Supply & Demand
The good's own price moves you along a curve; everything else shifts it. P and Q move together for demand shifts, opposite for supply shifts.
Why the curves slope
- Demand = marginal benefit
- The demand curve is willingness to pay and is marginal utility, which falls. First ice cream fantastic, second good, third eaten on a dare; by the sixth, marginal utility has gone negative.
- Supply = marginal cost
- The supply curve is the marginal cost curve, and MC rises. Unit 2: Bill goes first at 1 fish per coconut, more output pulls in Chris at 4 fish. World oil: Saudi Arabia first, US fracking later.
- Price takers
- Many small buyers and sellers, no collusion — the competitive model. Unit 10 drops it.
- Ceteris paribus
- "Other things being equal." Everything but the good's own price is held fixed.
What shifts what
| Shifts out (increase) | Shifts in (decrease) | |
|---|---|---|
| Supply | Productivity-raising innovation; cheaper inputs; more producers enter | Productivity-reducing regulation; costlier inputs; producers exit; a tax |
| Demand | New complementary good; substitute's price rises; people get richer; becomes fashionable | Complement's price rises; substitute's price falls; goes out of fashion or obsolete |
The good's own price is on neither list. Edwards asks it directly: a price change does not shift supply — it moves you along.
Worked events
| Event | Curve | Result |
|---|---|---|
| Europe lifts its fracking ban | Supply out | P ▼, Q ▲ |
| Avian flu kills laying hens (eggs, early 2023 and 2025) | Supply in | P ▲, Q ▼ |
Estimating a demand curve
You observe only the intersection, never the curves. Demand is revealed when supply shifts while demand stays put — Working (1925) used weather-driven Minneapolis potato harvests. Or randomize prices: Dupas and Miguel priced preventive health products at random, finding demand falls sharply with price and stays small at market prices despite large health benefits — a case for public provision.
Rules that earn points
- Name the market: "the market for X," axes P and Q.
- Say which curve moves, which direction, and why in mechanism terms.
- State both P and Q at the new equilibrium.
- If both curves move, one of P or Q is ambiguous — say which, and why.
- Shifting a curve when the good's own price changed.
- Shifting demand for a supply-side event. A tax on producers shifts supply, not demand.
- Forgetting that "supply increases" draws as a shift right/down, which lowers price.
Why does the demand curve for oil slope down?
- AThere are trade-offs
- BOil is cheaper to produce in Saudi Arabia than in North America
- CSome consumers are willing to pay more for oil than others
- DProducers are price takers
Answer
C — some consumers are willing to pay more than others.
Demand is willingness to pay, and it falls as quantity rises: high-value users first, lower-value users further right.
B is the trap. It is a true statement and the right kind of reasoning — but about marginal cost, which is why supply slopes up.
UC Berkeley opens Anchor House, adding 244 apartments for 772 students at market prices. In the Berkeley rental market:
- AP increases, Q increases
- BP decreases, Q increases
- CP increases, Q decreases
- DP decreases, Q decreases
Answer
B — price falls, quantity rises.
New units are an outward supply shift, and supply shifts move P and Q in opposite directions.
A is the trap: it is the right answer to the other Berkeley housing question, where the undergraduate class grows from 8,000 to 10,000 and demand shifts out. Same market, opposite curve, opposite price effect.
In a market you observe price rising and quantity falling. The most likely cause is:
- ADemand shifted out
- BSupply shifted in
- CDemand shifted in
- DThe price rose, causing a movement along supply
Answer
B — supply shifted in.
Only supply shifts push P and Q in opposite directions, and an inward shift is the one that raises price.
A is the trap: an outward demand shift does raise the price, but it raises quantity too. That directional check is the whole diagnostic.
The price of a good rises. The supply curve for that good:
- AShifts out
- BShifts in
- CDoes not shift — you move along it
- DBecomes flatter
Answer
C — a movement along the curve.
Curves are drawn ceteris paribus, holding everything but the good's own price fixed. The own price is the axis, so changing it moves you along.
A is the trap: "higher price, sellers supply more" is true, but that is a larger quantity supplied, not a larger supply.
Egg prices spiked in early 2023 and again in early 2025. Which is more plausible: a supply shock from avian flu carried by migrating birds, or a demand shock from baking? Explain and draw the market.
Model answer
The supply shock. Wild birds migrate in fall and spring, spreading avian flu, and the price of eggs peaks around January — right after the fall migration. A demand story would need bakers to suddenly want far more eggs in January 2023 and then not again until January 2025, which is not credible.
The diagram check seals it. An inward supply shift raises P and lowers Q, which is what happened. An outward demand shift would have raised P and raised Q.
- Choosing supply and shifting the supply curve, not demand.
- The mechanism: flu kills laying hens, so it changes costs and capacity, not willingness to pay.
- The seasonal timing evidence — migration in fall, price peak in January.
- The directional check: P up and Q down rules the demand story out.
- Both equilibria labeled on the diagram.
Why can't you estimate a demand curve directly from observed prices and quantities? Name two research designs that solve the problem.
Model answer
You only ever observe the intersection of supply and demand, never either curve, and prices and quantities move because both curves shift.
The demand curve is traced out only when supply shifts while demand holds still — Working (1925) used weather-driven potato harvests in Minneapolis. The alternative is to randomize prices directly, as Dupas and Miguel did with preventive health products, finding demand falls sharply with price and stays small at market prices even where the health benefits are large. That is an argument for public provision rather than market allocation.
- Naming the identification problem: only the intersection is observed.
- The condition for recovering demand: supply moves, demand stable.
- Both studies named with what varied the price in each.
- The policy implication drawn from the randomized result.