ECON-1221 Chapter 3 - Notes from the Textbook

All credit for this text goes to...

Ragan, C. T. S. (2024). Macroeconomics (18th Canadian ed.). Pearson Canada.

List the factors that determine the quantity demanded of a good

What is quantity demanded?

Quantity demanded = desired purchases at a given price, per time period

Quantity demanded is the amount of a product consumers want to purchase at a given price during a specific time period.

Key distinctions

Desired vs. actual — Quantity demanded is desired purchases, not necessarily actual purchases. If supply is constrained, quantity demanded may exceed quantity purchased/exchanged.

Example

You try to buy a plane ticket for reading week, but all flights are sold out.

• Quantity demanded: 1 ticket (what you wanted)
• Quantity purchased: 0 tickets (what you got)

Flow vs. stock — Quantity demanded is a flow variable — meaningless without a time period.

Flow = "per time" — Stock = "right now"

Variable Type	Question Answered	Example
Stock	How much exists now?	Water in bathtub (100L)
Flow	How much per time period?	Water from tap (10L/min)

The Trap

You cannot add a stock to a flow without specifying duration.

100L + 10L/min = ???

Until you know how long the tap runs, the addition is meaningless.

Example

“50,000 cars demanded in Canada” — Is this good or bad?

• 50,000 per day = enormous demand
• 50,000 per year = tiny demand

The number means nothing without the time period.

What is demand?

Demand = the entire price-quantity relationship (the whole curve)

Demand is the entire relationship between price and quantity demanded across all possible prices. Represented by the whole demand curve, not a single point.

What is a demand schedule?

A table showing quantity demanded at each price

A table showing quantity demanded at various prices, ceteris paribus.

Price ($)	Quantity Demanded (units/week)
5	10
4	20
3	35
2	55
1	80

What is a demand curve?

A graph of the demand schedule — price on Y-axis, quantity on X-axis

The graphical representation of the same relationship. Price on vertical axis, quantity on horizontal axis.

left=0; right=100; bottom=0; top=7;
---
y = 6 - 0.0625x | blue | label: Demand

Attention

Each point = quantity demanded (at that price)

The entire curve = demand

Why does the demand curve slope downward?

Price ↑ = Quantity Demanded ↓ (Law of Demand)

The Law of Demand, formulated by Alfred Marshall: price and quantity demanded are negatively related, ceteris paribus.

• Price ↑ → Quantity demanded ↓
• Price ↓ → Quantity demanded ↑

The mechanisms

Two reasons: substitution effect + income effect

Substitution effect — As price rises, the product becomes expensive relative to alternatives. Consumers switch to substitutes.

Income effect — As price falls, purchasing power effectively increases. Consumers can afford more.

Example

Meat prices rise:

• Substitution: Some consumers switch to vegetables or meat substitutes
• Income: The same budget now buys less meat, so they buy less

Both effects push quantity demanded downward.

What factors determine quantity demanded?

Own price (along the curve) + 6 shifters (move the whole curve)

The 1 + 6 structure

Category	Factor	Effect on Curve
On the axis	Own price	Movement along the curve
Shifters	Everything else	Shifts the entire curve

The 6 shifters (3-2-1)

Money (3) + People (2) + Wild card (1)

Money factors:

Factor	Direction of Effect
Consumer income ↑	Demand ↑ for normal goods; Demand ↓ for inferior goods
Price of substitutes ↑	Demand ↑ (switch toward this good)
Price of complements ↑	Demand ↓ (use them together, so buy less of both)

People factors:

Factor	Direction of Effect
Preferences shift toward good	Demand ↑
Population ↑	Demand ↑

Wild card:

Factor	Direction of Effect
Weather	Varies — cold snap ↑ demand for heating; snow ↑ demand for ski trips

How do we classify goods?

By income response

Idea

Normal good: income ↑ → demand ↑

Inferior good: income ↑ → demand ↓

Type	When Income ↑	Example
Normal good	Quantity demanded ↑	Restaurant meals
Inferior good	Quantity demanded ↓	Instant noodles, public transit

Example

Your income rises. You:

• Eat out more (restaurants = normal good)
• Take fewer buses, more taxis (public transit = inferior good for you)

By relationship to other goods

Substitutes compete; Complements combine

Type	Definition	Example
Substitutes	Satisfy similar needs; compete	Butter and margarine
Complements	Used together	Cars and gasoline

Example

Substitutes: Price of butter ↑ → Demand for margarine ↑ (people switch)

Complements: Price of flights to Calgary ↑ → Demand for Banff ski passes ↓ (used together)

What is the difference between movement along vs. shift of the demand curve?

Idea

Own price → move along.

Anything else → shift the whole curve

Change	Caused By	What Moves
Change in quantity demanded	Own price changes	Movement along existing curve
Change in demand	Any of the 6 shifters	Entire curve shifts left or right

What is movement along the demand curve and what causes it?

Movement along = change in Quantity Demanded

Caused by own price changing

When the product’s own price changes, you move along the existing curve to a new point. The curve itself doesn’t move.

• Price ↑ → move up and left along curve → quantity demanded ↓
• Price ↓ → move down and right along curve → quantity demanded ↑

What is a shift in the demand curve and what causes it?

Shift = change in Demand

Caused by any of the 6 shifters (not own price)

When any factor other than own price changes, the entire curve moves to a new position.

Demand increases (curve shifts right) — More quantity demanded at every price

Demand decreases (curve shifts left) — Less quantity demanded at every price

The 6 shifters that cause shifts:

1. Consumer income
2. Price of other goods
   • Price of substitutes
   • Price of complements
3. Consumer preferences
4. Population
5. Weather

Example

The Coffee Paradox News “Rising demand for coffee has increased prices” News story 2: “Rising coffee prices are reducing purchases”

Both are true:

1. Population/income growth shifted demand curve right → prices rose
2. Higher price caused movement up and left along the new curve → quantity demanded fell

First is a shift. Second is a movement along.

List the factors that determine the quantity supplied of a good

What is quantity supplied?

Quantity supplied = desired sales at a given price, per time period

Quantity supplied is the amount of a product producers want to sell at a given price during a specific time period.

Key distinctions

Desired vs. actual — Quantity supplied is desired sales, not necessarily actual sales. If demand is weak, quantity supplied may exceed quantity sold/exchanged.

Term	Meaning
Quantity supplied	What producers want to sell
Quantity sold/exchanged	What they actually sell

The Trap

Don’t confuse quantity supplied with quantity produced.

A firm might produce 100 units but only sell 80 — the other 20 sit in inventory. Production and sales can diverge.

Flow vs. stock — Quantity supplied is a flow variable — meaningless without a time period.

Example

“500 cars supplied” — Is this a lot?

• 500 per day = substantial supply
• 500 per year = tiny supply

The number means nothing without the time period.

What is supply?

Supply = the entire price-quantity relationship (the whole curve)

Supply is the entire relationship between price and quantity supplied across all possible prices. Represented by the whole supply curve, not a single point.

What is a supply schedule?

A table showing quantity supplied at each price

A table showing quantity supplied at various prices, ceteris paribus.

Price ($)	Quantity Supplied (units/week)
1	10
2	25
3	40
4	55
5	70

What is a supply curve?

A graph of the supply schedule — price on Y-axis, quantity on X-axis — slopes UPWARD

The graphical representation of the same relationship. Price on vertical axis, quantity on horizontal axis.

left=0; right=100; bottom=0; top=7;
---
y = 0.8 + 0.06x | red | label: Supply

Key distinction from demand

• Demand curve slopes downward (negative relationship)
• Supply curve slopes upward (positive relationship)

Higher price → producers want to supply MORE (not less)

Why does the supply curve slope upward?

Higher price → more profit per unit → worth producing more

The mechanism is profitability.

1. Higher price → more profit per unit sold
2. More profit → worth producing units that weren’t profitable before
3. Also → attracts new firms who couldn’t profit at lower prices

From the textbook

“Any event that makes production of a specific product more profitable will lead firms to supply more of it.”

Side	Slope	Core driver
Demand (downward)	Price ↑ → Quantity demanded ↓	Consumer satisfaction per dollar
Supply (upward)	Price ↑ → Quantity supplied ↑	Producer profit per unit

Demand asks: “Is this worth buying?” Supply asks: “Is this worth making?”

What factors determine quantity supplied?

Own price (along the curve) + 7 shifters (move the whole curve)

All 7 shifters tie back to PROFITABILITY

The 1 + 7 structure

Category	Factor	Effect on Curve
On the axis	Own price	Movement along the curve
Shifters	Everything else	Shifts the entire curve

The 7 shifters (3-3-1)

Costs (3) + Market (3) + Wild card (1)

Cost factors:

Factor	Direction of Effect	Mechanism
Input prices ↑	Supply ↓ (shifts left)	Costs ↑ → profit ↓
Technology improves	Supply ↑ (shifts right)	Costs ↓ → profit ↑
Tax ↑	Supply ↓ (shifts left)	Costs ↑ → profit ↓
Subsidy ↑	Supply ↑ (shifts right)	Revenue ↑ → profit ↑

Technology connects to short run, long run, and very long run

This will be explored later — technology affects efficiency, productivity, cost per unit, and market entry over different time horizons.

Market factors:

Factor	Direction of Effect	Mechanism
Price of substitute in production ↓	Supply ↑ (shifts right)	Other product less profitable → switch to this one
Price of complement in production ↑	Supply ↑ (shifts right)	Produce more of main product → byproduct supply rises
Number of suppliers ↑	Supply ↑ (shifts right)	More firms producing → more total output

What are substitutes and complements in production?

Idea

Substitutes = make one OR the other Complements = make one AND get the other

Type	Logic	Example
Substitutes in production	Same resources, choose which to make	Wheat/oats (same field), volleyballs/soccer balls (same factory)
Complements in production	One product creates the other as byproduct	Beef and leather (slaughter cattle → get both)

Substitutes in production

A farmer can plant wheat or oats in the same field.

• Price of oats ↓ → oats less profitable → farmer plants more wheat
• Supply of wheat shifts right (even though wheat’s price didn’t change)

Complements in production

Cattle produce both beef and leather.

• Price of beef ↑ → more cattle slaughtered → more leather produced
• Supply of leather shifts right (even though leather’s price didn’t change)

Wild card:

Factor	Direction of Effect	Mechanism
Good weather	Supply ↑ (shifts right)	Better yields, fewer disruptions
Bad weather	Supply ↓ (shifts left)	Damaged crops, disrupted production

Weather impacts

• Drought devastates wheat crop → supply shifts left
• Hurricane damages factory → supply shifts left
• Perfect growing season → supply shifts right

Distinguish between a shift of the supply curve and a movement along the supply curve

What is the difference between movement along vs. shift of the supply curve?

Idea

Own price → move along Anything else (the 7 shifters) → shift the whole curve

Change	Caused By	What Moves
Change in quantity supplied	Own price changes	Movement along existing curve
Change in supply	Any of the 7 shifters	Entire curve shifts left or right

What is movement along the supply curve and what causes it?

Movement along = change in quantity supplied

Caused by own price changing

When the product’s own price changes, you move along the existing curve to a new point. The curve itself doesn’t move.

• Price ↑ → move up and right along curve → quantity supplied ↑
• Price ↓ → move down and left along curve → quantity supplied ↓

What is a shift in the supply curve and what causes it?

Shift = change in supply

Caused by any of the 7 shifters (not own price)

When any factor other than own price changes, the entire curve moves to a new position.

Supply increases (curve shifts right) — More quantity supplied at every price

Supply decreases (curve shifts left) — Less quantity supplied at every price

The 7 shifters that cause shifts:

1. Input prices
2. Technology
3. Taxes/subsidies
4. Price of other products
   • Price of substitutes in production
   • Price of complements in production
5. Number of suppliers
6. Weather

Tracing a supply shift

New technology reduces production costs for smartphones:

1. Technology improves → cost per unit ↓
2. Lower costs → profit per unit ↑ at every price
3. Higher profit → firms willing to supply more at every price
4. Supply curve shifts right

Why do people often mistake a change in demand/supply and a change in quantity demanded/supplied?

The vocabulary sounds similar, but one is a SHIFT and one is a MOVEMENT

Term	What It Means	What Causes It
Change in demand/supply	Whole curve shifts	External factors (the shifters)
Change in quantity demanded/supplied	Movement along curve	Own price changes

The clear way to distinguish them

Ask: "Did the PRICE of THIS PRODUCT change, or did something ELSE change?"

If…	Then…	Example
Own price changed	Movement along (quantity changes)	Coffee price ↑ → quantity demanded ↓
Something else changed	Shift of curve (demand/supply changes)	Income ↑ → demand for coffee shifts right

The Trap

News headlines blur these constantly:

• “Rising demand increases prices” (shift caused price change)
• “Rising prices reduce demand” (should say “reduce quantity demanded”)

The second headline is technically wrong — rising prices cause movement along, not a shift of demand.

The Coffee Paradox (Demand version)

Story 1: “Rising demand for coffee has increased prices” Story 2: “Rising coffee prices are reducing purchases”

Both are true:

1. Income/population growth → demand shifts right → price rises
2. Higher price → movement along new curve → quantity demanded falls

First is a shift. Second is a movement along.

The Oil Paradox (Supply version)

Story 1: “Hurricane reduces oil supply, prices spike” Story 2: “High prices encouraging more oil production”

Both are true:

1. Hurricane (weather) → supply shifts left → price rises
2. Higher price → movement along new curve → quantity supplied rises

First is a shift. Second is a movement along.

Explain the forces that drive market price to equilibrium

What is a market?

A market = any situation where buyers and sellers negotiate exchange

Not limited to a physical place

A market exists in any situation (physical place OR electronic medium) in which buyers and sellers negotiate the exchange of goods or services.

Example

• Granville Island Market (physical place)
• Amazon (electronic medium)
• Global oil market (no single location — trades worldwide)

All are markets because buyers and sellers negotiate exchange.

What is a competitive market?

Competitive = no single buyer or seller can influence the price

Requires three conditions

A competitive market has:

1. Many buyers — each small relative to the market
2. Many sellers — each small relative to the market
3. Homogeneous products — identical, no differentiation

Condition	What It Ensures	Violation Example
Many small buyers	No buyer can influence price	Provincial gov’t buying prescription drugs (market power)
Many small sellers	No seller can influence price	DeBeers controlling diamond supply
Homogeneous product	Single market price exists	iPhones vs Android (differentiated products)

When does the supply-demand model apply?

Only when ALL THREE conditions are met.

Works for: apples, wheat, oil, steel, copper, lumber, foreign currency

Does NOT work for: smartphones, cars, branded clothing, fast food (differentiated products, market power)

What is market equilibrium?

Equilibrium = price where quantity demanded equals quantity supplied

The equilibrium price (or market-clearing price) is the price at which the quantity consumers want to buy exactly equals the quantity producers want to sell. At this price, the market “clears” — no shortages, no surpluses.

The equilibrium quantity is the amount actually bought and sold at the equilibrium price.

left=0; right=100; bottom=0; top=7;
---
y = 6 - 0.05x | blue | label: Demand
y = 1 + 0.04x | red | label: Supply
(55.56, 3.22) | label: Equilibrium

What is disequilibrium?

Disequilibrium = any price where Q_d ≠ Q_s

Market is NOT in balance — price will change

A disequilibrium price is any price where quantity demanded does not equal quantity supplied.

Term	Definition
Excess demand (shortage)	Q_d > Q_s — more buyers than goods available
Excess supply (surplus)	Q_s > Q_d — more goods than buyers want
Disequilibrium	Either shortage or surplus exists — price will change

What forces drive market equilibrium?

Shortages push price UP; Surpluses push price DOWN

These forces automatically move the market toward equilibrium

When price is BELOW equilibrium: Shortage

What Happens	Why	Result
Quantity demanded > Quantity supplied	Low price attracts buyers, discourages sellers	Shortage (excess demand)
Buyers compete for scarce goods	Some willing to pay more	Price gets bid UP
Price rises toward equilibrium	Shortage shrinks	Market moves toward balance

Concert tickets priced too low

• Face value: $50 (below equilibrium)
• Everyone wants tickets, but limited supply
• Shortage → scalpers emerge → actual price rises toward equilibrium

When price is ABOVE equilibrium: Surplus

What Happens	Why	Result
Quantity supplied > Quantity demanded	High price attracts sellers, discourages buyers	Surplus (excess supply)
Sellers compete for scarce buyers	Some willing to cut prices	Price gets pushed DOWN
Price falls toward equilibrium	Surplus shrinks	Market moves toward balance

Unsold inventory piling up

• Store prices winter coats at $300 (above equilibrium)
• Coats sit on racks unsold
• Surplus → store runs sales → price falls toward equilibrium

Summary of equilibrium forces

Situation	Price vs. Equilibrium	Force	Direction
Shortage	Price too LOW	Buyers bid up	Price ↑
Surplus	Price too HIGH	Sellers cut prices	Price ↓
Equilibrium	Price just right	No pressure	Price stable

What is the difference between absolute and relative price?

Absolute price = the price tag

Relative price = one price tag compared to another

Demand and supply respond to RELATIVE prices

Term	What It Is	Example
Absolute price (money price)	Dollar amount on the tag	Carrots: $3 per bag
Relative price	Ratio of one price to another	Carrots cost 1.5× what broccoli costs

Why this matters

Scenario	Absolute Price of Carrots	Relative Price of Carrots	Consumer Response
Carrots $2\to$3, other veg unchanged	↑ 50%	↑ (carrots now expensive vs. alternatives)	Substitute away from carrots
Carrots $2\to$3, ALL veg up 50%	↑ 50%	Unchanged (same ratio)	No substitution between vegetables

Same absolute price increase. Only the first changes relative price — and that’s what triggers substitution.

When economists say "price rises," they mean RELATIVE to other goods

If inflation hits all goods equally:

• Relative prices unchanged → no substitution between goods
• BUT real income falls → income effect kicks in → possible shift toward inferior goods

What is comparative statics?

Comparing two equilibria — before and after a change — ignoring the path between them

Comparative statics is the method economists use to analyze how equilibrium changes:

1. Start at equilibrium (before)
2. Change ONE exogenous variable (a shifter)
3. Find the new equilibrium (after)
4. Compare: What happened to price and quantity?

Term	Meaning
Static	A snapshot — a state of rest
Comparative	Comparing two snapshots
Dynamic (the alternative)	Tracking the adjustment path over time

Example

Drought destroys wheat crop → supply shifts left.

Comparative statics: Old equilibrium P=$5,Q=100.NewequilibriumP=$8, Q=70. Done.

Dynamic analysis: Day 1 shortage, Day 2 price rises to $6, Day 3 some buyers exit… [tracks the full path]

What are the limitations of comparative statics?

Tells you DIRECTION, not magnitude, timing, or distribution

First tool, not only tool

Comparative statics answers: “Which way does price/quantity move?”

It does NOT answer:

• How much? (magnitude)
• How fast? (timing)
• Who wins, who loses? (distribution)
• What happens during adjustment? (transition costs)
• Does the model even apply? (scope)

The Seven Lenses for Decomposing Claims expose exactly what comparative statics hides

See Seven Lenses Reveal What Comparative Statics Hides for the full mapping.

Good policy requires layering on what comparative statics ignores. Directional analysis is the foundation, not the complete answer.

How is the equilibrium price affected by shifts in the supply and demand curves?

Shift a curve → equilibrium moves → new price AND new quantity

Demand shifts

Demand Shift	Effect on Equilibrium Price	Effect on Equilibrium Quantity
Demand increases (right)	Price ↑	Quantity ↑
Demand decreases (left)	Price ↓	Quantity ↓

Demand increases

Population growth → demand for housing shifts right

• At old price: shortage (more buyers than sellers)
• Shortage → price bid up → movement along supply curve
• New equilibrium: higher price, higher quantity

Supply shifts

Supply Shift	Effect on Equilibrium Price	Effect on Equilibrium Quantity
Supply increases (right)	Price ↓	Quantity ↑
Supply decreases (left)	Price ↑	Quantity ↓

Supply decreases

Drought destroys wheat crop → supply shifts left

• At old price: shortage (more buyers than available wheat)
• Shortage → price bid up → movement along demand curve
• New equilibrium: higher price, lower quantity

Summary table

Shift	Price	Quantity
Demand ↑	↑	↑
Demand ↓	↓	↓
Supply ↑	↓	↑
Supply ↓	↑	↓

Notice the pattern

• Demand shifts: Price and quantity move the SAME direction
• Supply shifts: Price and quantity move OPPOSITE directions

What if BOTH curves shift?

One effect is certain, one is ambiguous — depends on which shift is bigger

Both Shift	Price Effect	Quantity Effect
Demand ↑ AND Supply ↑	Ambiguous (depends on magnitude)	Definitely ↑
Demand ↑ AND Supply ↓	Definitely ↑	Ambiguous
Demand ↓ AND Supply ↑	Definitely ↓	Ambiguous
Demand ↓ AND Supply ↓	Ambiguous	Definitely ↓

COVID-19 restaurant market

• Demand ↓ (people isolating at home)
• Supply ↓ (restaurants closed, staff unavailable)
• Both shifted left → quantity definitely ↓
• Price effect? Ambiguous — depended on which shift was larger