CH3 - Demand, Supply and Price

Question 1

What is quantity demanded?

Answer 1

The amount of a good or service that consumers want to purchase during some time period. It refers to a flow of desired purchases

Question 2

Name 6 variables that influence demand

Answer 2

1. Product’s own price
2. Consumer’s income
3. Prices of other products
4. Consumer’s preferences / tastes
5. Population
6. Significant changes in weather

Question 3

Latin expression meaning ‘all things equal’?

Answer 3

Ceteris paribus

Question 4

What is the difference between flow and stock?

Answer 4

Stock is a value that has meaning at a point in time

examples:
amount of income = flow
expenditure = flow
amount in bank account = stock

Question 5

How are the price of a product and quantity demanded related?

Answer 5

Price of a product and quantity demanded are relatived negatively - the lower the price, the higher the quantity and vice versa

Question 6

What is the law of demand?

Answer 6

economic hypothesis is that the price of a product and the quantity demanded are related negatively, other things being equal. That is, the lower the price, the higher the quantity demanded; the higher the price, the lower the quantity demanded.

Question 7

What does a demand schedule show?

Answer 7

table showing the relationship between quantity demanded and the price of a product, other things being equal

Question 8

On what axis is the price on a graph?

Answer 8

Vertical axis

Question 9

On what axis is quantity on a graph?

Answer 9

horizontal axis

Question 10

What does a negatice slope of a demand curve indicate?

Answer 10

The quantity demanded increases as the price falls

Question 11

What does a shift to the right in a demand curve indicate?

Answer 11

It indicates an increase in demand

Question 12

What does a shift to the left in a demand curve indicate?

Answer 12

It indicates a decrease in demand

Question 13

If the consumers average income increases, how does it affect the demand (curve)?

Answer 13

Normal goods: increase in demand = shifts to the right

Inferior goods: decrease in demand = shift to the left

Question 14

If the price of two complementary goods falls, how does it affect the demand (curve)?

Answer 14

Increase in demand for both goods = both demand curves shift to the right

Question 15

How does a consumer’s preference affect the demand curve?

Answer 15

if in favour, shift to the right
if against, shift to the left

Question 16

How does an increase in population with purchase power affect the demand curve?

Answer 16

The demand curve shifts to the right because the demand increases

Question 17

Define substitutes in consumption

Answer 17

goods that can be used in place of another good to satisfy similar needs or desires

Question 18

Define complements in consumption

Answer 18

goods that tend to be consumed together

Question 19

What is the difference between a movement along the demand curve and a shift of the whole demand curve?

Answer 19

Shift of the entire demand curve = change in demand at every single quantity demanded at every price

Movement along the curve (or to a new one): change in quantity demanded

Question 20

What does an increase in demand signify?

Answer 20

Demand curve shifts to the right, and hence quantity demanded is higher at each price

Question 21

What is the definition of quantity supplied?

Answer 21

amount of a good or service that producers want to sell during some time period. It is a flow (unit/time), and is the amount that producers are willing to offer for sale

Question 22

What are the 7 factors that can influence the quantity supplied of a product?

Answer 22

1. Product’s own price
2. Prices of inputs
3. Technology
4. Government taxes or subsidies
5. Prices of other products
6. Significant changes in weather
7. Number of suppliers

Question 23

In what direction are quantity supplied and price related?

Answer 23

quantity supplied and price are related positively.
the higher the product’s own price, the more its producers will supply; the lower the price, the less its producers will supply

Question 24

What does a supply schedule show?

Answer 24

Supply schedules show the relationship between quantity supplied of a product and the price of a product

Question 25

What does the positive slope of a supply curve imply?

Answer 25

The quantity supplied increases when price increases

Question 26

What do you refer to when talking about conditions of supply?

Answer 26

when talking about conditions of supply, you refer to the entire supply curve to complete the relationship between desired sales and all possible prices of the product

Question 27

What is an input?

Answer 27

Everything a firm uses to make its products

Question 28

What effect does a rise in price of inputs have on the supply curve?

Answer 28

It shifts to the left
(higher price of input = less profit = less production)

Question 29

What effect does a fall in price of inputs have on the supply curve?

Answer 29

It shifts to the right
(lower price of input = cheaper production = more profit)

Question 30

What effect does changes or innovation in technology have on the supply curve?

Answer 30

It shifts supply curve to the right

Question 31

What effect does changes or innovation in technology have on the supply curve?

Answer 31

It shifts supply curve to the right
(lower price of input = cheaper production = more profit)

Question 32

What effect does government taxes have on the supply curve?

Answer 32

It shifts to the left
(sales are less profitable)

Question 33

What effect does government subsidies have on the supply curve?

Answer 33

It shifts to right
(more profitable)

Question 34

What happens to the complementary goods x and y when there is a rise in price of good x?

Answer 34

Rise in price of good x leads to an increase in the supply of complementary product y

Question 35

What happens to substitute products x and y when there is a decrease in the price of y?

Answer 35

A reduction in the price of y leads to an increase in the supply of x

Question 36

How does the increase or decrease of suppliers affects the supply curve?

Answer 36

Shift to the right = increase in nbr of suppliers

Shift to the left = reduction in nbr of suppliers bc less profitable

Question 37

What does an increase in supply imply for the demand curve?

Answer 37

an increase in supply means that the whole supply curve has shifted to the right, so that the quantity supplied at any given price has increased; a movement up and to the right along a supply curve indicates an increase in the quantity supplied in response to an increase in the price of the product.

Question 38

When does excess demand happen, and what effect does it have on the price?

Answer 38

situation in which, at a given price, quantity demanded exceeds quantity supplied
It causes upward pressure on price

Question 39

When does excess supply happen, and what effect does it have on the price?

Answer 39

situation in which, at the given price, quantity supplied exceeds quantity demanded
It causes downward pressure on price

Question 40

What is the formula for market equilibrium?

Answer 40

Demand - Supply

positive = excess demand
negative = excess supply

Question 41

What effect does an increase in demand have on the market equilibrium?

Answer 41

Demand curve shifts to the right
New equilibrium, more is exchanged at a higher price

An increase in demand creates a shortage at the initial equilibrium price, and the unsatisfied buyers bid up the price. This rise in price causes a larger quantity to be supplied, with the result that at the new equilibrium more is exchanged at a higher price.

Question 42

What effect does an increase in supply have on the market equilibrium?

Answer 42

Supply curve shift to the right
New equilibrium at a lower price and higher quantity

increase in supply creates a surplus at the initial equilibrium price, and the unsuccessful sellers force the price down. This drop in price increases the quantity demanded, and the new equilibrium is at a lower price and a higher quantity exchanged.

Question 43

What effect does a decrease in demand have on the market equilibrium?

Answer 43

Demand curve shift to the left
New equilibrium, price and quantity exchanged lower than initially

decrease in demand creates a surplus at the initial equilibrium price, and the unsuccessful sellers bid the price down. As a result, less of the product is supplied and offered for sale. At the new equilibrium, both price and quantity exchanged are lower than they were originally.

Question 44

What effect does a decrease in supply have on the market equilibrium?

Answer 44

Supply curve shift to the left
New equilibrium at higher price and lower quantity

decrease in supply creates a shortage at the initial equilibrium price that causes the price to be bid up. This rise in price reduces the quantity demanded, and the new equilibrium is at a higher price and a lower quantity exchanged.

Question 45

What is the difference between relative and absolute price?

Answer 45

→Absolute price: amount of money that must be spent to acquire one unit of a product = money price

→Relative price: amount of money price of one product to the money price of another product, or a ration of two absolute prices

Question 46

What are the 3 conditions that must be satisfied in order for a market so follow demand-and-supply model?

Answer 46

1. There must be a large number of consumers of the product, each one small relative to the size of the market.
2. There must be a large number of producers of the product, each one small relative to the size of the market.
3. Producers must be selling identical or “homogeneous” versions of the product.

Question 47

What is disequilibrium price?

Answer 47

Price at which the quantity demanded does not equal quantity supplied - thus, market is in a state of disequilibrium, and market price is changing