Chapter 4 - Supply and Demand

Question 1

Competitive Market

Answer 1

• a market with many buyers and sellers, each has a negligible effect on the price

Question 2

Perfectly Competitive Market

Answer 2

• all goods are exactly the same
• buyers and sellers are numerous so no one can affect the market price
• all are ‘price-takers’

Question 3

Quantity Demanded

Answer 3

• the amount of the good buyers are willing and able to purchase

Question 4

Law of Demand

Answer 4

• the claim that the quantity demanded of a good decreases when the price of the good increases, all else equal

Question 5

Demand Schedule

Answer 5

• table showing relationship between price and quantity demanded

Question 6

Individual Demand

Answer 6

• the quantity demanded by a single buyer at each price

Question 7

Market Demanded

Answer 7

• the quantity demanded in the market. equal to the sum of the quantities demanded by all buyers at each price

Question 8

Demand Curve Shifters

Answer 8

• number of buyers
• income
• prices of related goods
• tastes/preferences
• expectations

Question 9

Normal Goods

Answer 9

• a good for which (all else equal) an increase in income leads to an increase in demand
• demand for this is positive to income

Question 10

Inferior Good

Answer 10

• a good for which (all else equal) an increase in income leads to a decrease in demand
• demand for this is negative to income

Question 11

Substitute Goods

Answer 11

• two goods for which an increase in the price of one good leads to an increase in the demand for the other

Question 12

Complements

Answer 12

• two goods for which an increase in the price of one good leased to a decrease in the demand for the other

Question 13

Quantity Supplied

Answer 13

• the amount of good sellers are willing and able to sell

Question 14

Law of Supply

Answer 14

• the claim that the quantity supplied of a good increases when the price of the good increases, all else equal

Question 15

Supply Schedule

Answer 15

• table showing the relationship between price and the quantity supplied

Question 16

Individual Supply

Answer 16

• the quantity supplied by a single supplier at each price

Question 17

Market Supply

Answer 17

• the quantity supplied in the market. Equal to the sum of the quantities supplied by all sellers at each price

Question 18

Supply Curve Shifters

Answer 18

• input prices
• technology
• number of sellers
• expectations

Question 19

Input

Answer 19

• the cost of an input into the production process

Question 20

Equilibrium

Answer 20

• price has reached the level where quantity supplied equals quantity demanded

Question 21

Equation for Market Demand

Answer 21

Qd = a - bP

• a captures everything (expect price) affecting demand
• b sensitivity of demand to changes in own-price

Question 22

Equation for Market Supply

Answer 22

Qs = c + dP

• c captures everything (expect price) affecting supply
• d sensitivity of supply to changes in own-price

Question 23

Surplus

Answer 23

• when the quantity supplied is greater than the quantity demanded
• results in a downward pressure on price

Question 24

Shortage

Answer 24

• when the quantity demanded is greater than the quantity supplied
• results in upward pressure on price

Question 25

Analyzing Changes in Equilibrium

Answer 25

1) decide whether event shifts the supply curve, the demand curve, or both
2) Decide in which direction curve shifts
3) Use supply-demand diagram to see how the shift changes equilibrium prices and quantities