Chapter 4
Extensions of
Demand and
Supply Analysis
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Changes in Demand and Supply
• Changes in supply and demand create a
disequilibrium.
• The market price and quantity adjust to a
new equilibrium.
4-2
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Figure 4-1 Shifts in Demand and in Supply:
Determinate Results, Panel (a)
4-3
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Figure 4-1 Shifts in Demand and in Supply:
Determinate Results, Panel (b)
4-4
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Figure 4-1 Shifts in Demand and in Supply:
Determinate Results, Panel (c)
4-5
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Figure 4-1 Shifts in Demand and in Supply:
Determinate Results, Panel (d)
4-6
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Changes in Demand and Supply
(cont'd)
• Summary
– Increases in demand increase equilibrium price
and quantity.
– Decreases in demand decrease equilibrium price
and quantity.
– Increases in supply decrease equilibrium price
and increase equilibrium quantity.
– Decreases in supply increase equilibrium price
and decrease equilibrium quantity.
4-7
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The Policy of GovernmentImposed Price Controls
• Price Controls
– Government-mandated minimum or maximum
prices
• Price Ceiling
– A legal maximum price (rent control)
• Price Floor
– A legal minimum price (e.g., farm products,
minimum wage)
4-8
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Figure 4-4 Agricultural Price
Supports
4-9
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Myth #4: Government intervention is
a good thing
• The truth is: Government intervention in a
free market most often leads to wastes
(inefficiency)
• There’s no free lunch: Government policy
can benefit some people at the expense of
other people, but there is an overall waste in
society
4-10
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