Recap

You've covered a lot of important material this week and last and I'm sure you feel overwhelmed. So here's a few points and suggestions that I hope will facilitate your absorption of the material.

Recall that the law of demand and supply refer only to the relationship between price and Q_d or Q_s. This relationship is illustrated on the demand and supply curves, respectively, as movements along these curves. In other words, they are the two variables responsible for every single point that creates the downward-sloping demand curve and the upward-sloping supply curve.
A shift or movement of these curves to represent increases or decreases in supply or demand, are due to changes in the determinants of demand and supply. In other words, events occur in life that cause supply and demand to rise or fall, independently of how consumers and sellers feel about prices. These events are stimuli that can be categorized under one or more factors of demand and supply.

Below, I've laid out a six-step process to facilitate your analysis of markets. The steps are the following:

1. Illustrate the market in equilibrium and label everything, including the name of the market in question. Know what market is being asked of you to analyze and label it.

2. Pick a side to begin analyzing. Remember there are only two............supply and demand. Don't try to analyze both simultaneously............you will screw up.

3 Once you choose where to begin, identify the determinants that are affected by the conditions, events or scenario given. It is important not to make up your own here, but to stick to the determinants.

4. Shift the appropriate curve to illustrate an increase or decrease.

5. Go back to step 2 and repeat for the other side of the market, if any.

6. Identify the changes to equilibrium price and quantity. These are self-evident once you've determined how supply and demand are affected based on step 4.

The truth is, it takes more than a week or two to master the tools of supply and demand. Your absorption and understanding of this material will depend on how much time you spend working in the textbook, the problem set and any supplemental materials that I may have provided you or that you can access online.

Looking Ahead

In the next section, we turn our attention to price controls. Up to now, we've discussed that markets are free. In other words, buyers and sellers are free to establish prices and quantities. However, in a few markets, this is not allowed because the government has forcefully imposed the price in the market and prevented supply and demand to function as it would in a free market. You will learn about price floors and price ceilings. Consequently, price controls reduce economic surplus in markets in which they are imposed.