ARE 201 · Unit 4
Demand & Supply
Review Session
Curves · Shifters · Equilibrium · Linked Markets
Today's route
Five questions organize the review
1
Point or curve?
Why the good's current price is not a demand shifter.
2
Which curve moves?
Identify demand and supply shifters.
3
What happens to equilibrium?
Combine the effects of one or two curve shifts.
4
Can we calculate it?
Read equations and solve for the intersection.
5
Do markets connect?
Trace one shock through related markets.
Key idea 1 · Predict first
The price of ice cream falls from $6 to $4
Nothing else changes. What happens in the market demand graph?
Key idea 1 · See the mechanism
The price is already inside the demand schedule
Market demand for ice cream
| Price | Quantity demanded |
|---|
| $6 | 20 |
| $4 | 50 |
| $2 | 90 |
The price falls, but nobody's preferences, income, expectations, or number of buyers changes.
Same table, different row: quantity demanded rises from 20 to 50.
Key idea 1 · Now change a shifter
It becomes 95°F: compare buyers at the same prices
| Price | Before | After 95°F |
|---|
| $6 | 20 | 40 |
| $4 | 50 | 75 |
| $2 | 90 | 110 |
Hold price fixed. Do consumers now want a different quantity?
At the same $4 price, quantity demanded rises from 50 to 75. The entire demand schedule has changed.
Key idea 1 · The decision rule
Use the same-price test
At the same price, do consumers now want a different quantity?
No
The relationship has not changed. Select a different point from the same curve.
PRICE MOVES THE POINT
→
Yes
The quantity buyers want at that price has changed. The entire curve shifts.
A SHIFTER MOVES THE CURVE
Key idea 1 · Avoid the wording trap
Three “price” statements—but three different roles
Coffee's current price
The price of coffee falls.
Movement along coffee demandCoffee's own current price is on the vertical axis.
A related good's price
The price of tea rises.
Coffee demand shifts rightTea is a substitute, so buyers switch toward coffee at every coffee price.
Expected future price
Coffee is expected to cost more next week.
Current coffee demand shifts rightSome buyers purchase now instead of waiting for the higher future price.
Demand shifters · Quick check
Which event shifts gasoline demand left?
Demand shifters · Quick check
Which statement is correct?
Income falls. Hold the supply curve fixed.
Market shocks
Use the same four steps every time
1
Name the market
Whose price and quantity are on the axes?
→
2
Identify the change
Is it the good's own current price or another determinant?
→
3
Shift one curve
Demand or supply? Left or right?
→
4
Find the new intersection
Compare the new equilibrium with the old one.
Market shifts · NC State coffee market
Predict each shock before revealing it
A tariff raises the cost of imported coffee beans.
Which determinant changes? What happens to P* and Q*?
Input cost ↑ → S shifts left → P* ↑, Q* ↓
NC State students return for the fall semester.
Think about the number of potential buyers near campus.
Number of buyers ↑ → D shifts right → P* ↑, Q* ↑
A large tea harvest makes tea less expensive.
Assume coffee and tea are substitutes.
Price of a substitute ↓ → coffee D shifts left → P* ↓, Q* ↓
A stronger local job market raises incomes.
Assume coffee is a normal good.
Income ↑ → coffee D shifts right → P* ↑, Q* ↑
Single shocks · Build the pattern
Can you derive all four outcomes?
Select one outcome. The graph will show the curve shift and the new equilibrium.
Reading a demand function
What do the signs tell us?
q₁ = 1000 − 10p₁ + 5p₂ + 2I
Reading a demand function
Turn parameter changes into curve shifts
q₁ = 1000 − 10p₁ + 5p₂ + 2I
Baseline
p₂ = 50
I = 100
q₁ = 1450 − 10p₁
Inverse demand: p₁ = 145 − 0.1q₁
The substitute becomes cheaper
p₂: 50 → 10
I = 100
q₁ = 1250 − 10p₁
Demand shifts left.
Income rises
p₂ = 50
I: 100 → 200
q₁ = 1650 − 10p₁
Demand shifts right.
Calculating equilibrium
Where do demand and supply intersect?
QD = 9000 − 300P
QS = 1000 + 700P
Linked markets · Predict first
Production technology improves for Jellycat
Assume Jellycat plush toys and Labubu figures are substitutes. What happens in both markets?
Linked markets · Trace the mechanism
One shock travels through two markets
Jellycat market
→
Labubu market
Technology improves → Jellycat S right → Jellycat price falls → Labubu D left → Labubu price and quantity fall
Two simultaneous shocks · Core method
Analyze each shift separately—then combine
Demand increases
More buyers enter the Triangle rental market.
Alone: P* ↑ and Q* ↑
+
Supply increases
Several new apartment buildings open.
Alone: P* ↓ and Q* ↑
Combine the arrows: both shifts raise Q*, so Q* definitely increases. Their price effects oppose each other, so P* is ambiguous.
Two simultaneous shocks · Magnitudes matter
When D and S both increase, experiment with shift sizes
P* unchanged · Q* increasesEqual-sized shifts offset in price, while both raise quantity.
Two simultaneous shocks · Organize the possibilities
Use the matrix only after explaining each cell
| Demand \ Supply | No change in S | S increases | S decreases |
|---|
| No change in D | P same
Q same | P ↓
Q ↑ | P ↑
Q ↓ |
| D increases | P ↑
Q ↑ | P ambiguous
Q ↑ | P ↑
Q ambiguous |
| D decreases | P ↓
Q ↓ | P ↓
Q ambiguous | P ambiguous
Q ↓ |
Ambiguous does not mean “nothing happens.” It means the direction depends on the relative magnitudes of the two shifts.
Two simultaneous shocks · Practice
The Triangle rental-apartment market
A major employer hires thousands of workers while several new apartment buildings open. What can we determine?
Two simultaneous shocks · Agricultural practice
Two shocks hit the fresh-strawberry market
A nutrition report increases consumer interest while a severe drought reduces the harvest. What can we determine?
Extension · Reading market data
Higher price and higher quantity: upward demand?
Across several towns, researchers observe:
Towns with higher rice prices also purchase more rice.
Does this prove demand slopes upward?
Extension · Oil market
Same framework, three very different shocks
🌎
Rapid global economic growth
Production, shipping, and travel expand around the world.
D right → P* ↑, Q* ↑
📉
A global recession
Production, shipping, and travel contract around the world.
D left → P* ↓, Q* ↓
⚙️
New extraction technology
U.S. producers can extract substantially more oil at each price.
S right → P* ↓, Q* ↑
Final checkpoint · Combine two shocks
Fertilizer prices fall while consumer income rises
For a normal agricultural good, which conclusion is correct?
Before you leave
Four habits prevent most mistakes
Run the same-price test
If quantity changes at the same price, the curve shifted. A change in the good's own current price moves the point.
POINT OR CURVE?
Name the market first
The price of one good can be on the axis in its own market and a shifter in another market.
WHICH MARKET?
Separate cause from outcome
A shifter moves a curve. The new intersection determines equilibrium price and quantity.
SHIFT → EQUILIBRIUM
For two shocks, combine last
Analyze each shift separately. A variable is ambiguous when the two separate effects point in opposite directions.
SEPARATE → COMBINE