Chapter 5: Equilibrium of Supply and Demand

Question 1

equilibrium occurs when

Answer 1

the price has moved to a level where the quantity demanded equals the quantity supplied

Question 2

the price at which equilibrium occurs is called the

aka

Answer 2

equilibrium price

aka “market-clearing” price (b/c both buyers and sellers are happy)

Question 3

equilibrium quantity=

Answer 3

when the quantity supplied and quantity demanded are at equilibrium

Question 4

when plotting both the supply curve and demand curve on a graph, at which point will equilibrium be?

Answer 4

where the 2 curves intersect

Question 5

surplus=

Answer 5

occurs whenever the quantity supplied is greater than quantity demanded
(price is too high)

Question 6

shortage=

Answer 6

happens whenever the quantity demanded is greater than the quantity supplied
(price is too low)

Question 7

which 3 steps should you use when trying to understand how an event will impact a market?

Answer 7

1. determine if the event(s) shift the supply curve, demand curve, or both curves simultaneously
2. determine which direction the curve(s) shift
3. draw out the shift(s) on the supply-and-demand model to see how the events change equilibrium price and quantity

Question 8

the change in quantity demanded results from a change in

Answer 8

supply

Question 9

when facing a surplus, what will sellers do?

Answer 9

• decrease price to try and increase sales
• this causes quantity demanded to rise and quantity supplied to fall
• prices continue to fall until market reaches equilibrium

Question 10

what’s a simple solution for a shortage?

- what does this cause?

Answer 10

increase prices

• causes quantity demanded to fall and quantity supplied to rise
• this reduces the shortage (brings the market to equilibrium)

Question 11

markets will eventually reach equilibrium. ___ do all the work in adjusting

Answer 11

prices

Question 12

example: (use the 3 steps to analyze how an event impacts a market)

while in quarantine, many people started to bake. How did this impact the market for flour?

Answer 12

1. shifts the demand curve (change in buyers preferences)
2. demand curve shifts right (increase in quantity demanded for flour)
3. draw out:
   - changes to price: P keeps increasing until equilibrium is reached
   - changes to Q: quantity demanded rises quickly, but prices don’t rise right away (shortage occurs)

Question 13

assume that universities and textbooks are complements in consumption. If the number of unis in canada goes up, then the price of textbooks would ___ because the textbook ____ curve shifts ___

Answer 13

rise

demand curve shifts right

Question 14

which of the below would likely cause the equilibrium price of pizza to fall and the equilibrium quantity of pizza to fall?

a) the price of flour falls
b) the price of hamburgers falls (substitute)
c) the price of beer falls (complement)
d) # of restaurants selling pizza falls

Answer 14

a. the price of flour falls

Question 15

A change in __________ will cause a movement along a demand curve, which is called a change in _______

Answer 15

price

quantity demanded

Question 16

Which of the below would cause the equilibrium price of coconuts to fall?

a) New health studies show that coconuts are unhealthy.
b) The government imposes additional taxes on coconut production.
c) A storm destroys most of the coconut crops.
d) The price of pineapples, a substitute good, rises.

Answer 16

a) New health studies show that coconuts are unhealthy.

* not sure why

Question 17

If the price of pizza’s ingredients decreases, we would expect the equilibrium price of pizza to ____ and the equilibrium quantity to ____.

Answer 17

fall

rise

Question 18

Assume phones are a normal good for consumers and Apple found a new technology that enables it to lower production costs. At the same time, the consumers’ income increases. We would expect equilibrium quantity to ______ and price to ______ .

Answer 18

increase

increase or decrease

Question 19

Assume that beef is a normal good. A recession causes buyers’ income to fall and, at the same time, the government allocates subsidies to beef producers. In the market for beef, we would expect these two changes to cause beef prices to ______ and the quantity sold to ______.

Answer 19

decrease

increase or decrease

Question 20

Suppose that chicken and duck are substitute goods in consumption. If barley is an input for duck production but not in the production of chicken, a rise in the price of barley will ______ the supply of duck and ______ the demand for chicken.

Answer 20

lower

raise