1 Introduction

Question 1

What do suppliers do to decrease surplus

Answer 1

Decrease price to sell more

• Qty decrease along supply curve
• Qty demanded increase along demand curve

(To decrease shortage, increase price to sell more. vice versa^)

Question 2

Does price ceiling lead to shortage or surplus

Answer 2

Shortage - set below equilbrium

Eg rent controls

Question 3

MOVEMENT along demand/supply curve is due to

Answer 3

Price

Change in QUANTITY demanded/supplied is due to a change in price

Question 4

SHIFT in demand is due to

Answer 4

Non-price factors:
1. Price of complementary goods
2. Price of substitute goods
3. Income
4. Preferences
5. Number of buyers in market
6. Expectations about future

Non-price: change in DEMAND
Price: change in QUANTITY demanded

Question 5

SHIFT in supply is due to

Answer 5

Non-price factors:
1. Change in price of input
2. Change in technology
3. Number of sellers in market
4. Expectation of future price changes

Question 6

Buyer’s surplus

Seller’s surplus

Answer 6

Buyer’s surplus = buyer’s reservation price - market price

Seller’s surplus = market price - seller’s reservation price

No cash on the table when surplus is maximized