Cahpter 3

Question 1

Theory of Supply and Demand

Answer 1

Increase in prices occurrs either because of an increase in demand or decrease in supply.

Question 2

The Demand Schedule

Answer 2

Relationship between price and quantity demanded, other things held constant.

Question 3

Is the relationship between price and quantity demanded direct or inverse?

Answer 3

Inverse. The higher the price, the lower the quantity demanded and the lower the price, the more units bought (quantity demanded).

Question 4

Describe the slope of the demand curve.

Answer 4

Downward-Sloping.

Question 5

What is the graphical representation of the demand?

Answer 5

The curve itself.

Question 6

What is the graphical representation of the quantity demanded?

Answer 6

Any point along the demand curve.

Question 7

Why does quantity demanded drop as prices increase?

Answer 7

Due to Substitution and Income Effects.

Question 8

Substitution Effect

Answer 8

Occurs because goods are now relatively expensive, so consumers opt for less pricey substitutes.

Question 9

Income Effect

Answer 9

Consumer’s income is no longer enough, causing them to buy less of that product.

Question 10

What do changes in price cause? (Demand)

Answer 10

Changes in quantity demanded NOT demand curve. (Movement along the curve)

Question 11

What causes changes in the demand curve?

Answer 11

Non-price effects.

Question 12

What are the possible non-price effects? (Demand)

Answer 12

• Average income: rise in incomes causes rise in demand.
• Population: as population grows, demand grows.
• Prices of related goods.
• Tastes.
• Special influences: availability of alternatives.

Question 13

The Supply Schedule

Answer 13

Relationship between price and quantity supplied, other things constant.

Question 14

Describe the slope of the supply curve.

Answer 14

Upward sloping.

Question 15

Describe the relationship between price and quantity supplied.

Answer 15

Direct.

Question 16

What happens to quantity supplied if prices:

• increase
• decrease

Answer 16

• Quantity supplied increases.

- Quantity supplied decreases.

Question 17

What do changes in price cause?

Answer 17

Changes in quantity supplied NOT supply curve. (Movement along the curve)

Question 18

Non-Price Effects (Supply)

Answer 18

• Technology: skills/ know-how.
• Input prices: lower production costs increase supply.
• Prices of related goods.
• Government policies: reducing tariffs on imported goods increases the overall supply.
• Special influences.

Question 19

What is the equilibrium point?

Answer 19

When quantity supplied is equal to quantity demanded. This is the intersection of both curves, meaning supply and demand are in balance.

Question 20

What happens if the quantity supplied is larger than the quantity demanded?

Answer 20

Surplus —> Prices reduced.

Question 21

What happens if the quantity supplied is smaller than the quantity demanded?

Answer 21

Shortage —> Prices increase.

Question 22

What happens if demand rises?

Answer 22

Demand curve shifts to the right —> prices and quantity increase.

Question 23

What happens if demand falls?

Answer 23

Demand curve shifts left —> prices and quantity decrease.

Question 24

What happens if supply rises?

Answer 24

Supply curve shifts to the right —> prices decrease and quantity increases.

Question 25

What happens if supply falls?

Answer 25

Supply curve shifts to the left —> prices increase and quantity decreases.