Chapter 3: Demand And Suppy

Question 1

What is a market?

Answer 1

Where buyers and sellers exchange goods and service for monetary values

Question 2

What is a competitive market?

Answer 2

A market that has many buyers and sellers. Not one buyer nor seller can influence the price of a good or service

Question 3

What is money price and relative price?

Answer 3

The money price is the monetary value that the good or service has.
The relative price is the ratio of one price to another. (it demonstrates opportunity cost). You divide the money price by the price of the basket (indexing), shows the price relative to other goods/services.

Question 4

What does the law of demand state?

Answer 4

It states that, all else equal:
Higher price = lower demand
And the inverse relationship^

Question 5

Why does the law of demand exist?

Answer 5

Because of the substitution and income effect:
Substitution - a good always has substitutes. When the price of a good rises, people are going to find cheaper substitutes
Income effect: when prices rise relative to income, people can’t afford everything that they had previously purchased.

Question 6

A demand curve is also known as what?

Answer 6

A willingness-to-pay curve

Question 7

What are the six factors that influence demand?

Answer 7

• price of related goods
• expected future prices
• income
• expected future income and credit
• preferences
• population

Question 8

How does price of related goods affect demand?

Answer 8

Substitute: a good that can be used in place of another
When the price of a substitute is lower, people will buy that instead

Complement: a good that is used alongside another
When the price of pencils is lower, people will buy more erasers

Question 9

How does expected future prices affect demand?

Answer 9

When prices are expected to increase, people will buy more at the current moment.
When prices are expected to decrease, people will buy less now

Question 10

How does income affect demand?

Answer 10

Normal good: when income increases, demand increases (clothes)
Inferior good: when income increases, demand decreases (ramen)

Question 11

How does expected future income and credit affect demand?

Answer 11

When you are expected to gain income or credit, you will spend more at the current moment

Question 12

How does population affect demand?

Answer 12

As population increase, demand increases

Question 13

How does preferences affect demand?

Answer 13

People have different preferences

Trends/ fads

Question 14

What is quantity supplied

Answer 14

The amount that producers plan on selling at a certain price

Question 15

What is the law of supply?

Answer 15

The higher the price, the more producers want to sell, the lower the price, the less they want to sell

Question 16

The supply curve can also be looked at as…?

Answer 16

A minimum-supply-price curve, as quantity produced increases , so does marginal cost

Question 17

What are the six factors that change supply?

Answer 17

1. Price of factors of production
2. Price of related goods
3. Expected future prices
4. Number of suppliers
5. Technology
6. The state of nature

Question 18

How does price of factors of production affect supply?

Answer 18

As the price of factors of production increases, the minimum price that suppliers are willing to accept for a good increases as well.
Increased price in factors of production = decrease in supply

Question 19

How does price of related goods affect supply?

Answer 19

If the price of a substitute is higher, the producer would rather want to produce that good.
ex. If the price of cookies goes up, the supply of cakes decreases

If the price of a complement rises, the producer will produce more
Ex. If the price of wood chips rises, the supply of lumber increases as well.

Question 20

How does expected future prices affect supply?

Answer 20

If prices are expected to rise in the future, supply will decrease now
If prices are expected to drop , supply will increase now

Question 21

How does number of suppliers affect supply?

Answer 21

More suppliers= more supply

Question 22

How does technology affect supply?

Answer 22

Advancements in technology create new products and increase efficiency, therefore increasing supply

Question 23

How does the state of nature affect supply?

Answer 23

If there is a natural disaster, this decreases our ability to produce therefore decreasing supply

Question 24

When does market equilibrium occur?

Answer 24

When the supply and demand curve intersect

Question 25

What is a shortage and a surplus?

Answer 25

Shortage: when the quantity demanded exceeds the quantity supplied
Surplus: when the quantity supplied exceeds the quantity demanded

Question 26

A demand curve shows the: (3)

Answer 26

Marginal benefit for consumers
Max. price consumers are willing to pay for each unit
The amount consumers are willing to buy for each price.

Question 27

True or False: It is possible for the equilibrium price and quantity to “maybe” rise or fall due to different factors that affect both supply and demand.

Answer 27

Yes this is possible.

It is possible for quantity to rise and price to maybe rise or fall, or the inverse.