Chapter 2 - Supply and demand

Question 1

Definition of Demand

Answer 1

Demand is the consumer’s desire, willingness, and ability to purchase goods and services

Question 2

Definition of quantity demanded

Answer 2

The quantity demanded is the amount of a good or service a consumer is willing to buy at a given price, holding all other factors constant

Question 3

Economists primarily focus on how _________ affects the quantity demanded

Answer 3

a good’s own price

Question 4

What are 3 ways of showing the relationship between demand and price

Answer 4

• Demand schedule
• Demand curve
• Demand function

Question 5

Describe a demand schedule

Answer 5

This is a chart showing the quantity demanded at difference prices

Question 6

Empirical evidence suggests that the quantity demanded by consumers follows which law

Answer 6

The law of demand

Question 7

Define the Law of Demand

Answer 7

Consumers demand a higher quantity of a good or service when the price is lower (and a lower quantity when the price is higher), holding all other factors that influence the amount consumers want to consume constant***

Question 8

The law of demand can be illustrated using which curve

Answer 8

the demand curve (according to the law of demand, demand curves slope downwards)

Question 9

The demand curve provides an answer to the question of…

Answer 9

what happens to the quantity demanded as price changes, holding all other factors constant

Question 10

Changes in the quantity demanded in response to a price change is referred to as

Answer 10

a movement along the demand curve

Question 11

Shift in the demand curve depends on what factors

Answer 11

• Income
• Price of substitute or compliment
• Tastes
• Government rules/regulations

Question 12

The demand curve relationship can be expressed mathematically using the

Answer 12

Demand function

Question 13

Describe the demand function

Answer 13

Q = D(p, Y, X) –> it allows us to think precisely about how the quantity demanded will respond to a change in price, holding income (and all other factors) fixed

• Q is the quantity demanded
• D is the demand function that depends on price (p), income (Y), and other factors (X)
  –> we will hold all other factors constant so our demand function will be Q = D(p, Y)

–> A constant in the equation reflects all the other factors

Question 14

if you have a demand function with the variables Q, p, and Y - how would you obtain the demand function

Answer 14

By substituting for income, Y –> so that Q = p essentially

Question 15

What is the inverse demand curve

Answer 15

that is when p = Q

Question 16

In the demand function For a given change in price, the quantity consumed will change by (ex. Q=30-(p/5)+0.1Y)

Answer 16

Delta Q = -1/5 * Delta P

–> so coefficient on the p multiplied by the change in p

Question 17

In many cases we might have an estimate of the demand from all consumers in a market, but in some scenarios we may only know the demands of individual consumers or groups of consumers - in these cases what do we do

Answer 17

we add up the demand from each consumer (or group)

Question 18

The total quantity demanded at a given price is equal to…

Answer 18

the sum of individual consumer demands at that price

Question 19

How do you get the market demand

Answer 19

By adding all the individual consumer demands at that price

Question 20

Define Horizontal Summation (in regards to market demand)

Answer 20

When summing demand for a private good, we add up the quantity demanded of each individual at each price

(DO NOT look at the graph and add the curves vertically. Just remember if no one person demands gasoline above price P_max, the market doesn’t demand any at prices above P_max either

Question 21

Define supply

Answer 21

Supply is the producer’s willingness to sell goods and services at a price

Question 22

Define Quantity Supplied

Answer 22

The amount of a good or service that producers want to sell at a given price, holding other factors that influence supply decisions constant

Question 23

What 3 ways are there to show the relationship between the price of a good or service and the quantity producers want to sell

Answer 23

• Supply schedule
• Supply curve
• Supply function

Question 24

Law of supply

Answer 24

Producers will normally offer more for sale at higher prices and less at lower prices when holding other factors constant

Question 25

Describe the slope of a demand and supply curve

Answer 25

Demand curve has a negative slope and supply curve has a positive slope

Question 26

Changes in the quantity supplied in response to a price change are referred to as

Answer 26

movements along the supply curve

Question 27

what factors can cause a shift in the supply curve

Answer 27

• Prices
• Production cost
• Technological change
• Government regulation

Question 28

What would be the effect of a blending component cost decreases on the supply curve

Answer 28

It would shift right because supply would increase

Question 29

Describe the supply function

Answer 29

Q = S(p, py, X)

–> Q is quantity supplied, and p is price and py is the price of other possible inputs or outputs, and X is other factors

Question 30

What happens to the quantity supplied if the price of coffee increases by ∆p ( Q = 9.6 + 0.5p - 0.2pc,

Answer 30

the quantity will increase by 0.5∆p

Question 31

How do you obtain total market supply

Answer 31

You need to add up the supply from each producer (market supply is adding up the quantities not the prices)

Question 32

Suppose there are 3 producers in the market for gasoline. Their supply functions are given by: Q1=10+P1; Q2=15+2P2; Q3=35+P3. What is the market supply of gasoline in this case?

Answer 32

You assume that market supply = p and therefore p1 = p2 = p3 –> 60 +4p

Question 33

Define market equilibrium

Answer 33

The market is in equilibrium when all market participants are able to buy or sell as much as they want; no participant wants to change their behavior given what other market participants are doing

Question 34

How do you determine market equilibrium

Answer 34

its where the demand and supply curve intersect

Question 35

Who is an important figure for determining Market equilibrium

Answer 35

John Forbes Nash

Question 36

Define market price

Answer 36

The equilibrium price is the p at which demand equals supply, consumers can buy as much as they want, and seller can sell as much as they want

Question 37

Define market quantity

Answer 37

The equilibrium quantity is the q such that the quantity demanded equals the quantity supplied

Question 38

𝑄D = 40 - (P/5)
Qs = (P/3) - 10

–> How can you solve for market equilibrium knowing these two formulas for quantity supplied and quantity demanded

Answer 38

In equilibrium quantity demanded is equal to quantity supplied, so you set the two formulas equal to each other and solve for the equilibrium price. Once you get the equilibrium price you can substitute it back into Qd or Qs to get the equilibrium quantity

Question 39

The supply and demand model tells use the price and quantity that will ______ the market ______________

Answer 39

clear, holding all other factors fixed

Question 40

What are the two sets of factors that can change the market equilibrium by shifting the supply and demand curves or both

Answer 40

• Market fundamentals –> income, inputs, preferences, technology, etc.
• Government intervention –> tax, subsidy, geographical restrictions, price ceilings/price floors

Question 41

The change in the price of an input leads to a shift in the ______ curve, and a movement along the _____ curve

Answer 41

shift in supply curve, movement along the demand curve

Question 42

What are concurrent shifts

Answer 42

shifts in both the demand and the supply curve

Question 43

Concurrent shifts: An increase in demand (shift right) and a decrease in supply (shift left) does what

Answer 43

• this can lead to an increase in price, but the effect on the quantities is ambiguous

Question 44

Concurrent shifts: If demand and supply both increase then

Answer 44

• equilibrium quantities will increase but the effect on price is ambiguous

Question 45

Concurrent shifts: If supply decreases and demand increases then

Answer 45

• the price will increase but the effect on quantities is ambiguous

Question 46

When demand and supply change at the same time, what two things determine the outcome

Answer 46

the size of the shifts and the price elasticities of demand and supply determine the outcome

Question 47

How do you calculate the price elasticity of demand

Answer 47

It is the percentage change in quantity demanded divided by the percentage change in price

Question 48

What does being more elastic mean

Answer 48

that means more responsive to changes

Question 49

Describe the elasticity of the demand curve

Answer 49

• downward sloping linear demand curve (Consider elasticity as p/Q)

–> where the line intersects with the price axis is perfectly elastic demand where there is undefined elasticity

–> perfectly inelastic demand has an elasticity of zero and is where the demand curve intersects with the quantity curve

–> inelastic demand is between 0 and -1 (the percentage change in quantity is smaller than the percentage change in price)

–> At the midpoint of the linear demand curve, a 1% increase in price causes a 1% fall
in quantity, so the elasticity equals -1, which we refer to as unitary elasticity

Question 50

What elasticity does a horizontal demand curve have

Answer 50

perfectly elastic at p

Question 51

What elasticity does a vertical demand curve have

Answer 51

Perfectly inelastic at every price

Question 52

What are the 3 government interventions that can lead to shifts in equilibrium

Answer 52

1. Curve shifts
2. Price controls
3. Taxes/Subsidies

Question 53

Governments use what 3 main approaches to shift curves:

Answer 53

1. Limits on who can buy (Governments can restrict who can buy certain products shifting the demand curve to the left by shrinking the market, and thus decreasing the quantity demanded at any price)
2. Restrictions on imports or exports (Import restrictions shift the importing countries supply curve to the left, while restrictions on exports shift the exporting country’s demand curve to the left)
3. Government purchases (Governments can buy goods directly, increasing the quantity demanded at each price. This shifts the demand curve to the right)

Question 54

Governments can intervene by controlling prices in the market: what are the two main forms of doing this

Answer 54

1. Price ceiling: Policy in which a government sets a maximum price that can prevail in the market –> these cause a shortage/excess demand
2. Price floor: Policy in which a government sets a minimum price that can prevail in the market –> here we have excess supply

Question 55

In which case does supply not equal demand

Answer 55

In cases where the government intervenes in the market –> in the absence of government intervention, supply equals demand and the market clears, but with government intervention the quantity demanded and the quantity supplied need not equal the actual quantity that is bought and sold

Question 56

Describe the effects of a specific tax

Answer 56

• the imposition of specific sales tax yields the same equilibrium regardless of who pays the tax
• Tax is shared by both the producer and the consumer - customers pay a higher price and producers receive less because of the tax

Question 57

How do you figure out how much tax revenue the government receives

Answer 57

you get the area of the rectangle created by the tax. Look at the new equilibrium point due to the tax, and go down and create a rectangle with the original price that should be paid at that equilibrium quantity

Question 58

How do you fin equilibrium price or quantity when tax is imposed

Answer 58

• if the tax is imposed on the supplier that means the price that they receive decreases, so you would substitute p in quantity supplied with (p-tax)
• if the tax is imposed on the consumer that means that the price they pay increases, so you would substitute p in quantity demanded with (p + tax)

Question 59

What type of market does the supply and demand model work well for

Answer 59

• a perfectly competitive market

Question 60

What are the 5 characteristics of a perfectly competitive market

Answer 60

1. Many small buyers and sellers
2. Consumers believe all firms produce identical products
3. All market participants have full information about price and product characteristics
4. Transaction costs (expenses over and above the price) are negligible
5. Firms can easily enter and exit the market, so competition is high