Concert tickets for a mid-size act cost $80. The artist goes viral on three platforms in a week. Within days, resale prices hit $240 — same venue, same seats. No law was passed, no committee met. Millions of independent decisions moved the price. This lesson builds the machine that explains it: the supply and demand model, the single most important graph in the course. Unit 2 is 20–25% of the exam by itself, and Units 3–6 all build on this diagram.
Demand is the relationship between price and the quantity buyers are willing and able to purchase, other things constant. The law of demand: price up → quantity demanded down (and vice versa). Two reasons: - Substitution effect: when a good's price rises, buyers switch to relatively cheaper substitutes. - Income effect: a higher price shrinks the purchasing power of a given income.
[GRAPH: Demand curve. X-axis: "Quantity", Y-axis: "Price". Downward-sloping line labeled D. Arrow along the curve from (Q=10, P=$8) to (Q=20, P=$5) labeled "change in quantity demanded (movement along)". A second, rightward-shifted parallel line labeled D₂ with arrow labeled "change in demand (shift)".]
The distinction the exam tests relentlessly: - A change in the good's own price → movement along the curve = change in quantity demanded. - A change in anything else → the whole curve shifts = change in demand.
Determinants of demand (shifters) — TIBER-ish list:
| Shifter | Rightward (increase) example |
|---|---|
| Tastes/preferences | Product goes viral |
| Income — normal goods | Incomes rise |
| Income — inferior goods | Incomes fall (ramen, bus rides) |
| Prices of substitutes | Substitute's price rises (Pepsi ↑ → Coke demand ↑) |
| Prices of complements | Complement's price falls (consoles ↓ → game demand ↑) |
| Expectations | Buyers expect higher future prices |
| Number of buyers | Population grows |
Supply is the relationship between price and the quantity sellers are willing and able to produce. The law of supply: price up → quantity supplied up, because higher prices cover rising marginal costs and attract production.
Determinants of supply (shifters):
| Shifter | Rightward (increase) example |
|---|---|
| Input/resource prices | Wages or raw-material costs fall |
| Technology | Better production methods |
| Taxes / subsidies | Per-unit tax ↓ or subsidy ↑ |
| Expectations of sellers | Expect lower future prices → sell more now |
| Number of sellers | Firms enter the market |
| Prices of related outputs | Alternative product a producer could make becomes less profitable |
Same grammar as demand: own price → movement along (change in quantity supplied); anything else → shift (change in supply).
Where the curves cross, quantity demanded = quantity supplied: the market clears at equilibrium price P* and quantity Q*.
[GRAPH: Market equilibrium. X-axis "Quantity", Y-axis "Price". Downward D and upward S crossing at (Q = 100, P = $6), dashed lines to both axes. At P = $9 a horizontal gap between curves labeled "Surplus (Qs > Qd)". At P = $3 a gap labeled "Shortage (Qd > Qs)".]
Markets self-correct through price. That's the punchline of the whole model.
| Shift | P* | Q* |
|---|---|---|
| Demand ↑ (right) | ↑ | ↑ |
| Demand ↓ (left) | ↓ | ↓ |
| Supply ↑ (right) | ↓ | ↑ |
| Supply ↓ (left) | ↑ | ↓ |
When both curves shift, one of P or Q is determinate and the other depends on the relative sizes of the shifts — the answer the AP exam wants is "indeterminate" (or "cannot be determined").
| Case | P* | Q* |
|---|---|---|
| D↑ and S↑ | indeterminate | ↑ |
| D↓ and S↓ | indeterminate | ↓ |
| D↑ and S↓ | ↑ | indeterminate |
| D↓ and S↑ | ↓ | indeterminate |
Shortcut: the two effects that agree determine the variable; where they conflict, it's indeterminate. Never guess a direction for the indeterminate variable — that's a lost point, not a coin flip.
The price of coffee beans (an input to lattes) rises. What happens in the latte market?
Strategy: Input price → supply shifter.
Solution: Supply of lattes shifts left → P rises, Q falls. Demand curve does not move; quantity demanded falls as a movement along the demand curve in response to the higher price.
Interpretation: The last sentence is the FRQ-grade answer: the demand curve is untouched even though buyers buy less.
Electric scooters and scooter-helmets are complements; scooters and e-bikes are substitutes. Scooter prices fall sharply. Predict effects in (i) the helmet market and (ii) the e-bike market.
Solution: - (i) Cheaper scooters → more scooters ridden → demand for helmets shifts right → helmet P ↑, Q ↑. - (ii) Cheaper scooters pull buyers away from e-bikes → e-bike demand shifts left → P ↓, Q ↓.
Interpretation: The triggering event was a price change, but in the related markets it arrives as a demand shift — the own-price/other-price distinction in action.
The market for beef: (1) a drought raises cattle-feed prices; (2) simultaneously, a health report boosts consumer preference for beef. Determine the effects on equilibrium price and quantity.
Solution: - Feed prices ↑ → supply shifts left (P↑, Q↓ pressure). - Preferences ↑ → demand shifts right (P↑, Q↑ pressure). - Price: both push up → P* rises. Quantity: effects conflict → indeterminate without knowing shift magnitudes.
Interpretation: On the FRQ, draw both shifts, state P rises, and state explicitly that Q "cannot be determined because it depends on the relative magnitudes of the shifts." That sentence earns the point.
Qd = 120 − 2P and Qs = 30 + 4P. Find equilibrium, and the surplus/shortage at P = $20.
Solution: Set Qd = Qs: 120 − 2P = 30 + 4P → 90 = 6P → P* = 15; Q* = 120 − 2(15) = 90. At P = 20: Qd = 80, Qs = 110 → surplus of 30 units; price pressure downward.
Interpretation: Check by plugging P* into both equations: Qs = 30 + 60 = 90 ✓. Simple algebra, four-function-calculator friendly.
1. (A) Own price → movement along. B–E are all shifters (income, related price, tastes, number of buyers).
2. (B) Inferior good: income ↑ → demand ↓ (leftward shift). (C) wrongly calls it a movement along.
3. (D) Technology → supply right → price falls, quantity rises. The classic supply-shift signature: P and Q move in opposite directions.
4. (C) Surplus → price falls; falling price raises Qd and lowers Qs along the curves until they meet. The curves don't shift (D, E) — price adjusts.
5. (C) Fewer peanuts → peanut butter price ↑ → complement (jelly) demand shifts left → jelly P ↓, Q ↓. The blight hits jelly through the related-good channel, not jelly's supply.
6. (B) Expectations of lower future prices → demand left today (P↓, Q↓ pressure). Cheaper steel → supply right (P↓, Q↑ pressure). Price falls for sure; quantity depends on magnitudes → indeterminate.
7. (A) 100 − 4P = 20 + 4P → 80 = 8P → P = 10; Q = 100 − 40 = 60. Check: Qs = 20 + 40 = 60 ✓.
8. (C) A per-unit production tax raises sellers' costs → supply left. (A), (B), (E) shift supply right; (D) is a movement along the supply curve.
9. (C) Both shifts raise Q; they push P in opposite directions → P indeterminate.
10. (B) Safety news → demand right (P↑, Q↑). Fuel costs → supply left (P↑, Q↓). Price rises unambiguously; quantity is indeterminate.
11. (FRQ rubric, 6 points) - (a) 1 pt: Correctly labeled axes (P, Q), downward D, upward S, equilibrium marked P₁, Q₁. - (b) 2 pts: Supply shifts left (1); new intersection labeled with P₂ > P₁ and Q₂ < Q₁ (1). - (c) 2 pts: At P₁ after the supply decrease, quantity demanded exceeds quantity supplied — a shortage (1); buyers bid the price up until the market clears at P₂ (1). - (d) 1 pt: Strawberry price ↑ → demand for the complement falls → whipped-cream price and quantity both fall.
11. (FRQ-style) The market for strawberries is in equilibrium at P₁, Q₁. (a) Draw a correctly labeled supply-and-demand graph for strawberries showing P₁ and Q₁. (b) A late frost destroys a third of the strawberry crop. On your graph, show the effect and label the new equilibrium P₂, Q₂. (c) Explain why the price does not remain at P₁ after the frost, referring to a shortage or surplus. (d) Strawberries and whipped cream are complements. State the effect of the frost on equilibrium price and quantity in the whipped-cream market.
1. (A) Own price → movement along. B–E are all shifters (income, related price, tastes, number of buyers).
2. (B) Inferior good: income ↑ → demand ↓ (leftward shift). (C) wrongly calls it a movement along.
3. (D) Technology → supply right → price falls, quantity rises. The classic supply-shift signature: P and Q move in opposite directions.
4. (C) Surplus → price falls; falling price raises Qd and lowers Qs along the curves until they meet. The curves don't shift (D, E) — price adjusts.
5. (C) Fewer peanuts → peanut butter price ↑ → complement (jelly) demand shifts left → jelly P ↓, Q ↓. The blight hits jelly through the related-good channel, not jelly's supply.
6. (B) Expectations of lower future prices → demand left today (P↓, Q↓ pressure). Cheaper steel → supply right (P↓, Q↑ pressure). Price falls for sure; quantity depends on magnitudes → indeterminate.
7. (A) 100 − 4P = 20 + 4P → 80 = 8P → P = 10; Q = 100 − 40 = 60. Check: Qs = 20 + 40 = 60 ✓.
8. (C) A per-unit production tax raises sellers' costs → supply left. (A), (B), (E) shift supply right; (D) is a movement along the supply curve.
9. (C) Both shifts raise Q; they push P in opposite directions → P indeterminate.
10. (B) Safety news → demand right (P↑, Q↑). Fuel costs → supply left (P↑, Q↓). Price rises unambiguously; quantity is indeterminate.
11. (FRQ rubric, 6 points) - (a) 1 pt: Correctly labeled axes (P, Q), downward D, upward S, equilibrium marked P₁, Q₁. - (b) 2 pts: Supply shifts left (1); new intersection labeled with P₂ > P₁ and Q₂ < Q₁ (1). - (c) 2 pts: At P₁ after the supply decrease, quantity demanded exceeds quantity supplied — a shortage (1); buyers bid the price up until the market clears at P₂ (1). - (d) 1 pt: Strawberry price ↑ → demand for the complement falls → whipped-cream price and quantity both fall.
Exam tip: For every scenario, run this three-step drill: (1) Which market? (2) Which curve — does the event hit buyers or sellers' costs? (3) Which way, and what happens to P and Q? Sixty seconds, every time. Double shifts: write both arrows first, then let agreement decide and conflict mean "indeterminate."