the data from the text to practice constructing and
drawing the demand curve on your own, either on a paper or in
Excel.  Please take a moment to read through the stated learning
outcomes for this chapter of the text, which you can find at the
beginning of each section.  These should be your goals as you read
through the chapter.  The reading covers 2.2.1-2.2.2.  Please read
this section on “Demand” in its entirety, including the introduction
to Chapter 3.  

 Reading this section should take approximately 30 minutes.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-Share-Alike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work’s original creator or licensee.

2.2.1 The Demand Curve   Note: The demand curve shows the relationship between the price of a good and the quantity demanded at each price.  The demand curve is negatively sloped because of the inverse relationship between price and quantity demanded.  For example, assuming that the ceteris paribus condition applies, i.e. all other factors affecting demand remain unchanged, if the price of an iPhone drops, what do you think will happen to the demand for the iPhone?  Conversely, if the price increases, would more people be buying the iPhone or less?

2.2.2 Changes in Demand   Note: Pay special attention to movement along the curve versus shifts of the curve.  The former refers to changes in the quantity demanded due to price changes.  The latter refers to the breakdown of the ceteris paribus condition.  In order to understand shifts in demand curve, you need to know that price remains constant and the shift of the demand curve is in response to changes in other factors that affect demand, including changes in the prices of related goods, changes in income, changes in tastes, and changes in expectations.

The resulting effect is that a rightward shift of the curve indicates an increase in demand and signifies that at any given price, consumers demand a larger quantity of the good than before, while a “decrease in demand” refers to a leftward shift of the curve and signifies that at any given price, consumers demand a smaller quantity of the good than before.

2.3 Supply   - Reading: Principles of Microeconomics: “Chapter 3, Section 2: Supply” Link: Principles of Microeconomics: “Chapter 3, Section 2: Supply” (PDF)

 Instructions: Read this section to learn about the theory of
supply.  Use the data from the text to practice drawing the supply
curve on your own, either on paper or in excel.  Please read this
section on Supply in its entirety.  Please take a moment to read
through the stated learning outcomes for this chapter of the text,
which you can find at the beginning of each section.  These should
be your goals as you read through the chapter.  This reading covers
sections 2.3.1 and 2.3.2.  

 Reading this section should take approximately 1 hour and 30
minutes.  

 Terms of Use: The text was adapted by The Saylor Foundation under a
[Creative Commons-Attribution-NonCommerical-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work's original creator or licensee.

2.3.1 The Supply Curve   Note: The supply curve is a mirror reflection of the demand curve.  You should recognize that the supply curve operates from the firm’s point of view, such that if a product is highly priced, the firm will want to supply more of it.  As such, it is a positively sloped curve indicating the positive relationship between price of the good and quantity supplied.

2.3.2 Changes in Supply   Note: The demand curve is similar to the supply curve in that an “increase” refers to a rightward shift of the curve and signifies that there will be a larger quantity of the good than before; a “decrease in supply” refers to a leftward shift of the curve and signifies that there will be a lesser quantity of the good than before.  This section will present the three principal factors that shift the supply curve: changes in input prices, changes in technology, and changes in expectations.

2.4 Market Equilibrium   Note: When left alone, a market will move to equilibrium – in other words, the market price will move to the level at which the quantity supplied equals the quantity demanded.  However, this outcome can be both desirable and undesirable for buyers or sellers.

  • Reading: Principles of Microeconomics: “Chapter 3, Section 3: Demand, Supply, and Equilibrium” Link: Principles of Microeconomics: “Chapter 3, Section 3: Demand, Supply, and Equilibrium” (PDF)

    Instructions: Read this section to learn how demand and supply interact with one another to determine prices and quantities that may or may not be optimal.  Please take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section.  These should be your goals as you read through the chapter.  This reading covers units 2.4.1-2.4.3.

    Reading this section should take approximately 1 hour.

    Terms of Use: The text was adapted by The Saylor Foundation under the Creative Commons-Attribution-NonCommerical-ShareAlike 3.0 Licesne without attribution as requested by the work's original creator or licensee.

2.4.1 Market Equilibrium   - Lecture: Khan Academy’s “Market Equilibrium” Link: Khan Academy’s “Market Equilibrium” (YouTube)

 Instructions: Please watch the entire lecture, which is about
market equilibrium.  

 Watching this lecture should take approximately 10 minutes.  

 Terms of Use: This video is licensed under a [Creative Commons
Attribution-NonCommercial-ShareAlike License 3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/us/deed.en_CA).
 It is attributed to the Khan Academy.

2.4.2 Market Surplus and Shortage   2.4.3 Simultaneous Shifts in Supply and Demand   - Lecture: Khan Academy’s “Changes in Market Equilibrium” Link: Khan Academy’s “Changes in Market Equilibrium” (YouTube)

 Instructions: Please watch the entire lecture, which is about
changes in market equilibrium.  

 Watching this lecture should take approximately 10 minutes.  

 Terms of Use: This video is licensed under a [Creative Commons
Attribution-NonCommercial-ShareAlike License 3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/us/deed.en_CA).
 It is attributed to the Khan Academy.

2.4.4 Putting Demand and Supply to Work   - Reading: Principles of Microeconomics: “Chapter 4, Section 1: Putting Demand and Supply to Work” Link: Principles of Microeconomics: “Chapter 4, Section 1: Putting Demand and Supply to Work” (PDF)

 Instructions: Read this section to learn about some applications of
the demand and supply model.  

 Reading this section should take approximately 1 hour.  

 Terms of Use: The text was adapted by The Saylor Foundation under
a[Creative Commons-Attribution-NonCommerical-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work's original creator or licensee.
  • Reading: Bookboon.com: Krister Ehlester's Essentials of Microeconomics Link: Bookboon.com: Krister Ehlester’s Essentials of Microeconomics (PDF)

    Instructions: When you click the link above, you will be directed to a page on which you can download the entire book as a PDF.  Please read Chapter 2, Sections 2.1-2.3 (pages 12-17) for a mathematical exposition of the demand and supply model.

    Reading these sections should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Assessment: Econ100’s “Demand and Supply Quiz: Chapter 4” Link: Econ100’s “Demand and Supply Quiz: Chapter 4” (HTML)

    Instructions: Please follow the link to get to the main page of Econ100.  Click on the “Quiz” tab on the left hand side menu and then go to Chapter 4 to take the test.  Please attempt all four levels of the quiz for a thorough assessment of your understanding of the material covered so far in this unit.

    Completing this assessment should take approximately 1 hour and 30 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

2.5 Manipulating the Market   2.5.1 Price Controls: Ceilings and Floors   - Reading: Principles of Microeconomics: “Chapter 4, Section 2: Government Intervention in Market Prices: Price Floors and Price Ceilings” Link: Principles of Microeconomics: “Chapter 4, Section 2: Government Intervention in Market Prices: Price Floors and Price Ceilings” (PDF)

 Instructions: Read this section to learn why the government
sometimes chooses to control prices. Take a moment to read through
the stated learning outcomes for this chapter of the text, which you
can find at the beginning of each section.  

 Reading this section should take approximately 45 minutes.  

 Terms of Use: The text was adapted by The Saylor Foundation under a
[CreativeCommons-Attribution-NonCommercail-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work's original creator or
licensee. 

2.5.2 Controlling Quantities   Note: While the market typically controls prices, it can also be manipulated by controlling quantities through Quotas, Licenses, and Wedges.  We will now study the results that come about in a market place when general restrictions on quantities are instituted.

  • Reading: Bookboon.com: Krister Ehlester’s Essentials of Microeconomics Link: Bookboon.com: Krister Ehlester’s Essentials of Microeconomics (PDF)

    Instructions: When you click the link above, you will be directed to a page from which you can download the entire book as a PDF.  Proceed to Section 2.4, entitled ”Price and Quantity Regulations” (page 17), and review the Price Ceilings and Price Floor analysis.  End with Section 2.4.3, entitled “Quantity Regulations” (page 20), pertaining to Quantity Regulations.

    Reading this section should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

2.6 Elasticity   Note: Elasticity is a measure of responsiveness.  It measures the percentage change in something based on the percentage change in something else that affects it.  For example, Price Elasticity of Demand implies the percentage change in quantity demanded for a good due to a percentage change in the price of that good.

  • Reading: The Economic Education Group of the Federal Reserve Bank of St. Louis: Scott A. Wolla’s “Higher Gasoline Prices: Temporary or Time to Buy a Hybrid?” Link: The Economic Education Group of the Federal Reserve Bank of St. Louis: Scott A. Wolla’s “Higher Gasoline Prices: Temporary or Time to Buy a Hybrid?” (PDF)

    Instructions: Please click on the link above, select the “September 2012” link on the left side of the webpage, and then select the “PDF of Classroom Edition” link to download this material. Please read through this pamphlet and attempt the questions before viewing the answers. The answers are provided to you as a self-check.

    Reading this material and completing these questions should take you approximately 1 hour and 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: State University of New York at Oswego: Professor John Kane’s Lecture Notes on ECON 101: “Chapter 6: Elasticity” Link: State University of New York at Oswego: Professor John Kane’s Lecture Notes on ECON 101“Chapter 6: Elasticity” (HTML)

    Available in:
    Flash
    PPT

    Instructions: When you click on the link above, you will be directed to a webpage with a list of contents.  Please click on Chapter 6 and read the HTML version of the lecture notes.  The material covers all sections in subunit 2.6.

    Reading this chapter should take approximately 30 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Lecture: YouTube: Massachusetts Institute of Technology: John Gruber’s “Lecture 3: Elasticity” Link: YouTube: Massachusetts Institute of Technology: John Gruber’s “Lecture 3: Elasticity” (YouTube)

    Instructions: Please click on the link above and watch this video, focusing on both how elasticity is calculated as well as its potential implications for health care. Consider if you agree or disagree with the possible social and health implications of changing the overall elasticity of demand for national health systems.

    Watching this video and pausing to take notes should take approximately 1 hour.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Lecture: Khan Academy’s “Price Elasticity of Demand” Link: Khan Academy’s “Price Elasticity of Demand” (YouTube)

    Instructions: Please watch the entire lecture, which is about price elasticity of demand.

    Watching this lecture should take approximately 15 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “More on Elasticity of Demand” Link: Khan Academy’s “More on Elasticity of Demand” (YouTube)

    Instructions: Please watch the entire lecture, which is about elasticity of demand.

    Watching this lecture should take approximately 5 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Constant Unit Elasticity” Link: Khan Academy’s “Constant Unit Elasticity” (YouTube)

    Instructions: Please watch the entire lecture, which is about constant unit elasticity.

    Watching this lecture should take approximately 5 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Total Revenue and Elasticity” Link: Khan Academy’s “Total Revenue and Elasticity” (YouTube)

    Instructions: Please watch the entire lecture, which is about total revenue and elasticity.

    Watching this lecture should take approximately 10 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “More on Total Revenue and Elasticity” Link: Khan Academy’s “More on Total Revenue and Elasticity” (YouTube)

    Instructions: Please watch the entire lecture, which is about total revenue and elasticity.

    Watching this lecture should take approximately 10 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Cross Elasticity of Demand” Link: Khan Academy’s “Cross Elasticity of Demand” (YouTube)

    Instructions: Please watch the entire lecture, which is about cross elasticity of demand.

    Watching this lecture should take approximately 10 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Elasticity of Supply” Link: Khan Academy’s “Elasticity of Supply” (YouTube)

    Instructions: Please watch the entire lecture, which is about elasticity of supply.

    Watching this lecture should take approximately 10 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Elasticity and Strange Percent Changes” Link: Khan Academy’s “Elasticity and Strange Percent Changes” (YouTube)

    Instructions: Please watch the entire lecture, which is about elasticity and strange percent changes.

    Watching this lecture should take approximately 10 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

2.6.1 Price Elasticity of Demand   2.6.2 Cross Price Elasticity of Demand   2.6.3 Income Elasticity of Demand   2.6.4 Price Elasticity of Supply   - Assessment: Econ100’s “Markets in Action Quiz: Chapter 7” Link: Econ100’s “Markets in Action Quiz: Chapter 7” (HTML)

 Instructions: Please follow the link to get to the main page of
Econ100.  Click on the “Quiz” tab on the left hand side menu and
then go to Chapter 7 to take the test.  Please attempt all four
levels of the quiz for a thorough assessment of your understanding
of the material covered in sections 2.5 and 2.6.  

 Completing this assessment should take approximately 1 hour and 30
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above
  • Assessment: Econ100’s “Elasticity Quiz: Chapter 5” Link: Econ100’s “Elasticity Quiz: Chapter 5” (HTML)

    Instructions: Please follow the link to get to the main page of Econ100.  Click on the “Quiz” tab on the left hand side menu and then go to Chapter 5 to take the test.  Please attempt all four levels of the quiz for a thorough assessment of your understanding of the material covered in this unit.

    Completing this assessment should take approximately 1 hour and 30 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

End of Unit 2 Review   - Reading: MIT OpenCourseWare: “Principles of Economics Lecture Notes D2-D4” Link: MIT OpenCourseWare: “Principles of Economics Lecture Notes D2”“Principles of Economics Lecture Notes D3”, and “Principles of Economics Lecture Notes D4” (PDF)

 Instructions: These are optional readings.  Please read through the
notes in the first link (entitled D2, or “The Basics of Supply and
Demand”) for a brief review of the theory covered in subunits
2.1-2.5 as well as the second and third links (entitled D3, or “The
Elasticities of Demand,” and D4, or “Price Elasticity of Supply”) to
review material studied in subunit 2.6.  Note that for the third
link, you only need to read the first topic, “Price Elasticity of
Supply”.  

 Reading these sections should take approximately 1 hour.  

 Terms of Use: The materials above are released under a [Creative
Commons Attribution-NonCommercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  You can
find the original MIT versions of the
materials [here](http://ocw.mit.edu/courses/economics/14-01-principles-of-microeconomics-fall-2007/lecture-notes/).