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Here are some examples of the kinds of questions that you can answer when you understand how changes in supply and demand work...

The price of airplane fuel rises. What effect will this have on the price and quantity purchased of airline tickets?

In answering the question, follow the pattern of smaller questions below:
1. What is the relationship?
2. Which curve is affected?
3. How does the curve change?
4. How do P and Q change?


1. Higher labor prices (wages) is a higher resource price
2. Supply is affected
3. Supply falls
4. Thus, price rises while quantity falls

Suppose Tickles, a new kind of candy bar, is introduced and becomes very popular. What effect would this have on the price and quantity sold of Snickers candy bars?

In answering the question, follow the pattern of smaller questions below:
1. What is the relationship?
2. Which curve is affected?
3. How does the curve change?
4. How do P and Q change?


1. The goods are substitutes
2. Demand is affected
3. Demand for Snickers falls (since a new substitute is now available)
4. Thus, price falls and quantity falls

The price of coffee falls, due to an increase in the supply of coffee. What will happen to the price of coffee creamer and the quantity of creamer purchased?

In answering the question, follow the pattern of smaller questions below
1. What is the relationship?
2. Which curve is affected?
3. How does the curve change?
4. How do P and Q change?

1. Coffee and creamer are complements
2. When the price of a complement changes, demand (for creamer) is affected
3. The lower price of coffee increases demand for creamer
4. The effect will be to raise price and raise quantity

Here's one example of following the same procedure in reverse, to explain why price and quantity have changed as they have...
Suppose the average price of houses is falling, but the quantity being sold is rising from one month to the next. Name one thing that must be causing this.

1. How do P and Q change?
2. Which curve must have changed?
3. How did the curve change?
4. What is the relationship that might have caused it?

1. P down Q up
2. Supply must have changed (since P and Q are moving in opposite directions, we are seeing the effect of the law of demand, which is visible if demand is not changing, but supply is)
3. lower price and higher quantity means supply rose
4. Labor or materials costs (resource prices) might be falling (of course, that's just one possible cause of an increase in supply)

Copyright 2006 by Ray Bromley. For economics information, and other information about Ray Bromley, visit www.raybromley.com. Permission to copy for educational use is granted, provided this notice is retained. All other rights reserved.
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