Chapter 3 - Demand, supply and price

Question 1

What is meant by quantity demanded?

Answer 1

How much a consumer desires to obtain a product at a specific price, not how much they actually buy

Question 2

What is meant by demand?

Answer 2

This is the total demand of a product, it represents the entire curve, and not just a single point.

Question 3

What is a stock variable?

Answer 3

A stock variable is one that doesn’t change based on time.

Ex: 30 000 eggs in a farm on January 23rd, 2025

Question 4

What is a flow variable?

Answer 4

A flow of demand per unit of time.

Ex: 2000 eggs per day

Question 5

What are the variables that affect quantity demanded?

Answer 5

Price. The price of a product will cause a movement along the demand curve.

Question 6

What are the variables that affect demand (they cause a shift in the entire curve, left or right)

Answer 6

1) income
2) Price of other goods
3) Consumer preferences
4) Population
5) Significant changes in weather

Question 7

How does income shift the demand curve?

Answer 7

income
a) if we have a normal good and income rises, demand for the good increases (shift to the right)

Ex: when income rises we want to buy more clothes

b) if we have an inferior good and income rises, demand for the good decreases (shift to the left)

Ex: when income rises, we start taking Ubers instead of taking the bus

Question 8

how do the prices of other goods affect the demand curve?

Answer 8

Substitutes in consumption is when the demand for one good changes based on the price relative to another good.

Ex: If you are buying Toyota corolla and the price of the Honda civic goes down, the demand for Honda civics goes up (shift to the right). On the other hand, if the Price of the Toyota corolla goes up, the demand for Honda civics can also go up again (shift to the right)

We can also have Complements in consumption where 2 or more goods go together and their demands also move together.

Ex: Cars and gasoline. If the price of gasoline goes down, the demand for cars and gasoline goes up (shift to the right)

Question 9

How do consumer preferences shift the demand curve

Answer 9

Consumer preferences are a very personal thing. They can change based on outside information or just because there is a new trend.

Ex: You hear about this new app called TikTok and everyone seems to want to use it. The demand for TikTok videos will go up. (shift to the right)

Question 10

How does population shift the demand curve?

Answer 10

The more people are born, the more the demand will go up (shift to the right).

Question 11

How do significant changes in weather shift the demand curve?

Answer 11

Ex: If there is a cold snap, this would lead to a higher demand for heating services (shift to the right).

Ex: Bad weather in exotic countries like if the Bahamas were to have rainy weather, this would decrease demand for vacations to The Bahamas (shift to the left).

Question 12

What can cause a change in quantity Demanded?

Answer 12

1) A shift in the demand curve with price being constant
2) the price could change and make a point move along the demand curve
3) A combination of the two

Question 13

What is meant by quantity supplied?

Answer 13

How much a producer desires to supply a product at a specific price, not how much they actually supplied

Question 14

What is meant by supply?

Answer 14

This is the total supply of a product, it represents the entire curve, and not just a single point.

Question 15

What are the variables that affect quantity supplied?

Answer 15

Price. The price of a product will cause a movement along the supply curve

Question 16

What are the variables that affect supply (they cause a shift in the entire curve, left or right)

Answer 16

1) Cost of inputs
2) Technology
3) Gov’t taxes or subsidies
4) Prices of other products
5) Significant changes in weather
6) Number of suppliers

Question 17

How do cost of inputs shift the supply curve?

Answer 17

If cost of inputs go down, cost of production will also go down. This will encourage firms (producers) to supply more (shift to the right).

if cost of inputs go up, the opposite happens.

Question 18

How does technology shift the supply curve?

Answer 18

Technological innovation can reduce cost of inputs which would reduce cost of production and encourage producers to supply more (shift to the right).

Question 19

How do gov’t taxes or subsidies shift the supply curve?

Answer 19

1) Taxes will make it more costly for firms, this will discourage them to supply (shift to the left)

2) Subsidies will make cost of production cheaper, this will encourage firms to increase supply (shift to the right).

Question 20

How do prices of other products shift the supply curve?

Answer 20

If we have substitutes in production, this would mean that the price of one product would affect the supply of the other product in the opposite direction.

Ex: If a farmer can produce wheat and oats in the same field, and the price of oats increases, the farmer would start to increase the supply of oats (shift to the right).

Ex: If a farmer again can produce both wheat and oats and the price of oats decreases, they would then increase the supply of wheat instead (shift to the left).

If we have complements in production, this would mean the price of one product would change the supply of another product in the same direction.

Ex: If a producer can make bread and the price of butter increases, the supply of butter and bread would increase together (shift to the right).

Question 21

How do significant changes in weather shift the supply curve?

Answer 21

Extreme weather can impact the inputs of production.

Ex: Flooding can wipe out a whole crop thus reducing supply (shift to the left).

Ex: Extreme heat can give farm workers heatstroke and stop operations in a apple orchard, thus reducing supply (shift to the left).

Question 22

How do the number of suppliers shift the supply curve?

Answer 22

Ex: If existing suppliers are making money, more suppliers will join, this will increase supply (shift to the right).

Ex: If existing suppliers are losing money, more suppliers will leave, this will reduce supply (shift to the left)

Question 23

What can cause a change in quantity supplied?

Answer 23

1) A shift in the supply curve with price being constant
2) the price could change and make a point move along the supply curve
3) A combination of the two

Question 24

What is a market?

Answer 24

A place where buyers and sellers make exchanges

Question 25

What is equilibrium price?

Answer 25

The price where supply meets demand

Question 26

How does equilibrium correct itself?

Answer 26

Excess supply will bring the price down and excess demand will bring the price up.

Question 27

What are the 4 possible curve shifts when it comes to equilibrium?

Answer 27

1) Increase in demand, increases the Eq price and qty
2) Decrease in demand, decrease the Eq price and qty
3) Increase in supply, decrease in Eq price and increase qty
4) Decrease in supply, increase in Eq price and decrease qty

Question 28

What is an absolute price?

Answer 28

The amount of money used to acquire that good.

Question 29

What is a relative price?

Answer 29

The price of a good compared to other goods

Question 30

Why do relative prices matter more than absolute prices?

Answer 30

Ex: if the price of apples goes up and the price of oranges also goes up, then we don’t prefer one over the other. If the price of apples goes up but the price of oranges remains the same, now we prefer the oranges over the apples. Prices relative to other goods are more important.