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Economics · 02 / 06

Markets: supply, demand, model

High school · intermediate · Worked example and 4 exercises with solutions, at your pace.

Need a foundation?Indicators: rates, indices, chartsScientific experiments: control and conclusion
UnderstandSee an exampleGuided exercise3 progressive challenges

The principle, simply

A market model isolates mechanisms under explicit assumptions. In a simple case demand falls as price rises while supply rises. Equilibrium equates quantities supplied and demanded. A price change moves along a curve; another factor can shift the curve itself.

y=10-x
THE PICTURE TO REMEMBERMarkets: supply, demand, model
  1. 01Assumptions
  2. 02Supply and demand
  3. 03Equilibrium
  4. 04Shock and new equilibrium

WORKED EXAMPLE

From principle to reasoning

A change in income that changes demand at every price shifts the demand curve rather than merely moving along it.

Solve a problem in this subject

  1. Define the indicator

    Specify quantity, population, period and unit. Distinguish level, change, rate of change and percentage points.

  2. Read or calculate

    Identify denominator and comparison base. From 20% to 25% is +5 percentage points but a 25% relative increase.

  3. Explain a mechanism

    Show steps connecting a proposed cause to its effect. Separate model, assumptions and evidence; correlation alone is insufficient.

  4. Discuss with evidence

    Use a precise example and limitations. Averages conceal distributions; nominal measures include price effects.

YOUR TURN

01 · Try before checking

Must a tax change only the paid price and leave quantity unchanged?

One hint

Both sides of the market react.

Reveal and understand the solution

No: price and quantity can change depending on supply and demand responses. State assumptions and sensitivities.

Compare method, conditions and answer; identify the exact part to revisit.

IMPROVE THROUGH PRACTICE

Three additional challenges with solutions

Start with the first challenge. Write your method before opening a hint; use the solution to find the first step that needs work.

Reflect after practising
02 · Recognise and understandLink to this exercise

When price rises, distinguish movement along demand from a shift of demand.

A hint to get started

Hold other factors constant and change only price.

Step-by-step solution
  1. A price change moves the point along the curve.
  2. Income or preference changes may shift the entire curve.
  3. Quantity demanded differs from the demand function.

Which step did you miss? Retry without help, then explain why the method works.

03 · Apply the methodLink to this exercise

For Qd = 20 − p and Qo = 2p − 4, find equilibrium price.

A hint to get started

At equilibrium Qd = Qo.

Step-by-step solution
  1. 20 − p = 2p − 4.
  2. 3p = 24, so p = 8.
  3. Both equations give quantity 12 in this simplified model.

Which step did you miss? Retry without help, then explain why the method works.

04 · Go furtherLink to this exercise

Can a price ceiling below equilibrium create a shortage in this model?

A hint to get started

Compare quantity demanded with quantity supplied at that price.

Step-by-step solution
  1. At the lower price, demand may exceed supply.
  2. The gap is a shortage in the model.
  3. Actual effects also depend on enforcement and actors’ responses.

Which step did you miss? Retry without help, then explain why the method works.

The trap to avoid

Model assumptions are not universal facts; specify axes.

Without notes, can you…

  • Explain the principle in your own words?
  • Rebuild the diagram and its connections?
  • Solve the exercise and justify the method?

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