The document provides a comprehensive guide on the principles of supply and demand, detailing how changes in various determinants can shift demand and supply curves. It explains key concepts such as the law of demand and supply, the factors influencing them, and the process of establishing market equilibrium. Additionally, it outlines the implications of shifts in curves on price and quantity in competitive markets.

1. Supply and Demand Guide
To solve the homework problems do the following:
1. Identify the determinant change
2. Shift the appropriate curve in the correct direction
3. Change price appropriately
4. Move along the other curve (the one that did not shift) in
response to the price change.
The following information will tell you the determinants and
how the change, as well as definitions of the key terms.
Demand
Demand: The amount that consumers are willing and able to
purchase at various prices.
Law of Demand: Price and Quantity Demanded vary inversely.
Quantity Demanded: The amount that consumers are willing
and able to buy at a particular price.
Change in Quantity Demanded: Changes in price change the
quantity demanded. This is a Movement Along a Demand Curve
in Response to a Price Change.
Change in Demand: This is a shift in the position of the
demand curve, either upward or downward. If the curve shifts
upward, consumers are saying they will pay more for all
quantities of the good or service. If it shifts downward,

2. consumers are saying they will pay less for all quantities of the
good or service.
Determinants of Demand: The Demand Curve will shift only
when one (or more) of the Determinants of Demand changes.
These determinants are:
1. Size of Market: the number of consumers in the market for
the good or service. If this factor increases, the curve shifts
upward (increase in demand). If this decreases, the curve shifts
downward (decrease in demand).
2. Consumer Tastes and Preferences: if these shift in favor of a
product, the demand curve shifts upward (demand increases); if
these shift against a product, the demand curve shifts downward
(demand decreases).
3. Consumer Income: as the income of consumers increase,
consumers purchase more of all normal goods (assume all the
goods in the homework are normal goods), this shifts the
demand curve upward (demand increases); if income decreases,
then consumers buy less of all normal goods, this shifts the
demand curve downward (demand decreases).
4. Prices of Related Goods:
a. Complimentary Goods: These are goods that are used to
together like peanut butter and jelly. If the price of peanut
butter goes up, the Quantity Demanded of peanut butter will
decrease (a movement along a demand curve in response to a
price change). However, the Demand for jelly will decline
(decrease in demand) as fewer people buy it to go with the
peanut butter, since they are buying less peanut butter.
b. Substitute Goods: These are goods that are used in place of
each other. If the price of Coke Cola goes up, the Quantity

3. Demanded of Coke does down (a movement along the demand
curve). But the Demand for Pepsi – the substitute good – goes
up as people substitute the lower priced Pepsi for the higher
priced Coke (the Pepsi demand curve shifts upward).
5. Expectations about the Future: If people have a positive
view of the future they will consumer more and save less. This
shifts the demand curve for all normal goods upward. If people
have a negative view of the future, they will consume less and
save more, this shifts the demand curve for all normal goods
downward.
Supply
Supply: The amount that producers are willing and able to
bring to market at various prices.
Law of Supply: Price and Quantity Supplied vary directly.
Quantity Supplied: The amount that producers are willing and
able to bring to market at a particular price.
Change in Quantity Supply: Changes in price change the
quantity supplied. This is a Movement Along a Supply Curve in
Response to a Price Change.
Change in Supply: This is a shift in the position of the supply
curve, either upward (inward) or downward (outward). If the
curve shifts upward, producers are saying they will bring less to
market at all prices. If it shifts downward, producers are saying
they will bring more to market at all prices.
Determinants of Supply: The Supply Curve will shift only when
one (or more) of the Determinants of Supply changes. These
determinants are:

4. 1. Number of Firms in the Industry: If the number of firms in
an industry increases, the more the industry can produce – this
shifts the supply curve downward (outward) – this is an increase
in supply. If the number of firms in an industry decreases, the
industry can produce less output – this shifts the supply curve
upward (inward) – this is a reduction in supply.
2. Relative Price of Alternative Outputs: If a firm can produce
Product A or Product B with the same resources (inputs), it will
produce the product with the higher price. If the price of
Product A increases relative to Product B, then the firm will
produce more of A and less of B. This causes the Supply Curve
for A to shift outward (increase in supply) and the Supply Curve
for B to shift upward (decrease in supply).
3. Costs of Production*: The costs of production is the primary
determinant of supply. If the costs of production increase, then
supply decreases – the Supply Curve shifts inward (a decrease
in supply). If the costs of production decrease, then supply
increases – the Supply Curve shifts outward (an increase in
supply).
4. Expectations About the Future: If firms have a positive view
of the future, they will increase production which is an increase
in supply – the curve shifts outward. If firms have a negative
view about the future, they will decrease production and the
supply curve will shift upward – a decrease in supply.
* The Costs of Production include:
· Prices of inputs – the Factors of Production
· Business Taxes
· Complying with regulations

5. · Less any Subsidies the firm may receive
In equilibrium, the quantity supplied equals the quantity
demanded.
Graph A
When one or more of the determinants of demand (see above)
change such that the demand for a good increases, that shows
that consumers are willing to pay more for all possible
quantities of the good. The upward shift in the demand curve
causes an increase in price. Suppliers respond to the higher
market price by bringing a greater quantity supplied to market –
recall the Law of Supply.
SHAPE
Graph B
When one or more of the determinants of demand (see above)
change such that the demand for that good decreases. The
demand curve reflects this by shifting downward, showing the
consumers are willing to pay less for all possible quantities of
the good. This causes a decrease in price. Suppliers respond to
the price change by bringing a lesser quantity supplied to
market - recall the Law of Supply.
SHAPE
Graph C

6. When one or more of the determinants of supply (see above)
change such that the supply for that good increases, the supply
curve shifts outward showing that suppliers can bring more
product to market at lower prices for all possible quantities.
This causes a decrease in price. Demanders will respond to the
price change with a greater quantity demanded – recall the Law
of Demand.
SHAPE
Graph D
When one or more of the determinants of supply (see above)
change such that the supply for that good decreases, the supply
curve shifts inward showing the suppliers can bring fewer
products to market at higher prices for all possible quantities.
This causes an increase in price, and demanders are willing to
buy a lesser quantity demanded – recall the Law of Demand.
SHAPE
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SUMMARY OF CHAPTER 4:
· Economists use the model of supply and demand to analyze
competitive markets. In a competitive market, there are many
buyers and sellers, each of whom has little or no influence on
the market price.
· The demand curve shows how the quantity of a good
demanded depends on the price. According to the law of
demand, as the price of a good falls, the quantity demanded
rises. Therefore, the demand curve slopes downward.
· In addition to price, other determinants of how much
consumers want to buy include income, the prices of substitutes
and complements, tastes, expectations, and the number of
buyers. If one of these factors changes, the demand curve shifts.
· The supply curve shows how the quantity of a good supplied
depends on the price. According to the law of supply, as the

11. price of a good rises, the quantity supplied rises. Therefore, the
supply curve slopes upward.
· In addition to price, other determinants of how much
producers want to sell include input prices, technology,
expectations, and the number of sellers. If one of these factors
changes, the supply curve shifts.
· The intersection of the supply and demand curves determines
the market equilibrium. At the equilibrium price, the quantity
demanded equals the quantity supplied.
· The behavior of buyers and sellers naturally drives markets
toward their equilibrium. When the market price is above the
equilibrium price, there is a surplus of the good, which causes
the market price to fall. When the market price is below the
equilibrium price, there is a shortage, which causes the market
price to rise.
· To analyze how any event influences a market, we use the
supply-and-demand diagram to examine how the event affects
the equilibrium price and quantity. To do this, we follow three
steps. First, we decide whether the event shifts the supply curve
or the demand curve (or both). Second, we decide in which
direction the curve shifts. Third, we compare the new
equilibrium with the initial equilibrium.
· In market economies, prices are the signals that guide
economic decisions and thereby allocate scarce resources. For
every good in the economy, the price ensures that supply and
demand are in balance. The equilibrium price then determines
how much of the good buyers choose to consume and how much
sellers choose to produce.
Mankiw, N. Gregory. Principles of Economics (Mankiw's
Principles of Economics) (Page 86). South-Western College
Pub. Kindle Edition.
Key Concepts: market, p. 66 competitive market, p. 66 quantity
demanded, p. 67 law of demand, p. 67 demand schedule, p. 67
demand curve, p. 68 normal good, p. 70 inferior good, p. 70

12. substitutes, p. 70 complements, p. 70 quantity supplied, p. 73
law of supply, p. 73 supply schedule, p. 73 supply curve, p. 74
equilibrium, p. 76 equilibrium price, p. 76 equilibrium quantity,
p. 76 surplus, p. 77 shortage, p. 77 law of supply and demand,
p. 78