Pindyck Microeconomics study guide CH2
Chapter 2: The Basics of Supply and Demand
CHAPTER 2
THE BASICS OF SUPPLY AND DEMAND
TEACHING NOTES
This chapter reviews the basics of supply and demand that students should be familiar with from their introductory economics courses. You may choose to spend more or less time on this chapter depending on how much review your students require. Chapter 2 departs from the standard treatment of supply and demand basics found in most other intermediate microeconomics textbooks by discussing many real-world markets (copper, office space in New York City, wheat, gasoline, natural gas, coffee and others) and teaching students how to analyze these markets with the tools of supply and demand.
The real-world applications are intended to show students the relevance of supply and demand analysis, and you may find it helpful to refer to these examples during class.
One of the most common problems students have in supply/demand analysis is confusion between a movement along a supply or demand curve and a shift in the curve. You should stress the ceteris paribus assumption, and explain that all variables except price are held constant along a supply or demand curve. So movements along the demand curve occur only with changes in price. When one of the omitted factors changes, the entire supply or demand curve shifts. You might find it useful to make up a simple linear demand function with quantity demanded on the left and the good’s price, a competing good’s price and income on the right. This gives you a chance to discuss substitutes and complements and also normal and inferior goods. Plug in values for the competing good’s price and income and plot the demand curve. Then change, say, the other good’s price and plot the demand curve again to show that it shifts. This demonstration helps students understand that the other variables are actually in the demand function and are merely lumped into the intercept term when we draw a demand curve. The same, of
CHAPTER 2
THE BASICS OF SUPPLY AND DEMAND
TEACHING NOTES
This chapter reviews the basics of supply and demand that students should be familiar with from their introductory economics courses. You may choose to spend more or less time on this chapter depending on how much review your students require. Chapter 2 departs from the standard treatment of supply and demand basics found in most other intermediate microeconomics textbooks by discussing many real-world markets (copper, office space in New York City, wheat, gasoline, natural gas, coffee and others) and teaching students how to analyze these markets with the tools of supply and demand.
The real-world applications are intended to show students the relevance of supply and demand analysis, and you may find it helpful to refer to these examples during class.
One of the most common problems students have in supply/demand analysis is confusion between a movement along a supply or demand curve and a shift in the curve. You should stress the ceteris paribus assumption, and explain that all variables except price are held constant along a supply or demand curve. So movements along the demand curve occur only with changes in price. When one of the omitted factors changes, the entire supply or demand curve shifts. You might find it useful to make up a simple linear demand function with quantity demanded on the left and the good’s price, a competing good’s price and income on the right. This gives you a chance to discuss substitutes and complements and also normal and inferior goods. Plug in values for the competing good’s price and income and plot the demand curve. Then change, say, the other good’s price and plot the demand curve again to show that it shifts. This demonstration helps students understand that the other variables are actually in the demand function and are merely lumped into the intercept term when we draw a demand curve. The same, of