Chapter 3: Supply, Demand, and Market Equilibrium

Practice Problems

Reading Supply and Demand Shifts

For each situation below, determine which curve shifts and in which direction, then determine what happens to the equilibrium price and quantity. If one of price or quantity cannot be determined without more information, say so.

Demand increases (shifts right), supply is unchanged.
Supply increases (shifts right), demand is unchanged.
Demand decreases (shifts left), supply is unchanged.
Supply decreases (shifts left), demand is unchanged.
Both demand and supply increase (both shift right) at the same time.
Demand increases while supply decreases at the same time.
The price of a close substitute for this good falls. What happens to this good’s market?
The price of a key input used to produce this good rises. What happens to this good’s market?

Show Answer

Demand shifts right. Both equilibrium price and quantity increase (dashed lines show the original curves, black dot the original equilibrium, gray dot the new one).
Supply shifts right. Equilibrium price decreases while quantity increases.
Demand shifts left. Both equilibrium price and quantity decrease.
Supply shifts left. Equilibrium price increases while quantity decreases.

Both curves shift right. Equilibrium quantity unambiguously increases (both shifts push quantity up), but equilibrium price is ambiguous, it depends on which shift is larger. The panel above shows one example where the supply increase dominates and price falls; if the demand increase had been larger instead, price could have risen.
Demand shifts right while supply shifts left. Equilibrium price unambiguously increases (both shifts push price up), but equilibrium quantity is ambiguous, it depends on which shift is larger.
A falling price for a substitute makes that substitute more attractive, so buyers switch away from this good, this good’s demand shifts left. That is the same pattern as (c): both equilibrium price and quantity decrease.
A higher input cost makes this good more expensive to produce at every quantity, so supply shifts left. That is the same pattern as (d): equilibrium price increases while quantity decreases.

Problem 1: Equilibrium and Price Supports

The table below shows the demand and supply schedules for soybeans.

Price	Quantity Demanded	Quantity Supplied
$7.20	10	40
$7.00	15	35
$6.80	20	30
$6.60	25	25
$6.40	30	20
$6.20	35	15

Quantities are in thousands of bushels.

What is the equilibrium price of soybeans?
How many thousand bushels will be exchanged at that price?
If the federal government supports a price of $7.00 per bushel, is there a shortage or a surplus, and how many thousand bushels?

Show Answer

Equilibrium price is $6.60, where quantity demanded equals quantity supplied.
25 thousand bushels are exchanged at equilibrium.
At the $7.00 price support, quantity demanded is 15 and quantity supplied is 35. That is a surplus of 20 thousand bushels, the government’s price floor sits above equilibrium, so sellers offer more than buyers want at that price.

Problem 2: Equilibrium with a Price Ceiling

The table below summarizes the market for principles of economics textbooks.

Price	Quantity Demanded	Quantity Supplied
$40	4,200	200
$50	2,200	600
$60	1,200	1,200
$70	700	2,000
$80	550	3,000

What is the market equilibrium price and quantity?
A college places a $50 price ceiling on textbooks to control costs for students. How many textbooks actually get sold at that price?
While the ceiling is in effect, a new printing technology lowers production costs, shifting supply to the right. What happens to the number of textbooks actually sold?

Show Answer

Equilibrium is $60, where quantity demanded and quantity supplied both equal 1,200.
At the $50 ceiling, quantity demanded is 2,200 but quantity supplied is only 600. The number of textbooks actually sold is capped by the shorter side of the market, so only 600 get sold, even though far more students want one at that price. This leaves a shortage of 1,600 books.
A rightward shift in supply means more textbooks are supplied at every price, including $50. As long as the ceiling is still below the new equilibrium price, more textbooks get sold than before (still capped by supply, but a higher supply quantity), narrowing the shortage. In the graph above, quantity supplied at the $50 ceiling rises from 600 to 900, so the shortage shrinks from 1,600 to 1,300 books.

Problem 3: Concert Tickets and StubHub

A popular artist announces a stadium tour. Tickets go on sale through the venue at a fixed face price of $150, but the stadium only has 50,000 seats.

Draw or describe what happens to the demand curve for this concert compared to a typical touring act, and explain why.
At the $150 face price, is the quantity of tickets demanded larger or smaller than the quantity supplied (50,000 seats)? What does that imply happens in a resale market like StubHub?
Suppose resale tickets end up selling for $600. Using the supply and demand model, explain why the resale price is so much higher than the face price, even though it is the same seats being sold.
Discussion: A small number of platforms (like Live Nation-Ticketmaster) control both primary ticket sales and much of the resale market for major tours, and have faced antitrust scrutiny over this. Does having one dominant platform change how well the basic supply-and-demand model predicts ticket prices? Why or why not?
Airline seats on a specific flight are also fixed in number once the plane is scheduled. Is the short-run supply curve for seats on a given flight similarly vertical? Given that, why do airline tickets not typically show up on a resale market the way concert tickets do?

Show Answer

Demand for this concert shifts far to the right relative to a typical touring act; at every price, many more people want a ticket, because the artist’s popularity increases how much value fans place on attending.
Supply is fixed at 50,000 seats no matter the price (a vertical supply curve, at least in the short run for a specific show date). If quantity demanded at $150 is far above 50,000, there is an excess quantity demanded at the face price, some people who want a ticket at $150 will not get one, which creates the incentive for a resale market to exist.
Because supply is fixed, the face price of $150 does not do the job of rationing the limited seats to only the people willing to pay the most. The resale price is close to the price at which quantity demanded actually equals quantity supplied (50,000) once the artificially low face price is removed, that market-clearing price reflects how much buyers are truly willing to pay for a scarce good.
Open discussion. The basic model still explains the direction of the price (fixed supply and high demand push price up), but a dominant platform may be able to set or influence prices and fees beyond what a fully competitive resale market would produce, which is a market power question the simple supply-and-demand model does not fully capture. This is a preview of ideas covered when we study market structure later in the course.
Yes, the number of seats on a specific flight is also fixed once the plane is set, so short-run supply for that one flight is vertical too, just like a single concert. The key difference is on the pricing and transfer side, airlines themselves practice extensive dynamic pricing, raising the fare many times as a flight fills up, so the airline (not a third party) captures most of the value that would otherwise go to scalpers. Airline tickets are also typically non-transferable (tied to a passenger’s name and ID), which blocks a resale market from forming the way concert tickets can be resold. One more difference worth noting: a concert is one venue with a fixed number of seats, but “airline seats” as a market means many airlines choosing flight frequency, routes, and plane size. Looking across a whole market like that, and over a longer time frame, supply does start to look like a normal upward-sloping curve rather than a single vertical line, airlines can and do add more seats when prices (and profits) are high. The vertical-supply story applies best to one specific, already-scheduled flight in the very short run.

Problem 4: The Used Car Market During a Computer Chip Shortage

In 2021, a global shortage of semiconductor chips forced automakers to slow down new car production, since modern cars need chips to run everything from engines to infotainment systems.

What happens to the supply of new cars during the chip shortage? Which direction does the new car supply curve shift?
As new cars become harder to find, many buyers turn to the used car market instead. What happens to the demand curve for used cars, and why?
At the same time, some used car owners decide to hold onto their vehicles longer rather than sell, since replacing the car would be difficult and expensive. What happens to the supply curve for used cars?
Using your answers to (b) and (c), explain what happens to the equilibrium price of used cars. Can you say for certain what happens to the equilibrium quantity of used cars sold? Why or why not?

Show Answer

The chip shortage raises production costs and limits how many new cars manufacturers can actually build, so the new car supply curve shifts left.
With new cars scarce and often more expensive, used cars become a more attractive substitute, so the demand curve for used cars shifts right, more buyers want used cars at every price.
Owners who would normally sell (perhaps to buy a newer car) hold on instead, so fewer used cars are offered for sale at every price, the supply curve for used cars shifts left.
Both shifts, demand right and supply left, push the equilibrium price of used cars up unambiguously (which is exactly what happened in 2021 and 2022). Equilibrium quantity is ambiguous, the rightward demand shift pushes quantity up while the leftward supply shift pushes quantity down, so without knowing the relative size of each shift, we cannot say from the model alone whether more or fewer used cars actually changed hands. In practice, used car sales volume fell even as prices spiked, telling us the supply shift was the dominant force.

Problem 5: The Ozempic Effect

A new class of prescription drugs (GLP-1 medications like Ozempic and Wegovy) is approved for weight loss, in addition to its original use for diabetes. Demand for these drugs surges rapidly, driven by both word of mouth and social media, while manufacturers struggle to build enough production capacity to keep up.

What happens to the demand curve for these drugs, and why?
In the short run, manufacturing capacity for a complex injectable drug cannot expand quickly. What does that imply about the shape of the short-run supply curve, and what happens to price and quantity as a result?
Patients who need the drug for diabetes (its original approved use) report trouble finding it in stock, even though production levels have not fallen. Using the model, explain how a demand shift alone can create a shortage for existing users, without any change in supply.
Over the following two years, manufacturers invest heavily in new factories and production lines, and competing drug makers enter the market with similar products. What happens to the supply curve over this longer time horizon, and what would you expect to happen to price?

Show Answer

Demand shifts right, a new, large group of potential buyers (people seeking weight loss, not just diabetes management) enters the market, increasing quantity demanded at every price.
In the short run, supply is close to fixed (nearly vertical), since building new manufacturing capacity takes years. With demand shifting right against a nearly fixed short-run supply, the price rises sharply while quantity increases only modestly.
Even though the amount supplied has not decreased, the large rightward shift in demand means quantity demanded now exceeds quantity supplied at the old price. Because there is effectively a price ceiling in practice (insurance-negotiated prices, or simply a price that does not adjust instantly), this excess demand shows up as a shortage, existing patients cannot get the drug even though nothing about supply changed for them specifically. On the graph, holding the price at its original $100 level after demand shifts to D1 shows quantity supplied stuck near 30 (short-run supply barely moves) while quantity demanded jumps to 56, a shortage of 26 units at that price.
As new factories come online and competitors enter, the supply curve shifts right over time. With demand still elevated but supply now catching up, we would expect the equilibrium price to fall from its earlier peak (and quantity to keep rising), which is the standard pattern for markets adjusting to a large demand shock over the longer run.