Chapter 4: The Market Forces of Supply and Demand

Question 1

How do you describe a shift in the supply (or demand) curve? A shift along a fixed supply (or demand) curve?

Answer 1

An increase/decrease in quantity supplied (or demanded) vs. an increase/decrease in supply (or demand).

Question 2

Define ‘Market’.

Answer 2

A group of buyers and sellers of a particular good or service.

Question 3

Define ‘Competitive market’.

Answer 3

A market in which there are many buyers and sellers so that each has a negligible impact on the market place.

Question 4

Define ‘Quantity demanded’.

Answer 4

The amount of a good that buyers are willing and able to purchase.

Question 5

Define ‘Law of demand’.

Answer 5

The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises.

Question 6

Define ‘Demand schedule’.

Answer 6

A table that shows the relationship between the price of a good and the quantity demanded.

Question 7

Define ‘Demand curve’.

Answer 7

A graph of the relationship between the price of a good and the quantity demanded. Slopes downward.

Question 8

Define ‘Normal good’.

Answer 8

A good for which, other things equal, an increase in income leads to an increase in demand.

Question 9

Define ‘Inferior good’.

Answer 9

A good for which, other things equal, an increase in income leads to a decrease in demand.

Question 10

Define ‘Substitutes’.

Answer 10

Two goods for which an increase in the price of one leads tp an increase in the demand for the other.

Question 11

Define ‘Complements’.

Answer 11

Two goods for which an increase in the price of one leads to a decrease in the demand for the other.

Question 12

Define ‘Quantity supplied’.

Answer 12

The amount of a good that sellers and willing and able to sell.

Question 13

Define ‘Law of supply’.

Answer 13

The claim that, other things equal, the quantity supplies of a good rises when the price of the good rises.

Question 14

Define ‘Supply schedule’.

Answer 14

A table that shows the relationship between the price of a good and the quantity supplied.

Question 15

Define ‘Supply curve’.

Answer 15

A graph of the relationship between the price of a good and the quantity supplied. Slopes upward.

Question 16

Define ‘Equilibrium’.

Answer 16

A situation in which the price has reached the level where quantity supplied equals quantity demanded.

Question 17

Define ‘Equilibrium price’.

Answer 17

The price that balances quantity supplied and quantity demanded.

Question 18

Define ‘Equilibrium quantity’.

Answer 18

The quantity supplied and the quantity demanded at the equilibrium price.

Question 19

Define ‘Surplus’.

Answer 19

A situation in which quantity supplied is greater than quantity demanded.

Question 20

Define ‘Shortage’.

Answer 20

A situation in which quantity demanded is greater than quantity supplied.

Question 21

Define ‘Law of supply and demand’.

Answer 21

The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

Question 22

In addition to price, what other factors determine how much customers want to buy?

Answer 22

Income, the prices of substitutes and complements, tastes, expectations, and the number of buyers. Unlike for price, which shifts along the demand curve, if one of these factors changes, the demand curve shifts.

Question 23

In addition to price, what other factors determine how much producers want to sell?

Answer 23

Input prices, technology, expectations, and the number of sellers. Unlike for price, which shifts along the supply curve, if one of these factors changes, the supply curve shifts.

Question 24

What does the intersection of the supply and demand curves determine?

Answer 24

The market equilibrium.

Question 25

What happens when the market price is above the equilibrium price? Below it?

Answer 25

When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage of the good, which causes the market price to rise.

Question 26

To analyse how any event influences a market, we use the supply-and-demand diagram to examine how the events affect the equilibrium price and quantity. What are the 3 steps used?

Answer 26

1. We decide whether the event shifts the supply curve or the demand curve (or both).
2. We decide which direction the curve shifts.
3. We compare the new equilibrium with the initial equilibrium.

Question 27

In market economies, ___ are the signals that guide economic decisions and thereby allocate scarce resources.

Answer 27

Prices.