Chapter 4 - The Market Forces of Supply and Demand

Question 1

What is a Market

Answer 1

Sellers (determine supply) and buyers (determine demand)

Question 2

Competitive Market

Answer 2

Market with many buyers and sellers that are competing against each other, therefore they have a negligible impact on market prices.

Question 3

Perfectly Competitive Market

Answer 3

1. All the goods and services are the same
2. So many buyers and sellers that there not one individual or firm that can have influence on market price

Question 4

Price Takers

Answer 4

In a perfectly competitive market prices are determined by the forces of supply and demand. So, individuals and firms simply have to accept these prices therefore they are price takers.

Question 5

Quantity of Demand

Answer 5

The amount that a buyer is willing and able to purchase

Question 6

Law of Demand

Answer 6

When the price of a good or service increases, demand decreases and vice versa. (If all other factors are equal)

Question 7

Demand Schedule

Answer 7

A table showing the relationship between price and quantity demanded if all other factors are held constant.

Question 8

Normal Good

Answer 8

When demand for a good decreases when income decreases it is considered a normal good.

Question 9

Inferior Good

Answer 9

When demand for a good increases when income decreases it is considered an inferior good. (ex. bus rides go up when income goes down because people cant afford individual transportation)

Question 10

Income (Demand Shifts)

Answer 10

Income increase and decrease is what makes these goods normal or inferior. These goods aren’t always normal or inferior it depends on the situation (income)

Question 11

Prices of Related Goods

Answer 11

The price of related goods affect the demand of other goods. Certain goods can be substituted with related goods, therefore shifting their demand curve. These goods are called substitutes. (ex. frozen yogurt and ice cream, or sweaters and hoodies)

Certain goods also incentivize the purchasing of another good that essentially pairs well with one another. These goods are called compliments. (ex. hot fudge and sprinkles - icecream, peanut butter - jelly)

Question 12

Tastes

Answer 12

Tastes determine demand for any good. Peoples tastes are determined by historical and psychological factors.

Question 13

Expectations

Answer 13

Demand can also be determined and changed by peoples expectations. When people expect or don’t expect certain things they will spend less or more. (ex. knowing you’ll have a higher paycheque next month can adjust spending habits and therefore shift the demand curve)

Question 14

Number of Buyers

Answer 14

The higher the number of buyers in a certain market (buying a specific good or service) the higher the demand. (simple math)

Question 15

Shifts in Demand Curve

Answer 15

All changes besides a price change are factors that shift the demand curve.

Question 16

Quantity Supplied

Answer 16

The amount that a seller is willing and able to sell

Question 17

Law of Supply

Answer 17

When the price of a good or service increases, sellers will sell more of it to make more profit.

Question 18

Supply Schedule

Answer 18

a table showing the relationship between price and quantity supplied

Question 19

Supply Curve

Answer 19

Slopes upward because the higher the price, the more supplied.

Question 20

Input Prices (Supply Shifts)

Answer 20

When the price of an input (ingredients, equipment, labour) increases, profit decreases. (Shift left)

Question 21

Technology (Supply Shift)

Answer 21

Technology can make production less expensive and more efficient, so quantity supplied would increase. (Shift right)

Question 22

Expectations (Supply Shift)

Answer 22

Certain expectations of the future affect the supply curve. Expectations of an increase in price and decrease in price affect the curve. (Shift right or left)

Question 23

Number of Sellers

Answer 23

The number of sellers and therefore products affects the quantity supplied.

Question 24

Market Equilibrium

Answer 24

This is the point where the supply curve and demand curve intersect (equilibrium price and quantity)

Question 25

Market-Clearing Price

Answer 25

the equilibrium price, because at this price everyone in the market is satisfied.

Question 26

Surplus (of a good)

Answer 26

A surplus means that sellers ares selling a good for a price that buyers are not willing or able to pay, and now sellers are stuck with an excessive amount of their good. This is solved by reducing the price of the good, bringing it to the equilibrium price.

Quantity supplied is exceeding quantity demanded.

Question 27

Shortage (of a good)

Answer 27

A shortage occurs when the price of a good is lower than the equilibrium. Essentially there is not enough pf the good for everyone.

Quantity supplied is lower than quantity of demand.

Question 28

Surplus and Shortage Causes

Answer 28

Surplus
- Technological advancements
- Price floors (government-set price, could be above equilibrium)

Shortage
- natural disasters
- price control (government-set price, could be below equilibrium)

Question 29

Steps to Effects on Equilibrium

Answer 29

1. Decide wether the event is shifting the supply curve, demand curve, or both
2. Decide wether the shift is to the right or left
3. Look at how the change affected the equilibrium price and quantity

Question 30

Shifts versus Movement

Answer 30

If the quantity supplied stays the same despite increase in demand, that is a shift in the supply curve. But, if a firm raises prices in response to the increasing demand then it becomes a shift in the supply curve and a movement along the supply curve.

Question 31

Supply and Demand, Quantity Supplied and Demanded

Answer 31

Supply and Demand refer to the overall supply and demand curves.

Quantity Supplied and Demand refer to specific points on the curves.