Chapter 2/3: Demand & Supply

Question 1

What is the Individual Demand Curve?

Answer 1

A graph that plots the quantity of an item that an individual plans to purchase at each price

Question 2

What is another way for describing an individual’s demand curve?

Answer 2

drawing a person’s buying plans given current economic conditions

Question 3

What does the phrase “holding all else constant” infer?

Answer 3

Rule out the possibility of other factors changing

Question 4

What does Ceteris Paribus mean?

Answer 4

All other things being unchanged or constant

Question 5

what does 𝑞 = 𝑓(𝑃) mean?

Answer 5

q = quality, f() = how the price directly influences quantity, p = price

Question 6

What happens to demand when prices fall lower and lower?

Answer 6

Quantity demands get higher and higher

Question 7

What is a change in quantity demanded or quantity supplied vs change in demand or supply?

Answer 7

Change in quantity demanded or quantity supplied is a movement along the curve. Change in pure supply or demand means an literal shift in the lines or curves

Question 8

What does the law of Demand state?

Answer 8

The tendency for quantity demanded to be higher as prices fall

Question 9

What four principles should you use in order to decide if and how much you want to buy something? What do each of these principles mean?

Answer 9

• Marginal Principle: Break down the question of ”how many litres of gas to buy?”
  into a series of smaller marginal choices.
• Cost-Benefit Principle: For each marginal choice, buy the additional litre of gas if the
  benefits exceed the costs (or price of gasoline).
• Opportunity Cost Principle: “Or what?” To accurately assess the marginal benefits
  of each litre of gas, always makes a comparison to his next best alternative.
• The Rational Rule for the Buyer: Buy more of an item if the marginal benefit of one
  more is greater than (or equal to) the price.

Question 10

T/F demand illustrates the price at which you are willing to buy each quantity?

Answer 10

T

Question 11

Are demand curves and marginal benefit curves the same?

Answer 11

Yes

Question 12

What is the Diminishing Marginal Benefit?

Answer 12

Each additional item yields a smaller marginal benefit than the previous item

Question 13

Is your marginal benefit curve sloping upward or downward according to the diminishing marginal benefit theory?

Answer 13

The curve is downward sloping

Question 14

What does Market Demand Curve mean?

Answer 14

A graph plotting the total quantity of an item demanded by the entire market, at each price

Question 15

Individual demand curves are the building blocks of?

Answer 15

the market demand

Question 16

What does the interdependence principle suggest?

Answer 16

everything is connected

Question 17

What are the six factors that shift the market demand curve?

Answer 17

1. Income
2. Preferences
3. Prices of related goods
4. Expectations
5. Congestion and network effects
6. The type and number of buyers

Question 18

Normal Good definition?

Answer 18

A good for which higher income causes an increase in demand

Question 19

Examples of normal goods?

Answer 19

• Smartphone
• Restaurant meals
• Organic fruits and vegetables

Question 20

Inferior goods definition?

Answer 20

A good for which higher income causes a decrease in demand

Question 21

Examples of inferior goods?

Answer 21

• Non-smart phone
• Fast-food meals
• Non-organic fruits and vegetables

Question 22

Are all goods Inferior or Normal?

Answer 22

Not necessarily

Question 23

What is an example of a non inferior or normal good?

Answer 23

Generic products like canned foods, cars, etc.

Question 24

Can changes in your preferences shift your demand curve?

Answer 24

Absolutely

Question 25

What are some changes in your preference that can shift your demand curve?

Answer 25

-Life-altering event -Marketing, influencers and fashion cycles -Social Pressure -Season/Weather

Question 26

Definition of complementary good?

Answer 26

Goods that go well together. Your demand for a good will decrease if the price of a complementary good rises

Question 27

Examples of complementary goods?

Answer 27

- hot dogs and hot dog buns - cereal and milk - iphone & iphone cases

Question 28

Definition of Substitute Goods?

Answer 28

Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises, and it will fall if the price of a substitute good falls

Question 29

Examples of Substitute goods?

Answer 29

- If Pizza Hut raises their prices, then my demand for Dominos pizza will increase - coca cola & pepsi

Question 30

Can expectations about future prices or future availability influence your current demand? If so what are some examples?

Answer 30

Yes, Example 1: If you see gas prices are high right now, you may decide to wait another few days before filling your car with gas. Example 2: Think back to the early months of the pandemic and the toilet paper shortage. Initially, when you saw toilet paper was available to buy again, you probably bought more rolls than usual. You wanted to stock up while you can!

Question 31

What does Congestion Effect mean?

Answer 31

When a good becomes less valuable because other people use it. If more people buy such a produce, your demand for it will decrease

Question 32

What does a network effect mean?

Answer 32

When a good becomes more useful because other people use it. If more people buy such a good, your demand for it will also increase

Question 33

What is an Individual Supply Curve?

Answer 33

A graph plotting the quantity of an item that a business plans to sell at each price

Question 34

What are the two things that have to be met in order for a market to be perfectly competitive?

Answer 34

1) all firms in an industry sell an identical good 2) there are many buyers and sellers, each of whom is small relative to the size of market

Question 35

Are most Markets perfectly competitive?

Answer 35

Most markets have some degree of imperfection * Only a few buyers or sellers * Selling a unique product * Product has loyal customers

Question 36

Do marginal costs include Variable Costs or Fixed Costs?

Answer 36

Marginal costs include Variable Costs but exclude Fixed Costs

Question 37

Variable Costs?

Answer 37

Variable costs like labour and raw material vary with the quantity of output you produce.

Question 38

Fixed Costs?

Answer 38

costs that don’t vary when you change the quantity of output you produce

Question 39

Are fixed or variable costs considered sunk costs?

Answer 39

Fixed costs

Question 40

Market Supply Curve?

Answer 40

A graph plotting the total quantity of an item supplied by the entire market, at each price

Question 41

What are the five factors that shift the market supply curve

Answer 41

1. Input prices 2. Productivity and technology 3. Prices of related outputs 4. Expectations 5. The type and number of sellers

Question 42

What is Productivity Growth?

Answer 42

producing more output with fewer inputs

Question 43

What does Complements-in-Production mean?

Answer 43

Goods that are made together. Your supply of a good will increase if the price of a complement-in production rises.

Question 44

What does Substitutes-in-Production mean?

Answer 44

Alternative uses of your resources. Your supply of a good will decrease if the price of a substitute-in-production rises.