Solved by verified expert:Select a news article(s) that discuss the economic concept: demand, supply, and equilibrium price of a particular productas the topic for your term paper. Usually it is enough to choose just one article, however if you can find more than one article, you can use them. At least one news article should be dated within the previous two months. Your task for the Term Paper is to analyze the issue described in the article using the economic concepts and theory learned in this class. Refer to the course content materials and use specific economic vocabulary within your term paper. The article you choose may not use these exact terms; therefore, it is incumbent upon you to convert the article language into economic language as is appropriate.Include at least one graph developed in our course. Please note the Term paper should be written in your own words. You can use short quotes from the article(s) to support your statements. However the size of these quotes should be reduced to minimum. No more than 20% of the text of the term paper should be made up of quotes. (less is better!!!).Please also avoid copying the materials from any textbooks, including our textbook.Please be aware that Wikipedia, Investopedia, and other on-line dictionaries and encyclopedias are not verifiable sources of reliable information. Acceptable sources of the information are: research papers, newspaper articles, and books.Please note that this is the course of microeconomics, so you should choose the concepts related to microeconomics (not macroeconomics).The concept to be used is:demand, supply, and equilibrium price of a particular productPlease include citations from attached material Also, this youtube video as areference:Format of the Paper:Written projects must be:
typed, double-spaced, in 12-point Times New Roman or Arial font, with margins no wider than one inch
have footnotes or endnotes, with correct citations
have a bibliography of sources used
include, for each entry, the author, title, city and state of publisher, publisher’s name, year, and page numbers
prepared using word processing software (Microsoft Word preferred), in a manner similar to the preparation of a written assignment for classroom submissionThe Term Paper should be about 3-5 or more double-spaced typewritten pages (without tables and graphs)Please note that hand-written and scanned works, pdf. files, jpg. files, as well as files posted in google drive, will not be accepted or graded.The paper should be written in APA style Research Paper format.
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Chapter 3: Demand and Supply in the text Principles of Microeconomics by OpenStax is available under
a Creative Commons Attribution 4.0 license. © Feb 25, 2016 OpenStax.
Chapter 3 | Demand and Supply
3 | Demand and Supply
Figure 3.1 Farmer’s Market Organic vegetables and fruits that are grown and sold within a specific geographical
region should, in theory, cost less than conventional produce because the transportation costs are less. That is not,
however, usually the case. (Credit: modification of work by Natalie Maynor/Flickr Creative Commons)
Why Can We Not Get Enough of Organic?
Organic food is increasingly popular, not just in the United States, but worldwide. At one time, consumers had
to go to specialty stores or farmer’s markets to find organic produce. Now it is available in most grocery stores.
In short, organic is part of the mainstream.
Ever wonder why organic food costs more than conventional food? Why, say, does an organic Fuji apple cost
$1.99 a pound, while its conventional counterpart costs $1.49 a pound? The same price relationship is true for
just about every organic product on the market. If many organic foods are locally grown, would they not take
less time to get to market and therefore be cheaper? What are the forces that keep those prices from coming
down? Turns out those forces have a lot to do with this chapter’s topic: demand and supply.
Introduction to Demand and Supply
In this chapter, you will learn about:
• Demand, Supply, and Equilibrium in Markets for Goods and Services
• Shifts in Demand and Supply for Goods and Services
• Changes in Equilibrium Price and Quantity: The Four-Step Process
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Chapter 3 | Demand and Supply
• Price Ceilings and Price Floors
An auction bidder pays thousands of dollars for a dress Whitney Houston wore. A collector spends a small fortune
for a few drawings by John Lennon. People usually react to purchases like these in two ways: their jaw drops because
they think these are high prices to pay for such goods or they think these are rare, desirable items and the amount paid
seems right.
Visit this website (http://openstaxcollege.org/l/celebauction) to read a list of bizarre items that have been
purchased for their ties to celebrities. These examples represent an interesting facet of demand and supply.
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 $2.07 per gallon by January 2015? 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 six months, such as
increases in supply and decreases in the demand for crude oil.
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.
3.1 | Demand, Supply, and Equilibrium in Markets for
Goods and Services
By the end of this section, 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 supply, and the law of supply
• Explain equilibrium, equilibrium price, and equilibrium quantity
First let’s first focus on what economists mean by demand, what they mean by supply, and then how demand and
supply interact in a market.
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Chapter 3 | Demand and Supply
45
Demand for Goods and Services
Economists use the term demand to refer to the amount of some good or service consumers are willing and able to
purchase at each price. Demand is based on needs and wants—a consumer may be able to differentiate between a
need and a want, but from an economist’s perspective they are the same thing. Demand is also based on ability to pay.
If you cannot pay for it, you have no effective demand.
What a buyer pays for a unit of the specific good or service is called price. The total number of units purchased at
that price is called the quantity demanded. A rise in price of a good or service almost always decreases the quantity
demanded of that good or service. Conversely, a fall in price will increase the quantity demanded. When the price of
a gallon of gasoline goes up, for example, people look for ways to reduce their consumption by combining several
errands, commuting by carpool or mass transit, or taking weekend or vacation trips closer to home. Economists call
this inverse relationship between price and quantity demanded the law of demand. The law of demand assumes that
all other variables that affect demand (to be explained in the next module) are held constant.
An example from the market for gasoline can be shown in the form of a table or a graph. A table that shows the
quantity demanded at each price, such as Table 3.1, is called a demand schedule. Price in this case is measured in
dollars per gallon of gasoline. The quantity demanded is measured in millions of gallons over some time period (for
example, per day or per year) and over some geographic area (like a state or a country). A demand curve shows the
relationship between price and quantity demanded on a graph like Figure 3.2, with quantity on the horizontal axis
and the price per gallon on the vertical axis. (Note that this is an exception to the normal rule in mathematics that the
independent variable (x) goes on the horizontal axis and the dependent variable (y) goes on the vertical. Economics
is not math.)
The demand schedule shown by Table 3.1 and the demand curve shown by the graph in Figure 3.2 are two ways of
describing the same relationship between price and quantity demanded.
Figure 3.2 A Demand Curve for Gasoline The demand schedule shows that as price rises, quantity demanded
decreases, and vice versa. These points are then graphed, and the line connecting them is the demand curve (D).
The downward slope of the demand curve again illustrates the law of demand—the inverse relationship between
prices and quantity demanded.
Price (per gallon)
Quantity Demanded (millions of gallons)
$1.00
800
$1.20
700
$1.40
600
Table 3.1 Price and Quantity Demanded of Gasoline
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Chapter 3 | Demand and Supply
Price (per gallon)
Quantity Demanded (millions of gallons)
$1.60
550
$1.80
500
$2.00
460
$2.20
420
Table 3.1 Price and Quantity Demanded of Gasoline
Demand curves will appear somewhat different for each product. They may appear relatively steep or flat, or they
may be straight or curved. Nearly all demand curves share the fundamental similarity that they slope down from left
to right. So demand curves embody the law of demand: As the price increases, the quantity demanded decreases, and
conversely, as the price decreases, the quantity demanded increases.
Confused about these different types of demand? Read the next Clear It Up feature.
Is demand the same as quantity demanded?
In economic terminology, demand is not the same as quantity demanded. When economists talk about
demand, they mean the relationship between a range of prices and the quantities demanded at those prices,
as illustrated by a demand curve or a demand schedule. When economists talk about quantity demanded, they
mean only a certain point on the demand curve, or one quantity on the demand schedule. In short, demand
refers to the curve and quantity demanded refers to the (specific) point on the curve.
Supply of Goods and Services
When economists talk about supply, they mean the amount of some good or service a producer is willing to supply at
each price. Price is what the producer receives for selling one unit of a good or service. A rise in price almost always
leads to an increase in the quantity supplied of that good or service, while a fall in price will decrease the quantity
supplied. When the price of gasoline rises, for example, it encourages profit-seeking firms to take several actions:
expand exploration for oil reserves; drill for more oil; invest in more pipelines and oil tankers to bring the oil to plants
where it can be refined into gasoline; build new oil refineries; purchase additional pipelines and trucks to ship the
gasoline to gas stations; and open more gas stations or keep existing gas stations open longer hours. Economists call
this positive relationship between price and quantity supplied—that a higher price leads to a higher quantity supplied
and a lower price leads to a lower quantity supplied—the law of supply. The law of supply assumes that all other
variables that affect supply (to be explained in the next module) are held constant.
Still unsure about the different types of supply? See the following Clear It Up feature.
Is supply the same as quantity supplied?
In economic terminology, supply is not the same as quantity supplied. When economists refer to supply, they
mean the relationship between a range of prices and the quantities supplied at those prices, a relationship
that can be illustrated with a supply curve or a supply schedule. When economists refer to quantity supplied,
they mean only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply
refers to the curve and quantity supplied refers to the (specific) point on the curve.
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Chapter 3 | Demand and Supply
47
Figure 3.3 illustrates the law of supply, again using the market for gasoline as an example. Like demand, supply can
be illustrated using a table or a graph. A supply schedule is a table, like Table 3.2, that shows the quantity supplied
at a range of different prices. Again, price is measured in dollars per gallon of gasoline and quantity demanded is
measured in millions of gallons. A supply curve is a graphic illustration of the relationship between price, shown
on the vertical axis, and quantity, shown on the horizontal axis. The supply schedule and the supply curve are just
two different ways of showing the same information. Notice that the horizontal and vertical axes on the graph for the
supply curve are the same as for the demand curve.
Figure 3.3 A Supply Curve for Gasoline The supply schedule is the table that shows quantity supplied of gasoline
at each price. As price rises, quantity supplied also increases, and vice versa. The supply curve (S) is created by
graphing the points from the supply schedule and then connecting them. The upward slope of the supply curve
illustrates the law of supply—that a higher price leads to a higher quantity supplied, and vice versa.
Price (per gallon)
Quantity Supplied (millions of gallons)
$1.00
500
$1.20
550
$1.40
600
$1.60
640
$1.80
680
$2.00
700
$2.20
720
Table 3.2 Price and Supply of Gasoline
The shape of supply curves will vary somewhat according to the product: steeper, flatter, straighter, or curved. Nearly
all supply curves, however, share a basic similarity: they slope up from left to right and illustrate the law of supply:
as the price rises, say, from $1.00 per gallon to $2.20 per gallon, the quantity supplied increases from 500 gallons to
720 gallons. Conversely, as the price falls, the quantity supplied decreases.
Equilibrium—Where Demand and Supply Intersect
Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal
axis, the demand curve and supply curve for a particular good or service can appear on the same graph. Together,
demand and supply determine the price and the quantity that will be bought and sold in a market.
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Chapter 3 | Demand and Supply
Figure 3.4 illustrates the interaction of demand and supply in the market for gasoline. The demand curve (D) is
identical to Figure 3.2. The supply curve (S) is identical to Figure 3.3. Table 3.3 contains the same information in
tabular form.
Figure 3.4 Demand and Supply for Gasoline The demand curve (D) and the supply curve (S) intersect at the
equilibrium point E, with a price of $1.40 and a quantity of 600. The equilibrium is the only price where quantity
demanded is equal to quantity supplied. At a price above equilibrium like $1.80, quantity supplied exceeds the
quantity demanded, so there is excess supply. At a price below equilibrium such as $1.20, quantity demanded
exceeds quantity supplied, so there is excess demand.
Price (per
gallon)
Quantity demanded (millions of
gallons)
Quantity supplied (millions of
gallons)
$1.00
800
500
$1.20
700
550
$1.40
600
600
$1.60
550
640
$1.80
500
680
$2.00
460
700
$2.20
420
720
Table 3.3 Price, Quantity Demanded, and Quantity Supplied
Remember this: When two lines on a diagram cross, this intersection usually means something. The point where the
supply curve (S) and the demand curve (D) cross, designated by point E in Figure 3.4, is called the equilibrium.
The equilibrium price is the only price where the plans of consumers and the plans of producers agree—that is,
where the amount of the product consumers want to buy (quantity demanded) is equal to the amount producers want
to sell (quantity supplied). This common quantity is called the equilibrium quantity. At any other price, the quantity
demanded does not equal the quantity supplied, so the market is not in equilibrium at that price.
In Figure 3.4, the equilibrium price is $1.40 per gallon of gasoline and the equilibrium quantity is 600 million
gallons. If you had only the demand and supply schedules, and not the graph, you could find the equilibrium by
looking for the price level on the tables where the quantity demanded and the quantity supplied are equal.
The word “equilibrium” means “balance.” If a market is at its equilibrium price and quantity, then it has no reason
to move away from that point. However, if a market is not at equilibrium, then economic pressures arise to move the
market toward the equilibrium price and the equilibrium quantity.
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Chapter 3 | Demand and Supply
49
Imagine, for example, that the price of a gallon of gasoline was above the equilibrium price—that is, instead of $1.40
per gallon, the price is $1.80 per gallon. This above-equilibrium price is illustrated by the dashed horizontal line at
the price of $1.80 in Figure 3.4. At this higher price, the quantity demanded drops from 600 to 500. This decline in
quantity reflects how consumers react to the higher price by finding ways to use less gasoline.
Moreover, at this higher price of $1.80, the quantity of gasoline supplied rises from the 600 to 680, as the higher
price makes it more profitable for gasoline producers to expand their output. Now, consider how quantity demanded
and quantity supplied are related at this above-equilibrium price. Quantity demanded has fallen to 500 gallons, while
quantity supplied has risen to 680 gallons. In fact, at any above-equilibrium price, the quantity supplied exceeds the
quantity demanded. We call this an excess supply or a surplus.
With a surplus, gasoline accumulates at gas stations, in tanker trucks, in pipelines, and at oil refineries. This
accumulation puts pressure on gasoline sellers. If a surplus remains unsold, those firms involved in making and
selling gasoline are not receiving enough cash to pay their workers and to cover their expenses. In this situation, some
producers and sellers will want to cut prices, because it is better to sell at a lower price than not to sell at all. Once
some sellers start cutting prices, others will follow to avoid losing sales. These price reductions in turn will stimulate a
higher quantity demanded. So, if the price is above the equilibrium level, incentives built into the structure of demand
and supply will create pressures for the price to fall toward the equilibrium.
Now suppose that the price is below its equilibrium level at $1.20 per gallon, as the dashed horizontal line at this
price in Figure 3.4 shows. At this lower price, the quantity demanded increases from 600 to 700 as drivers take
longer trips, spend more minutes warming up the car in the driveway in wintertime, stop sharing rides to work, and
buy larger cars that get fewer miles to the gallon. However, the below-equilibrium price reduces gasoline producers’
incentives to produce and sell gasoline, and the quantity supplied falls from 600 to 550.
When the price is below equilibrium, there is excess demand, or a shortage—that is, at the given price the quantity
demanded, which has been stimulated by the lower price, now exceeds the quantity supplied, which had been
depressed by the lower price. In this situation, eager gasoline buyers mob the gas stations, only to find many stations
running short of fuel. Oil companies and gas stations recognize that they have an opportunity to make higher profits
by selling what gasoline they have at a higher price. As a result, the price rises toward the equilibrium level.
Read Demand, Supply, and Efficiency (http://cnx.org/content/m48832/latest/) for more discussion on the
importance of the demand and supply model.
3.2 | Shifts in Demand and Supply for Goods and
Services
By the end of this section, you will be able to:
• Identify factors that affect demand
• Graph demand curves and demand shifts
• Identify factors that affect supply
• Graph supply curves and supply shifts
The previous module explored how price affects the quantity demanded and the quantity supplied. The result was the
demand curve and the supply curve. Price, however, is not the only thing that influences demand. Nor is it the only
thing that influences supply. For example, how is demand for vegetarian food affected if, say, health concerns cause
more consumers to avoid eating meat? Or how is the supply of diamonds affected if diamond producers discover
several new diamond mines? What are the major factors, in addition to the price, that influence demand or supply?
Visit this website (http://openstaxcollege.org/l/toothfish) to read a brief note on how marketing strategies can
influence supply and demand of products.
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Chapter 3 | Demand and Supply
What Factors Affect Demand?
We defined demand as the amount of some product a consumer is willing and able to purchase at each price. That
suggests at least two factors in addition to price that affect demand. Willingness to purchase suggests a desire, based
on what economists call tastes and preferences. If you neither …
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