Topic Two

What Most Economic Questions Can be Reduced To:  Demand and Supply

Question for Thought: “An increase in the price of a product leads to a decrease in the quantity demanded, but an increase in demand leads to an increase in price.” Is this a paradox?

Required Readings:

• Sexton, Chapters 4 – 5
• The Wall Street Journal

Additional Readings:

• Levi, Chapters 3 (Demand), 7 (Market Equilibrium), 8 (Price Ceilings) on reserve.
• Robert Costanza and Lisa Wainger, “No Accounting For Nature: How Conventional Economics Distorts the Value of Things,” Washington Post, September 2, 1990, p. B3 on reserve.
• Heilbroner, The Making of Economic Society, Chapter 2, pp. 29-31, and Chapter 3, pp. 52-53 on reserve.

LEARNING OBJECTIVES FOR TOPIC 2:

• You should be able to identify the major factors (e.g. price) that influence the quantity of some product a consumer will buy, and explain how each factor affects that quantity (e.g. higher price à lower quantity purchased)?
• You should be able to identify the major factors (e.g. wages) that influence the quantity of some product a firm will sell, and explain how each factor affects that quantity (e.g. higher wages à lower quantity)?
• You should be able to use the theories of supply & demand to analyze the effects of a disturbance (i.e. a change in supply or demand) on the market for some good or service.  Analyze means determine how the disturbance affects the equilibrium price and quantity.
• You should be able to determine who gains and who loses from a price ceiling or price floor.