Economist Writing Every Day

When I was a graduate student, I paid for my tuition by tutoring for the university athletics department. I tutored stat, math, micro, macro, excel, and finance. I tutored the same students each week, so I got to know them pretty well over the course of the semester. I also got to know their strengths and weaknesses. It was at this time that I realized most quantitative or even analytical ideas could be described in 4 potentially equivalent ways:

1. Mathematically
2. Using logic in English
3. Graphically
4. With a Table

In this post I want to share the Supply & Demand cheat-sheet that I use to help my students learn about the effects of supply and demand.

The first step is to teach the basic one-curve changes.

Rule #1 for principles: Always increase and decrease horizontally, right and left, never vertically. An increase in demand? That’s a shift to the right. An increase in supply? That’s also a shift to the right. I’d hear students say things like “An increase in demand is a shift up and an increase in supply is a shift down.” That’s confusing, hard to remember, and violates basic intuition. Increase to the right, always.*

Then, our job is to roll through the mechanics of one-curve changes. An increase in demand? That increases the quantity transacted and the price. An increase in supply? That increases the quantity transacted and decreases the price. After graphing the 4 combinations of increasing/decreasing supply/demand, we get this nice chart where each row describes a change in a curve, and we can write in the resulting impact on price and quantity.

That’s easy. It’s not at all clear to me that the table helps organize our thoughts except to make clear that there are combinations of the changes that we can mentally organize. When one curve moves, graphing or English appear to be the more illustrative method. But what if more than one curve changes? That’s where using the table really shines. See below. What if both supply and demand increase? Well, let’s refer to the table above for the individual effects. An increase in demand increases both the quantity and the price. An increase in supply increases the quantity and decreases the price. In other words, the change in each curve puts pressure on quantity to increase. That’s unambiguous. But, the two changes place opposing pressure on price. Without knowing the relative magnitudes, the net effect on price is ambiguous. Below is the expanded table.

The advantage of this method is that, given the easy one-curve effects, we can refer to the table to see which one-curve changes have the same or opposing effects on quantity and price. That seemingly small benefit of organizing our thoughts in the table of one-curve changes turns out to have big benefits in the two-curve change cases. Students start to see patterns in the table that they miss when they graph.

Graphing two-curve changes each time has 2 drawbacks. 1) There is no shorthand. Students have to complete the entire graph for each problem. 2) And this is a big one, graphing can cause students to introduce their own arbitrary relative shifts in the curves. When graphing, students might see a price increase when both demand and supply rise, and then grow incredulous toward the graphing methodology. It’s not that graphing can’t handle the problem of relative changes, it’s that many students are insufficiently trained in graphs to recognize when an effect is ambiguous. Pre-empting that incredulity with a table helps to keep students feeling competent and engaged.

Finally, another benefit of the tables is that, analytically, it permits the introduction of ambiguous curve changes. Say we know that demand increases and we have no idea what happens to supply. Clearly, we have no idea what the effects on quantity and price would be. But, it’s important for students to see that. They need to know that they can’t reason from information about only curve while being ignorant of the other.  

Unfortunately, that 4^th possible value increases the number of rows in the table substantially, with little apparent payoff to including any one row. But, this helps students begin the transition from the blackboard, to reality. Because the next step is to reverse the information that is provided and what is being asked. We like to teach like we know when curves shift. But, a change in demand or supply is usually a conclusion, not a premise. IRL, we see changes in price or quantity and we have to use our training in order to determine what the causes were. Economists often forget that they are describing reality. They will use the language of shifting curves to talk about reality as if those curves exist somewhere besides on paper. Demand** and supply are real. Demand curves and supply curves are not – they’re analogies. Below is the reversed graph when we only know one effect.

Do you see the problem? If all we know is that quantity rose, then we have very little idea about what happened to demand and supply. The table echoes Scott Sumner’s advice of “Never reason from a price change (alone).” There are 5 possible causes for the effect that we observe. Many students have a hard time with multiple possible versions of reality that are all logically valid.  For some exercises, I provide students with the additional premise “given that only demand or supply changes and not both”. Clearly, that narrows down the possible answers.

It’s also clear that there are many, many versions of these questions. And I include darn near all of them in my question banks. I also let the students access the question banks for practice. And though they receive feedback on whether they answer correctly, they are not provided with the correct answer when they answer incorrectly. I tell them that they can’t memorize all of the possible combinations. Even if they did, they’d only have provided themselves with a fraction of a single chapter’s worth of answers. That’s not a good investment. Different students will have different depths of understanding. But they all have to buck-up and train.

*Intermediate students may want to shift vertically when discussing the cost of regulations or inflation expectations, but that’s a step further after learning about the basics I’m describing here.

**Or nominal, as the case may be.