CLUTCH CH. 3 - SUPPLY AND DEMAND - Amazon …lightcat-files.s3.amazonaws.com/packets/admin...curve, we move along the demand curve. MACROECONOMICS - CLUTCH CH. 3 - SUPPLY AND DEMAND

! www.clutchprep.com

!

MACROECONOMICS - CLUTCH

CH. 3 - SUPPLY AND DEMAND

CONCEPT: INTRODUCTION TO SUPPLY AND DEMAND

● A market is a group of buyers and sellers of a particular good or service.

□ A market is perfectly competitive when:

- The goods for sale are _______________________________________________

- The buyers and sellers are both ________________________________________

› Lots of buyers

› Lots of sellers

› Each market participant has __________ influence on price

Examples of products in (perfectly) competitive markets: Examples of products in less competitive markets:

Ceteris Paribus – a Latin phrase meaning ____________________________________.

- - -



Page 2

PRACTICE: Which of the following goods would most likely be sold in a perfectly competitive market?

a) Luxury cars

b) Wheat

c) Laptop Computers

d) Pizza

PRACTICE: Products sold in a perfectly competitive market are

a) Homogenous

b) Heterogeneous

c) Efficient

d) Inefficient

e) Both (a) and (c)

PRACTICE: The Latin phrase ceteris paribus means:

a) All things are known to change

b) Other things change equally

c) All things at equilibrium

d) Other things being equal



Page 3

CONCEPT: THE BASICS OF DEMAND

● Throughout this chapter, most of our analysis is done on the price/quantity graph:

● Demand relates to the behavior of __________________________ in our perfectly competitive market.

□ The quantity demanded is the amount of a good that buyers are willing to purchase at a given price.

- The demand schedule lists pairs of prices and quantities demanded.

The Law of Demand

When the price of a good rises, the quantity demanded of that good falls

What explains the Law of Demand? ● Substitution Effect ● Income Effect

● The demand curve is a graph showing the relation between the price of a good and its quantity demanded.

Demand Schedule for Wheat

Price ($) Quantity

9 10,000

7 25,000

5 40,000

3 55,000

1 70,000

5

4

3

2

1

10 20 30 40 50 60 70

- Note: Some goods are exceptions to the Law of

Demand, but are beyond our scope



Page 4

CONCEPT: INDIVIDUAL DEMAND AND MARKET DEMAND

● Every person has their own individual demand curve. This denotes the quantity they would demand at each price.

□ The market demand curve is created from the ______________ of all the individual demand curves.

Price of a Supreme Pizza

($)

Fat Albert’s Quantity Demanded

Skinny Hendrix’s

Quantity Demanded Market Demand

2 16 4

4 12 3

6 8 2

8 4 1

10 0 0

Fat Albert’s Demand Skinny Hendrix’s Demand

Market Demand

2 4 6 8 10 2 4 6 8 10

2 4 6 8 10

5

4

3

2

1

5

4

3

2

1

5

4

3

2

1

When asked to find the market demand:

- Sum all the individual demand curves.

12 14 16 18 20

12 14 16 18 20 12 14 16 18 20

10

9

8

7

6

10

9

8

7

6

10

9

8

7

6



Page 5

CONCEPT: SHIFTING DEMAND – INTRODUCTION

● Certain events cause the demand curve to shift on the graph.

WARNING! A change in price does not shift the demand curve because it is already a variable in the graph.

Change in Price Change in Other Determinants of Demand

Increase/Decrease in ___________________________

“All else equal”


“All else (NOT?) equal”

● It helps to think of the events that shift demand in terms of “good” or “bad” events.

Shift Right Shift Left

“Good thing” happens for the product demand = Shift Right

“Bad thing” happens for the product demand = Shift Left

Before: use P1 and Q1

After: use P2 and Q2



Page 6

CONCEPT: SHIFTING DEMAND – INCOME

● When a consumer’s income changes, the types of goods she buys also changes.

Mom’s House:

Dorm Room:

□ People buy more normal goods when they have ______________ money.

- Organic food

- New furniture

- Vacation

□ People buy more inferior goods when they have ______________ money.

- Canned Soup

- Used furniture

- “Stay”-cation

EXAMPLE: If craft beer is a normal good, what happens to demand when consumer income rises? What if income

decreases?

Income Increases Income Decreases



Page 7

CONCEPT: SHIFTING DEMAND – SUBSTITUTE GOODS

● The price changes of other related goods can affect the demand for a good

□ Two goods are considered to be substitute goods if:

- The increase in the price of Good X causes the demand of Good Y to ________________________

› When two variables get larger (or smaller) together, the relationship is directly proportional.

- Note: This is NOT a change in price. This is a change in the price of a related product.

Examples of substitute goods:

● Coke and Pepsi ● Margarine and Butter ● Apples and Oranges

EXAMPLE: Assume that regular toasters and defibrillator toasters are

substitute goods. If the price of regular toasters rises:

a) What happens to the demand for defibrillator toasters?

b) What happens to the demand for regular toasters?

Defibrillator Toasters Regular Toasters



Page 8

CONCEPT: SHIFTING DEMAND – COMPLEMENTARY GOODS

● The price changes of other related goods can affect the demand of a good

□ Two goods are considered to be complementary goods if:

- The increase in the price of Good X causes the demand of Good Y to _______________________

› When one variable gets larger as the other falls, the relationship is inversely proportional.

- Note: This is NOT a change in price. This is a change in the price of a related product.

Examples of complementary goods:

● Peanut Butter and Jelly ● DVD players and DVDs ● Cars and Gasoline

EXAMPLE: Assume that defibrillator toasters and Wonderbread are

complementary goods. If the price of defibrillator toasters falls:

a) What will happen to the demand for Wonderbread?

b) What happens to the demand for defibrillator toasters?

Wonderbread Defibrillator Toasters

Note: What if the two goods are neither substitutes nor complements?



Page 9

CONCEPT: SHIFTING DEMAND – CONSUMER PREFERENCES

● Consumer preferences change over time. The demand for a product is affected by consumer taste.

□ If changes in customer preferences benefit a good, its demand will _______________________

Examples of changes in consumer preference:

● Fitness rises in popularity ● Fashion ● Cellular phones

EXAMPLE: As a fitness craze sweeps the nation, upside

down yoga class membership has skyrocketed. What

happens to the demand for protein shakes?



Page 10

CONCEPT: SHIFTING DEMAND – EXPECTATIONS

● Expectations about the future can affect current demand for a good.

□ If consumers expect prices to increase in the future, the demand for the good today _____________________

- Directly proportional

- Note: This is NOT a change in price. This is a change in expectations about price.

Examples of changes in consumer expectations:

● Inclement weather ● Future income ● Expected price changes

EXAMPLE: As a hurricane approaches Brazil, fear of a shortage of coffee spreads. What happens to the demand for coffee

beans?



Page 11

CONCEPT: SHIFTING DEMAND – NUMBER OF CONSUMERS

● A change in the amount of consumers in a market will affect demand.

□ If the amount of consumers in a market increases, the demand for the good _______________________


Examples of changes in number of consumers:

● Immigration ● Birth rate ● Advertising

EXAMPLE: After Clutchtopia introduced its “Free Pizza For Everybody” Policy, immigration to the awesome country

skyrocketed, doubling its population. What happens to the demand for bar soap in Clutchtopia?



Page 12

CONCEPT: DEMAND SHIFT SUMMARY

DEMAND

Directly Proportional

(INSPEC)

Income: Normal Goods

Consumer Income ↑ → Demand for Normal Goods ↑

Substitutes Price of Substitute ↑ → Demand for Good ↑

Preferences for a Good

Preferences for Good ↑ → Demand for Good ↑

Consumer Expectations Expected Future Price ↑ → Demand for Good (now) ↑

Number of Consumers

Number of Consumers ↑ → Demand for Good ↑

Inversely Proportional

Income: Inferior Goods

Consumer Income ↑ → Demand for Inferior Goods ↓

Complements Price of Complement ↑ → Demand for Good ↓

Change in Price

Change in Price → Change in Quantity Demanded A change in the price of a good does not shift the demand

curve, we move along the demand curve.



Page 13

PRACTICE: What happens in the market for blenders if consumers decide that juicing their vegetables is better than

blending their vegetables?

a. Demand shifts to the left

b. Demand shifts to the right

c. Supply shifts to the left

d. Supply shifts to the right

PRACTICE: What happens in the market for beef jerky if customers expect a price increase in the future?





PRACTICE: If cheese in a can is an inferior good, what happens to its market when consumer income increases?







Page 14

CONCEPT: THE BASICS OF SUPPLY

● Supply relates to the behavior of _________________________ in our perfectly competitive market.

□ The quantity supplied is the amount of a good that sellers are willing to produce.

- The supply schedule lists pairs of prices and quantities supplied.

The Law of Supply

When the price of a good rises, the quantity supplied of that good rises

● The supply curve is a graph showing the relation between the price of a good and its quantity supplied.

Supply Schedule for Wheat

Price ($) Quantity

9 60,000

7 50,000

5 40,000

3 30,000

1 20,000

5

4

3

2

1

10 20 30 40 50 60 70



Page 15

CONCEPT: INDIVIDUAL SUPPLY AND MARKET SUPPLY

● Every producer has their own individual supply curve. This denotes the quantity they would supply at each price.

□ The market supply curve is created from the ______________ of all the individual supply curves.


($)

Papa Yum’s Quantity Supplied

Dominope’s

Quantity Supplied Market Supply

2 2 0

4 5 1

6 8 2

8 11 3

10 14 4

Papa Yum’s Supply Dominope’s Supply

Market Supply

2 4 6 8 10 2 4 6 8 10

2 4 6 8 10

5

4

3

2

1

5

4

3

2

1

5

4

3

2

1

When asked to find the market supply:

- Sum all the individual supply curves.

10

9

8

7

6

10

9

8

7

6

10

9

8

7

6

12 14 16 18 20 12 14 16 18 20

12 14 16 18 20



Page 16

CONCEPT: SHIFTING SUPPLY – INTRODUCTION

● Certain events cause the supply curve to shift on the graph.

WARNING! A change in price does not shift the supply curve because it is already a variable in the graph.

Change in Price Change in Other Determinants of Supply


“All else equal”


“All else (NOT?) equal”

● It helps to think of the events that shift supply in terms of “good” or “bad” events.

Shift Right Shift Left

“Good thing” happens for the product supply = Shift Right

“Bad thing” happens for the product supply = Shift Left

Before: use P1 and Q1

After: use P2 and Q2



Page 17

CONCEPT: SHIFTING SUPPLY – INPUT PRICES

● Changes in the price of inputs of a good (i.e. labor and materials) affects the good’s supply.

□ If input prices increase, supply will ___________________

- Inversely proportional

- Note: This is NOT a change in price. This is a change in input prices.

Examples of input price changes:

● Minimum wage increases ● Price of gasoline decreases ● Price of microchips decreases

EXAMPLE: If the cost of plastic, which is necessary for the

production of the noodle-cooling chopsticks, rises, what will

happen to the supply curve in this industry?

Noodle-cooling Chopsticks



Page 18

CONCEPT: SHIFTING SUPPLY – TECHNOLOGY

● Changes in technology affect the supply of a good.

□ If technology increases, supply will _____________________


Examples of technology increases:

● Wireless technology ● Industrial Revolution ● Movie Rentals

EXAMPLE: A new super pizza oven has revolutionized the time it takes to bake a stuffed crust pizza. Stuffed crust pizzas

can be hot and ready in less than one minute! What happens to the supply of stuffed crust pizza?



Page 19

CONCEPT: SHIFTING SUPPLY – TAXES AND SUBSIDIES

● Taxes and subsidies can affect the supply of a good.

□ Businesses treat most taxes as costs. If taxes increase, supply will ________________________

- Inversely Proportional

□ Subsidies are basically “reverse taxes.” If subsidies increase, supply will _______________________

- Directly Proportional

Examples of changes in taxes and subsidies:

● Property taxes ● School funding ● Agricultural subsidies

EXAMPLE: The new president of a well-known country has decided to slash funding for the arts. What will happen to the

supply of arts education?



Page 20

CONCEPT: SHIFTING SUPPLY – SUBSTITUTES IN PRODUCTION

● Factories can usually produce more than just one good.

□ If the price of a substitute in production increases, the supply of a product will ______________________

- Inversely Proportional

- Note: This is NOT a change in price. This is a change in price of a related product.

Examples of possible substitutes in production:

● Basketballs and Volleyballs ● Corn and Wheat ● Pizzas and Calzones

EXAMPLE: A company that produces peanut butter is also equipped to make almond butter. The company noticed that the

prices of almond butter are rising.

a. What will happen to the supply of peanut butter?

b. What will happen to the supply of almond butter?

Peanut Butter Almond Butter



Page 21

CONCEPT: SHIFTING SUPPLY – EXPECTATIONS

● Like demand, expectations about the future can affect current supply for a good. However, the supply side is trickier.

□ If suppliers expect prices to increase in the future, the supply for the good today _____________________

- Note: This is NOT a change in price. This is a change in expectations about price.

Examples of changes in producer expectations:

● Expected price changes

EXAMPLE: Señor Coffee makes artisanal coffees in an underdeveloped part of town. When, all of a sudden, a relentless

mob of hipsters moves into the neighborhood. Señor Coffee knows that hipsters will pay way too much for artisanal coffee

and expects future prices in the artisanal coffee industry to rise.

a. What happens if Señor Coffee stores some of his current production for sale when prices increase?

b. What happens to the supply of artisanal coffee if Señor Coffee hires another worker to anticipate demand?

Storage Hire Worker



Page 22

CONCEPT: SHIFTING SUPPLY – NUMBER OF SUPPLIERS

● A change in the amount of suppliers in a market will affect supply.

□ If the amount of suppliers in a market increases, the supply for the good _______________________


Examples of changes in number of suppliers:

● WNBA ● Tattoo Parlors

EXAMPLE: Jimmy Freezer sells ice cream in a small town. All of a sudden, it seems like everybody and their moms are

selling ice cream on every corner. What has happened to the supply of ice cream?



Page 23

CONCEPT: SHIFTING SUPPLY – NATURE

● Nature can have positive or negative effects on supply.

□ If there is a “positive event” in nature, the supply for the good _______________________


Examples of events in nature:

● Good weather ● Bad Weather

EXAMPLE: It seems like all season long the ideal amount of sunshine and rain has graced the farmlands in Iowa.

a. How will this affect the supply of wheat?

b. What if, instead of sunshine and rain, a meteor struck a different farm in Iowa every day of the season?

Sunshine Meteors



Page 24

CONCEPT: BIG DADDY SHIFT SUMMARY

DEMAND SUPPLY

Directly Proportional

(INSPEC)

Income: Normal Goods

Consumer Income ↑ → Demand for Normal Goods ↑

Substitutes Price of Substitute ↑ → Demand for Good ↑

Preferences for a Good

Preferences for Good ↑ → Demand for Good ↑

Consumer Expectations Expected Future Price ↑ → Demand for Good (now) ↑

Number of Consumers

Number of Consumers ↑ → Demand for Good ↑

(NESTS)

Nature

“Good” Nature Event → Supply of Good ↑

Producer Expectations of Future Price: Hire Hiring new workers → Supply of Good ↑

Subsidies

Subsidies ↑ → Supply of Good ↑

Technology Technology ↑ → Supply of Good ↑

Number of Suppliers

Number of Suppliers ↑ → Supply of Good ↑

Inversely Proportional

Income: Inferior Goods Consumer Income ↑ → Demand for Inferior Goods ↓

Complements

Price of Complement ↑ → Demand for Good ↓

(SITE)

Substitute in Production

Price of Substitute in Prod. ↑ → Supply of Good ↓

Input Prices Input Price ↑ → Supply of Good ↓

Taxes

Taxes ↑ → Supply of Good ↓

Producer Expectations of Future Price: Storage Storing current production → Supply of Good ↓

Change in Price

Change in Price → Change in Quantity Demanded A change in the price of a good does not shift the demand

curve, we move along the demand curve.

Change in Price → Change in Quantity Supplied A change in the price of a good does not shift the demand curve, we move along the demand curve.



Page 25

PRACTICE: What happens in the market for corn if the government decides to subsidize farmers?





PRACTICE: What happens in the market for corn if the price of wheat, a substitute in production, decreases?





PRACTICE: What happens in the market for corn if producers expect a future price increase, and begin to put production

into storage?







Page 26

CONCEPT: SUPPLY AND DEMAND TOGETHER – EQUILIBRIUM

● Now, supply and demand will be analyzed together on one graph.

□ The market is in equilibrium when _________________________________________________

- Equilibrium price – the price that balances Qs and Qd _______

- Equilibrium quantity – the Qs and Qd at the equilibrium price _______

Finding equilibrium on a graph Finding equilibrium in a schedule


Market Demand Market Supply

2 20 2

4 15 6

6 10 10

8 5 14

10 0 18

2 4 6 8 10

5

4

3

2

1



Page 27

CONCEPT: SUPPLY AND DEMAND TOGETHER – SURPLUS AND SHORTAGE

● Sometimes the market is not in equilibrium.

□ If the price is set too high, we have a surplus: ___________________________

□ If the price is set too low, we have a shortage: ___________________________

□ The law of supply and demand claims that the market price continually adjusts to balance Qs and Qd

2 4 6 8 10

5

4

3

2

1

2 4 6 8 10

5

4

3

2

1

10

9

8

7

6

10

9

8

7

6

12 14 16 18 20

12 14 16 18 20



Page 28

CONCEPT: SUPPLY AND DEMAND TOGETHER – DEMAND SHIFTS

● When demand shifts, the equilibrium price and quantity changes. For now, hold supply constant.

Demand shifts right

Demand shifts left

Steps for Analyzing Changes in Equilibrium

1. Decide whether the event shifts demand or supply (or both).

2. Decide the shift direction

3. Find new price and quantity: P2 and Q2

4. Compare to original: P1 and Q1



Page 29

CONCEPT: SUPPLY AND DEMAND TOGETHER – SUPPLY SHIFTS

● When supply shifts, the equilibrium price and quantity changes. For now, hold demand constant.

Supply shifts right

Supply shifts left








Page 30

PRACTICE: If the economy booms and incomes rise, what happens in the markets for inferior goods?

a. Prices and quantities both rise

b. Prices and quantities both fall

c. Prices rise and quantities fall

d. Prices fall and quantities rise

PRACTICE: A change in which of the following will NOT shift the demand curve for ice cream?

a. The price of frozen yogurt

b. The price of ice cream

c. The price of ice cream cones

d. The income of ice cream consumers

PRACTICE: A decrease in _________ will cause a movement along a given supply curve, which is called a change in

__________.

a. supply, demand

b. demand, supply

c. demand, quantity supplied

d. supply, quantity demanded



Page 31

PRACTICE: Gum and mints are substitutes. If the price of gum increases, what happens in the market for mints?

a. The supply curve shifts to the left

b. The supply curve shifts to the right

c. The demand curve shifts to the left

d. The demand curve shifts to the right

PRACTICE: Which of the following situations would lead to an increase in the equilibrium price of carrots and a decrease in

the equilibrium quantity of carrots sold?

a. An increase in the price of hummus, a complement to carrots

b. An increase in the price of celery, a substitute for carrots

c. An increase in the price of fertilizer, an input for carrots

d. An increase in consumers’ incomes, assuming carrots are a normal good

PRACTICE: The discovery of a new fertilizer will shift the ___________ curve for carrots, leading to a ___________

equilibrium price.

a. demand, higher

b. demand, lower

c. supply, higher

d. supply, lower



Page 32

CONCEPT: SUPPLY AND DEMAND TOGETHER – SHIFTS IN BOTH SUPPLY AND DEMAND

● When both supply and demand shift, the information about equilibrium price and quantity is sometimes less clear.

□ However, if both supply and demand shift, one variable (price or quantity) will always be ___________________

WARNING! The way you draw the shifts will make a difference when both supply and demand shift.

Supply shifts right, Demand shifts right

Incorrect Incorrect

Correct



Page 33

CONCEPT: SUPPLY AND DEMAND TOGETHER – SHIFTS IN BOTH SUPPLY AND DEMAND

Supply shifts left, Demand shifts left Supply shifts right, Demand shifts right

Supply shifts left, Demand shifts right Supply shifts right, Demand shifts left






P _____

Q _____

P _____

Q _____

P _____

Q _____

P _____

Q _____



Page 34

PRACTICE: What happens in the market for cream cheese if (1) the price of butter, a substitute for cream cheese, falls and

(2) the cost of milk, an input in cream cheese production, rises?

a. Equilibrium price rises, equilibrium quantity falls

b. Equilibrium price falls, equilibrium quantity falls

c. Equilibrium price ambiguous, equilibrium quantity rises

d. Equilibrium price ambiguous, equilibrium quantity falls

PRACTICE: If the wages of bus drivers increases at the same time that the income of consumers decrease, what happens

in the market for bus rides (assuming that bus rides are an inferior good)?

a. Equilibrium price rises, equilibrium quantity ambiguous

b. Equilibrium price rises, equilibrium quantity rises

c. Equilibrium price falls, equilibrium quantity ambiguous

d. Equilibrium price ambiguous, equilibrium quantity rises

PRACTICE: If producers of garden hoses have discovered new technology to improve production, while the number of

gardeners increases, what happens in the market for garden hoses?


b. Equilibrium price falls, equilibrium quantity falls





Page 35

PRACTICE: What happens in the market for tennis balls if (1) the price of tennis rackets, a complement for tennis balls,

increases and (2) the price of baseballs, a substitute in production, decreases?


b. Equilibrium price ambiguous, equilibrium quantity falls


d. Equilibrium price falls, equilibrium quantity ambiguous

PRACTICE: What happens in the market for wheat if (1) the cost of fertilizer, an input in production, increases and (2)

tornadoes ravages the Midwest, where wheat is grown?


b. Equilibrium price rises, equilibrium quantity falls

c. Equilibrium price falls, equilibrium quantity rises


PRACTICE: What happens in the market for online tutoring services if (1) the government decides to provide funding for

online tutors and (2) the price of private tutoring, a substitute for online tutoring services, increases?


b. Equilibrium price ambiguous, equilibrium quantity falls

c. Equilibrium price falls, equilibrium quantity ambiguous

d. Equilibrium price ambiguous, equilibrium quantity rises



Page 36

CONCEPT: SUPPLY AND DEMAND TOGETHER – QUANTITATIVE ANALYSIS

● We can use algebraic equations to find equilibrium price and quantity.

Plotting the equation of a demand curve on a graph:

𝑃 = 800 − 2𝑄(

Isolating Variables:

We may need to rearrange the equation to put the other variable by itself:

𝑃 = 800 − 2𝑄(

Quantity Solve for Price

100 200 300 400 500

1000

800

600

400

200



Page 37

Plotting the equation of a supply curve on a graph:

𝑃 = 200 + 𝑄*

Isolating Variables:

We may need to rearrange the equation to put the other variable by itself:

𝑃 = 200 + 𝑄*

Quantity Solve for Price

100 200 300 400 500

1000

800

600

400

200



Page 38


● We can find the equilibrium quantity and price from the equations of the demand and supply curves.

Step 1 (if needed): Rearrange the supply and demand equations so that both have the same isolated variable.

Step 2: Set the demand and supply curve equal to each other. At equilibrium, Qd = Qs, so use Q for both of them.

Step 3: Solve for the remaining variable using algebra.

Step 4: Use your answer from step two in either curve to solve for the other variable.

Demand

𝑃 = 800 − 2𝑄(

𝑄( = 400 −

12𝑃

Supply

𝑃 = 200 + 𝑄*

𝑄* = 𝑃 − 200

Step 2

Step 3

Step 4



Page 39

EXAMPLE: The supply and demand curves for ice cream are as follows:

𝑃 = 6–150𝑄(

𝑄* = 150𝑃 − 100

What is the equilibrium price and quantity of ice cream?

a. P* = $1, Q* = 50 b. P* = $2, Q* = 200 c. P* = $3, Q* = 350 d. P* = $4, Q* = 500

PRACTICE: The supply and demand curves for a product are as follows:

𝑄( = 10560 − 80𝑃

𝑃 =140𝑄* + 6

What is the equilibrium price and quantity of the product?

a. P* = $60, Q* = 5760 b. P* = $70, Q* = 4960 c. P* = $80, Q* = 4160 d. P* = $90, Q* = 3360



Page 40


● The equilibrium reached algebraically can be found on the graph as the ____________________ of supply and demand.

Demand

𝑃 = 800 − 2𝑄(

𝑄( = 400 −

12𝑃

Supply

𝑃 = 200 + 𝑄*

𝑄* = 𝑃 − 200

Price Quantity Demanded Quantity Supplied

100 200 300 400 500

1000

800

600

400

200



Page 41

Documents

CLUTCH CH. 3 - SUPPLY AND DEMAND - Amazon …lightcat-files.s3.amazonaws.com/packets/admin...curve, we move along the demand curve. MACROECONOMICS - CLUTCH CH. 3 - SUPPLY AND DEMAND