Chapter 3: Supply and Demand

Question 1

5 factors shifting the demand curve?

Answer 1

Changes in:
- prices of related goods/services (complements in consumption and substitutes in consumption)
- income (normal and inferior)
- tastes
- expectations (of changes in price and income)
- number of consumers

Question 2

5 factors shifting the supply curve?

Answer 2

• input prices
• prices of related goods/services. Substitutes in production (choice between producing one/good service or another – veterinary selling services for town or countryside) and complements in production (by-product – lamb wool and lamb meat).
• Technology (technology improvements allow for producers to spend less on inputs while maintaining output).
• Expectations (selling now vs storing for later).
• Number of producers

Question 3

Effects of shift in demand curve?

Answer 3

Price and quantity both increase or both decrease + movement on supply curve.

Question 4

Effects of shift in supply curve?

Answer 4

Price falls, quantity rise or vice versa + movement on demand curve.

Question 5

Effects of Supply and Demand shifting in the opposite direction?

Answer 5

Change in price, quantity ambiguous (unless magnitude specified).

Question 5

Effects of Supply and Demand shifting in the same direction?

Answer 5

Change in quantity, price ambiguous (unless magnitude specified).

Question 6

Features of perfectly competitive market?

Answer 6

• homogenous product
• no barriers to entry/exit
• perfect information

Question 7

Nature of equilibrium?

Answer 7

In a market where producers and consumers are informed, equilibrium converges to the same price. In surplus, it will be exhausted by potential producers lowering price. In shortage, it will be exhausted by potential buyers bidding higher.

Question 8

KEY TERM:
Competitive Market

Answer 8

a market in which there are many buyers and sellers of the same good or service, none of whom can influence the price.

Question 9

KEY TERM:
Supply and Demand Model

Answer 9

a model of how a competitive market behaves.

Question 10

KEY TERM:
Demand/supply schedule

Answer 10

a list or table showing how much of a good or service consumers/suppliers will want to buy/sell at different prices.

Question 11

KEY TERM:
Quantity demanded/supplied

Answer 11

the amount of a good or service consumers/suppliers are willing and able to buy/sell at some specific price.

Question 12

KEY TERM:
Demand/supply curve

Answer 12

a graphical representation of the demand/supply schedule. It shows the relationship between quantity demanded/supplied and price.

Question 13

KEY TERM:
Law of Demand

Answer 13

the principle that a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service.

Question 14

KEY TERM:
Law of Supply

Answer 14

the principle that a higher price for a good or service, other things equal, leads people to supply a larger quantity of that good or service.

Question 15

KEY TERM:
Movement along the Demand/Supply Curve

Answer 15

a change in the quantity demanded/supplied of a good that results from a change in the good’s price.

Question 16

KEY TERM:
Shift of Demand/Supply Curve

Answer 16

a change in the quantity demanded/supplied at any given price, represented graphically by the shift of the original demand/supply curve to a new position, denoted by a new demand/supply curve.

Question 17

KEY TERM:
Individual Demand/Supply Curve

Answer 17

a graphical representation of the relationship between quantity demanded/supplied and price for an individual consumer/producer.

Question 18

KEY TERM:
Market Demand/Supply Curve

Answer 18

the combined quantity demanded/supplied by all consumers given the market price.

Question 19

KEY TERM:
Input

Answer 19

a good or service used to produce another good or service.

Question 20

KEY TERM:
Market-clearing Price

Answer 20

when the quantity of a good or service demanded equals the quantity of that good or service supplied; also referred to as the equilibrium price.

Question 21

KEY TERM:
Surplus

Answer 21

the excess of a good or service that occurs when the quantity supplied exceeds the quantity demanded; surpluses occur when the price is above the equilibrium price.

Question 22

KEY TERM:
Shortage

Answer 22

the insufficiency of a good or service that occurs when the quantity demanded exceeds the quantity supplied; shortages occur when the price is below the equilibrium price.