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'''Introductory''':  1. In a free market, the price and quantity at which goods are sold are where __________ equals ___________.

'''Introductory''':  '''1. In a free market, the price and quantity at which goods are sold are where __________ equals ___________.'''

'''supply equals demand'''

supply equals demand

2. Suppose the price demand curve is P = $20 - Q, where P is price and Q is quantity.  Also suppose the price supply curve is P = $4 + Q.  At what price and quantity will the good be sold?

'''2. Suppose the price demand curve is P = $20 - Q, where P is price and Q is quantity.  Also suppose the price supply curve is P = $4 + Q.  At what price and quantity will the good be sold?'''

'''The good is sold where supply equals demand.  That means the supply P must equal the demand P, and the supply Q must equal the demand Q.  This can be found by graphing the above two equations and seeing where they intersect, or by solving them by setting P to the same value in both:'''

The good is sold where supply equals demand.  That means the supply P must equal the demand P, and the supply Q must equal the demand Q.  This can be found by graphing the above two equations and seeing where they intersect, or by solving them by setting P to the same value in both:

:<math> P = $20 - Q </math>

:<math> P = $20 - Q </math>

:<math> P = $4 + Q </math>

:<math> P = $4 + Q </math>

'''Therefore'''

Therefore  

:<math> 20 - Q = 4 + Q </math>

:<math> 20 - Q = 4 + Q </math>

:<math> 20 = 4 + 2Q </math>

:<math> 20 = 4 + 2Q </math>

:<math> Q = 8 </math>

:<math> Q = 8 </math>

'''Plugging this back into the first equation gives P:'''

Plugging this back into the first equation gives P:

:<math> P = $20 - Q = $20 - 8 = $12</math>

:<math> P = $20 - Q = $20 - 8 = $12</math>

'''Checking our work, we plug this P and Q into the second equation:'''

Checking our work, we plug this P and Q into the second equation:

:<math> 12 = 4 + 8 = 12</math>

:<math> 12 = 4 + 8 = 12</math>

'''Answer:  Q = 8, P = $12'''

Answer:  Q = 8, P = $12

'''Intermediate''': 3. Draw the supply and demand for air.  In addition, draw the supply and demand for a good that costs $10000000000000000000000000 trillion dollars.  

'''Intermediate''': '''3. Draw the supply and demand for air.  In addition, draw the supply and demand for a good that costs $10000000000000000000000000 trillion dollars.'''

'''The demand curve for air must be at a zero price, which is the x-axis (P=0 everywhere, although note that if the quantity of air ever approached zero then the demand price would sharply increase as people would pay to survive).  The supply curve for air must be at fixed quantity, and hence a vertical line.  They must intersect at P=0, Q=amount of air in the atmosphere:'''

The demand curve for air must be at a zero price, which is the x-axis (P=0 everywhere, although note that if the quantity of air ever approached zero then the demand price would sharply increase as people would pay to survive).  The supply curve for air must be at fixed quantity, and hence a vertical line.  They must intersect at P=0, Q=amount of air in the atmosphere:

[[Image:Air supply and demand.jpg]]

[[Image:Air supply and demand.jpg]]

'''Note, however, that air is not a scarce good, and that is why its supply and demand curves are so unusual and nonsensical.'''

Note, however, that air is not a scarce good, and that is why its supply and demand curves are so unusual and nonsensical.

'''The point where supply equals demand for an extremely expensive good must be at low quantity Q.  From there the supply curve would slope upwards, and the demand curve would slope downwards:'''

The point where supply equals demand for an extremely expensive good must be at low quantity Q.  From there the supply curve would slope upwards, and the demand curve would slope downwards:

[[Image:Expensive good supply and demand.jpg]]

[[Image:Expensive good supply and demand.jpg]]

(thanks to Kevin for both graphs above)

(thanks to Kevin for both graphs above)

4. Suppose 1000 persons in a town each have the following weekly demands for gas, and the gas stations have the following weekly supplies:

'''4. Suppose 1000 persons in a town each have the following weekly demands for gas, and the gas stations have the following weekly supplies:'''

Gallons Demand Price/gallon Supply Price/gallon

'''Gallons Demand Price/gallon Supply Price/gallon

10 $2.50 $.50

10 $2.50 $.50

20 $2 $.75

20 $2 $.75

30 $1 $1

30 $1 $1

40 $.75 $1.50

40 $.75 $1.50'''

(A) What is the price and overall quantity of gas sold each week?

'''(A) What is the price and overall quantity of gas sold each week?'''

'''The price and quantity at which the good (gas) is sold is where supply equals demand.  That means that the P for supply equals the P for demand, and the Q for supply equals the Q for demand.  Looking at the above table, where do both the P and Q for supply equal the corresponding P and Q for demand?  That occurs on the third line above:  Q equals 30 for both supply and demand, and P equals $1 for both supply and demand.  The answer is there:  P=$1, Q=30.'''

The price and quantity at which the good (gas) is sold is where supply equals demand.  That means that the P for supply equals the P for demand, and the Q for supply equals the Q for demand.  Looking at the above table, where do both the P and Q for supply equal the corresponding P and Q for demand?  That occurs on the third line above:  Q equals 30 for both supply and demand, and P equals $1 for both supply and demand.  The answer is there:  P=$1, Q=30.

(B) Suppose Congress declares war and imposes a price control of $.75 per gallon.  At what price and overall quantity will gas sell each week?

'''(B) Suppose Congress declares war and imposes a price control of $.75 per gallon.  At what price and overall quantity will gas sell each week?'''

'''When price P is fixed by the government at $.75, then what is the corresponding Q supply and demand?  Looking at the table, the corresponding Q in the supply column is 20 gallons, and the corresponding Q in the demand column is 40 gallons.  The lower number is what matters, because nothing can be bought unless it is both supplied and demanded.  So the supply is 20 gallons and that is what is sold at $.75 per gallon.  That is 20 times 0.75 = $15 per person, or $15,000 for the whole town.  Some may try to buy and sell gas illegally at a higher price, as illegal markets often develop when there are price controls.'''

When price P is fixed by the government at $.75, then what is the corresponding Q supply and demand?  Looking at the table, the corresponding Q in the supply column is 20 gallons, and the corresponding Q in the demand column is 40 gallons.  The lower number is what matters, because nothing can be bought unless it is both supplied and demanded.  So the supply is 20 gallons and that is what is sold at $.75 per gallon.  That is 20 times 0.75 = $15 per person, or $15,000 for the whole town.  Some may try to buy and sell gas illegally at a higher price, as illegal markets often develop when there are price controls.

5. Suppose the government limits the supply of Toyota cars that can be imported in 2008 to a certain quota.  What effect does this have on the supply curve, and on the equilibrium price?  Who is helped by this import quota, and who is hurt?  Be as specific as possible.

5. Suppose the government limits the supply of Toyota cars that can be imported in 2008 to a certain quota.  What effect does this have on the supply curve, and on the equilibrium price?  Who is helped by this import quota, and who is hurt?  Be as specific as possible.