Chapter2:TheBasicsofSupplyandDemandCHAPTER2THEBASICSOFSUPPLYANDDEMANDTEACHINGNOTESThischapterdepartsfromthestandardtreatmentofsupplyanddemandbasicsfoundinmostotherintermediatemicroeconomicstextbooksbydiscussingsomeoftheworld’smostimportantmarkets(wheat,gasoline,andautomobiles)andteachingstudentshowtoanalyzethesemarketswiththetoolsofsupplyanddemand.Althoughmostofthediscussionofeconomictheoryinthischapterservesasareview,thereal-worldapplicationsofthistheorywillbeenlighteningforstudents,particularlythematerialcoveredinSection2.5andExamples2.5and2.6.Someproblemsplaguetheunderstandingofsupplyanddemandanalysis.Oneofthemostcommonsourcesofconfusionisbetweenmovementsalongthedemandcurveandshiftsindemand.Throughadiscussionoftheceterisparibusassumption,stressthatwhenrepresentingademandfunction(eitherwithagraphoranequation),allothervariablesareheldconstant.Movementsalongthedemandcurveoccuronlywithchangesinprice.Astheomittedfactorschange,theentiredemandfunctionshifts.Studentsmayalsofindareviewofhowtosolvetwoequationswithtwounknownshelpful.Tostressthequantitativeaspectsofthedemandcurvetostudents,makethedistinctionbetweenquantitydemandedasafunctionofprice,Q=D(P),andtheinversedemandfunction,wherepriceisafunctionofthequantitydemanded,P=D-1(Q).ThismayclarifythepositioningofpriceontheY-axisandquantityontheX-axis.Studentsmayalsoquestionhowthemarketadjuststoanewequilibrium.Onesimplemechanismisthepartial-adjustmentcobwebmodel.Adiscussionofthecobwebmodel(basedontraditionalcorn-hogcycleoranyotherexample)addsacertainrealismtothediscussionandismuchappreciatedbystudents.Althoughthischapterintroducesdemand,income,andcross-priceelasticities,youmayfinditmoreappropriatetoreturntoincomeandcross-priceelasticityafterdemandelasticityisreintroducedinChapter4.Ifyouwait,youshouldpostponeExercise(7)untilincomeandcross-priceelasticitiesarediscussed.REVIEWQUESTIONS1.Supposethatunusuallyhotweathercausesthedemandcurveforicecreamtoshifttotheright.Whywillthepriceoficecreamrisetoanewmarket-clearinglevel?Assu...
