Demand and Supply

Question 1

What are the two types of markets considered for Supply and Demand?

Answer 1

Services and Finished goods & Factor of Production

Question 2

What is an intermediate good?

Answer 2

They are used in the production of final goods.

Question 3

What is the Demand function?

Answer 3

Q= f(Px, I, Py)

Px= price of good X
I= Measure of income
Py=Price of related goods

Question 4

What is equation for graphing demand?

Answer 4

Q=P(x)+B, graph standard. Price on Y, Quantity on X

Question 5

Law of Demand States

Answer 5

That demand usually increases at lower prices.

Question 6

Supply is determined by:

Answer 6

The selling prices and the cost of the components needed for manufacturing.

Question 7

What is equilibrium price and quantity? When is it stable?

Answer 7

The cross section on the graph where the quantity supplied and the quantity demanded are equal. Stability is achieved when there are forces present that drive prices back to equilibrium.

Question 8

What is a common value auction?

Answer 8

The value is the same to everyone but the bidders do not know the value at the time of the auction. Bidders must estimate value. Winning bidder could overestimate and have losses.

Question 9

What is an ascending price (english) auction?

Answer 9

Bidders can bid higher than the previous high bid, and the bidder that first offers the highest bid wins the item.

Question 10

What is sealed bid auction?

Answer 10

Each bidder gets one bid, unknown to others. Highest bid wins. Reservation prices are also given for the most the bidder would pay.

Question 11

What is a second price sealed bid (Vickrey) auction?

Answer 11

Highest bidder wins, but pays the second highest bid price.

Question 12

What is a dutch auction?

Answer 12

Price starts high then get lower until a bidder agrees to pay it.

Question 13

Explain consumer surplus. Where is it located on a graph?

Answer 13

The difference between the total value to consumers of the units of a good that they buy and total amount they must pay for those units.

It is the area under the demand curve and across from the price level.

Question 14

What is producer surplus?

Answer 14

Is the excess of the market price above the opportunity cost of production OR Total Revenue - Variable cost of producing those units. Calculate by taking height and width/2 (triangle area).

Question 15

What is the efficient quantity for a good?

Answer 15

It is the quantity of production that maximizes total consumer surplus and producer surplus (profits). Efficient allocation of resources to maximize total benefit to society. Anything less than this is inefficient.

Question 16

What are the effects of government regulations for supply and demand?

Answer 16

Leads to Deadweight loss. Not the efficient quantity.

Question 17

Give an example of a price floor and ceiling.

Answer 17

Minimum Wage and Rent control.

Question 18

Explain examples of trade restrictions and their effects of Supply and Demand.

Answer 18

Subsidies: Government payments, increases producers, people pay less. Not efficient.
Taxes: Increase prices and decrease the amount sellers receive.
Quotas: production limits, less than efficient.

All lead away from equilibrium where marginal cost=marginal benefit.

Question 19

What are economics costs and benefits?

Answer 19

Imposed or enjoyed by sellers or buyers that do not factor in the production or consumption decisions.
Ex: Cost - a company that pollutes the ocean that a fisherman works in. Benefit - A new garden developed.

Question 20

What are public goods and common resources?

Answer 20

Public good are goods and services that are consumed by people regardless of if they paid for them or not. “Free Riders”. Competitive markets will produce less of these.

A common resource is one that anyone can use. Usually are overused and destroyed. Production ends up being far greater than needed.

Question 21

What is a price ceiling? What do they lead to in the long run? What is a price floor?

Answer 21

A limit to what a seller can charge. If above Equilibrium price, doesn’t matter. There will be a shortage at the ceiling price, excess demand.

Long run: Long lines to make purchases, suppliers engage in discrimination, take bribes to sell at ceiling price, reduce quality level to match ceiling price.

Lower limit - ex. a wage rate.

Question 22

What is the basic effect of taxes?

Answer 22

Increases prices for buyers, decreases quantity supplied.

Question 23

What is a statutory incidence and actual incidence for tax? What is the effect on the demand curve of a statutory tax on the buyer?

Answer 23

Statutory - who is legally responsible for the tax. Actual - the party that actually bears the cost of the tax.

Causes a downward shift of the demand curve by the amount of the tax.

Question 24

What is elasticities effect on the tax burden?

Answer 24

If the demand is less elastic then consumers will bear a higher burden. If supply is less elastic, then suppliers bear a high burden of the tax revenue compared to consumers.

Question 25

What is price elasticity?

Answer 25

A measure of the responsiveness of the quantity demanded to a change in price. %ChangeQ/%ChangeP. Very responsive = Elastic, non-responsive = inelastic.

Question 26

What is the effect of substitution on elasticity?

Answer 26

If there are no good substitutes, demand tends to be inelastic.

Question 27

What is the price effect for demand when it is unitary inelastic?

Answer 27

-1.0 elasticity is when revenue is maximized.

Question 28

What are other factors on elasticity?

Answer 28

Portion of income - lower portion, less elastic

Time frame - longer, more elastic.

Question 29

What is income elasticity? What is a normal good? Inferior good?

Answer 29

Is it the quantity demanded change from an increase in income. Normal Good - An increase in income leads to increase in demand. Inferior Good - increase in income leads to decrease in demand.

Question 30

What is cross price elasticity of demand?

Answer 30

Change in quantity demand of one good and the price change in another. If positive, then it is a substitute. When negative, they are complements. OR when the price of one good increases and demand for another decreases, it is a complement.