Chapter 3: Demand & Supply

Question 1

what are the 2 sides of a market?

Answer 1

buyers & sellers

Question 2

Competitive Market

Answer 2

has many buyers & sellers so no single buyer or seller can influence the price
changes in response to demand & supply

Question 3

Producers offer items for sale if the price is _____ enough to cover opportunity cost. How do consumers respond to this change?

Answer 3

1. High
2. seek cheaper alternative to expensive items

Question 4

What is money price?

Answer 4

amount of dollars that must be given up in exchange for an object

Question 5

If a cup of coffee cost $1 & gum cost 50 cents, what is the opportunity cost of 1 cup of coffee? How does relative price relate?

Answer 5

1. 2 packs of gum
2. Relative Price - ratio of one price to another (is an opportunity cost)
   
   • Tells us opportunity cost of the good in terms of how much of the basket we must give up to buy it

Question 6

What is demand?

Answer 6

entire relationship between the price of a good & the quantity demanded of that good

Question 7

what is quantity demanded?

Answer 7

amount consumers plan to buy during a given time period at a particular price

Question 8

T/F: quantity demanded often exceeds the amount of goods available

Answer 8

T: quantity bought is less than the quantity demanded

Question 9

How is quantity demanded measured?

Answer 9

as an amount per unit of time
E.g. 1 cup of coffee per day, 7 cups per week, 365 cups per year

Question 10

Law of demand

Answer 10

other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; the lower the price of a good, the greater is the quantity demanded

Question 11

How does higher price reduce the quantity demanded? Explain the 2 main effects.

Answer 11

Substitution effect - when the price of a good rises, relative price & opportunity cost rises
- Goods have substitutes that can be used in its place
(e.g. energy bars or energy drinks)
- As opportunity cost rises, incentive to economize on
its use & switch to substitute becomes stronger
Income Effect - price rises relative to income
§ Higher price + unchanged income = people cannot afford to buy goods they previously bought
§ Decrease quantities demand of some goods & services

Question 12

Give an example of substitution & income effect

Answer 12

energy bar = $3, eventually doubles to $6
§ Fewer bars sold, more people switching to cheaper energy drink (substitute)
§ Tighter budget, people buy fewer energy bars

Question 13

What does the demand curve depict?

Answer 13

relationship between the quantity demanded of a good & its price when all other influences on consumers planned purchases remain the same

Question 14

What does the demand schedule depict?

Answer 14

lists quantities demanded at each price

Question 15

What is marginal benefit in relation to demand?

Answer 15

willingness & ability to pay
○ As quantity increases, marginal benefit for each additional unit decreases

Question 16

What is a change in demand?

Answer 16

• Any factor that influences buying plans changes, other than the price of the good

Question 17

As demand increases, the curve shifts _____ & quantity demanded at each price _____

Answer 17

1. rightwards
2. increases

Question 18

List 6 factors that bring change in demand

Answer 18

1. price of related goods
2. Expected future price
3. income
4. expected future income & credit
5. populaton
   6.preferences

Question 19

Substitute vs. Complement

Answer 19

§ Substitute - good used in place of another good (e.g. hamburger instead of hotdog)
§ If price of substitute for a good rises, people buy
less of the substitute
□ E.g. hotdog prices rise, people buy more burgers
(demand increases)
§ Complement - good used in conjunction w/ another good
□ E.g. energy bars & exercise
□ E.g. if gym prices fall, people buy more
memberships & more bars

Question 20

normal vs inferior good

Answer 20

§ Normal good - demand increases as income increases § Inferior good - demand decreases as income increases

Question 21

Explain how expected future prices effects changes in demand

Answer 21

§ EFP rises (& good can be stored), the OPC (opportunity cost) of obtaining good for future us is LOWER TODAY than in the FUTURE when price is expected to be HIGHER
§ Demand of good increases, today
§ E.g. Wheat drought; expect price of pasta to increase, therefore buy enough pasta for next few months

Question 22

Supply

Answer 22

entire relationship between the price of a good & quantity supplied of it

Question 23

Quantity supplied

Answer 23

point on supply curve that describes the quantity supplied at a particular price
Not same as quantity sold - quantity supplied often greater than the quantity demanded
Measured as an amount per unit of time

Question 24

Law of supply

Answer 24

the higher the price of a good, the greater the quantity supplied; the lower the price of a good, the smaller the quantity supplied

Question 25

why does higher price increase quantity supplied?

Answer 25

§ Marginal cost increases - as quantity produced increases, marginal cost increases
§ Higher price minimizes cost of production

Question 26

What is the minimum supply price?

Answer 26

shows the lowest price at which someone is willing to sell
○ Lowest price = marginal cost
○ Small quantity produced, lowest price someone willing to sell one more unit is low
○ As quantity produced increases, marginal cost of each additional unit rise along w/ supply curve

Question 27

6 factors than influence change in supply

Answer 27

1. Prices of Factors of Production
   § Price of factor of production increases, lowest price that produced is willing to accept for the good increases, supply decreases
   □ E.g. Price of jet fuel increases, supply of air travel decreases
2. Prices of Related Goods Produced
   § E.g. price of energy drink increases, firm switches production from cola drinks to energy drinks - cola drinks decreases supply
   □ Both drinks are substitutes in production - can be produced using same resources
   § E.g. Beef price rises, supply of cowhide increases
   □ Both are complements in production - produced together
3. Expected Future Prices
   § Return from selling good in future increase & is higher than it is today
4. Number of Suppliers
   § # of firms that produce good increases, supply of the good increases
5. Technology
   § New method discovered that lowers the cost of producing a good
6. State of nature
   § Natural forces that influence production
   □ E.g. good weather increases supply of agricultural products

Question 28

Price of a good falls, quantity supplied _____ & mvmt occurs ___ supply curve

Answer 28

1. decreases
   2.down

Question 29

Price of a good rises, quantity supplied _____ & mvmt occurs ____ the cupply curve

Answer 29

1. increases
2. up

Question 30

if supply increases, curve shifts____

Answer 30

right

Question 31

If supply decreases, curve shifts____

Answer 31

left

Question 32

Market Equilibrium

Answer 32

Occurs when the price balances buying plans & selling plans

Question 33

Equilibrium price vs equilibrium quantity

Answer 33

• Equilibrium price - quantity demanded = quantity supplied
• Equilibrium quantity - amount bought & sold at equilibrium price

Question 34

Market moves towards it equilibrium because:

Answer 34

1. Price regulates buying & selling plans
2. Price adjust when plans don’t match

Question 35

If price is too high _________.
If price is too low __________.

Answer 35

• Price too high, quantity supplied exceeds quantity demanded
• Price too low, quantity demanded exceeds quantity supplied

Question 36

When does a shortage vs a surplus occur?

Answer 36

• Price below equilibrium - shortage
• Price above equilibrium - surplus

Question 37

Shortages force prices ___. Why?

Answer 37

1. UP
   ○ Markets operate to increase price of good & move it towards equilibrium price
   ○ Noticing unsatisfied consumers, producers raise the price
   ○ Producers increase their output
   ○ As producers push price up, price rises towards equilibrium
   Rising price reduces shortage - decreases quantity demanded & increases quantity supplied

Question 38

As supply increases, price ____ & quantity ____.
As supply decreases, price _____ & quantity ____.

Answer 38

1. falls
2. increases
3. falls
4. decreases

Question 39

What happens when the equilibrium quantity of demand & supply changes in the same direction?

Answer 39

If Demand increase by more than supply increase, price rises
if Supply increases more than demand increases, price falls
§ Shortage nor surplus arises
§ Bigger increase in demand would create shortage
& rise in price
§ Bigger increase in supply would create surplus &
fall in price