Module 3: Demand and Supply
Section outline
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This chapter introduces the economic model of demand and supply—one of the most powerful models in all of economics. The discussion here begins by examining how demand and supply determine the price and the quantity sold in markets for goods and services, and how changes in demand and supply lead to changes in prices and quantities.
When economists talk about prices, they are less interested in making judgments than in gaining a practical understanding of what determines prices and why prices change.
Consider a price most of us contend with weekly: that of a gallon of gas. Why was the average price of gasoline in the United States $3.71 per gallon in June 2014? Why did the price for gasoline fall sharply to $1.96 per gallon by January 2016? To explain these price movements, economists focus on the determinants of what gasoline buyers are willing to pay and what gasoline sellers are willing to accept.
As it turns out, the price of gasoline in June of any given year is nearly always higher than the price in January of that same year. Over recent decades, gasoline prices in midsummer have averaged about 10 cents per gallon more than their midwinter low. The likely reason is that people drive more in the summer, and are also willing to pay more for gas, but that does not explain how steeply gas prices fell. Other factors were at work during those 18 months, such as increases in supply and decreases in the demand for crude oil.
Upon completion of this module, you will be able to:- Explain demand, quantity demanded, and the law of demand
- Identify a demand curve and a supply curve
- Explain supply, quantity supplied, and the law of supply
- Explain equilibrium, equilibrium price, and equilibrium quantity
- Identify factors that affect demand
- Graph demand curves and demand shifts
- Identify factors that affect supply
- Graph supply curves and supply shifts
- Identify equilibrium price and quantity through the four-step process
- Graph equilibrium price and quantity
- Contrast shifts of demand or supply and movements along a demand or supply curve
- Graph demand and supply curves, including equilibrium price and quantity, based on real-world examples
- Explain price controls, price ceilings, and price floors
- Analyze demand and supply as a social adjustment mechanism
- Contrast consumer surplus, producer surplus, and social surplus
- Explain why price floors and price ceilings can be inefficient
- Analyze demand and supply as a social adjustment mechanism
To achieve these objectives: [Edit these items to match your resources and activities.]
- Read the Module 3 Introduction
- Read Chapter 3 in the course textbook, Microeconomics.
- Complete Module 3 Discussion.
- Complete Module 3 Quiz.
- Complete the Module 3 Assignment.
- For course instructors, list any other reading assignments here.
[Include all reading assignments here that are outside of Moodle. Be as
concise as possible. More information can be included in the
third-party section below, if necessary.]
- Complete the [specific activities in the module. Include all in the order you want them completed.]
Module Pressbooks Resources and Activities
You will find the following resources and activities in this module at the Pressbooks website. Click on the links below to access or complete each item.
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Students mustMark as done
Chapter 3 of the Microeconomics
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Students mustMark as done
Module 3 In Class Activity (hide from students)
Course SLO 1: Identify the basic economic principles that serve as the foundation of economic analysis
Course SLO 2: Understand the interaction of supply and demand in determining prices and the role of prices in coordinating economic activity
Module SLO: 3.4.2 - Explain price controls, price ceilings, and price floors
The previous chapter introduced Adam Smith’s invisible hand. In this discussion, your task is to:
1. Explain how markets can allocate resources in a way that they go to those who value them the most
A quick hint is to think about examples of new products and when they are released, but you can also think about goods that are needs for some people, but wants for others.
Instructor Notes with Game Consoles Example:
In late 2020, the newest generation of game consoles were released by Sony with the PlayStation 5 and Microsoft with the Xbox Series S/X. Since their release, Sony and Microsoft have been unable to keep up with demand, and whenever they have inventory available, it is about instantly sold out. If one wanted to get one of the new consoles, and not wait for the shortage to alleviate itself, one would need to buy a console on the secondary market for around double the retail price of the product. The secondary market has made it so that people who really want the console will pay the higher price; then as shortages in the technology industry alleviate themselves, more consoles will be available for the people who are willing to wait for a lower price.
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