econ chapter 2.6 (price changes)

Question 1

When does price change?

Answer 1

When the market conditions of demand and supply change.

Changes in demand will cause a change in price and a movement along the supply curve.

Question 2

The effect of an increase in demand

Answer 2

this causes a shortage- This shortage forces the price to move up.

This in-turn incentivises current producers (and new producers attracted by higher prices) leading to an increase in QUANTITY supplied which results in equilibrium

Question 3

The effect of a decrease in demand

Answer 3

This creates a surplus-This surplus forces the price to move down.

This causes consumers to buy more due to the lower price, thus an increase in QUANTITY demanded which results in equilibrium.

Question 4

Effects of an decrease in supply

Answer 4

A decrease in supply will cause a rise in price which in turn causes contraction in demand- establishment of equilibrium.

Question 5

Effects of an increase in supply

Answer 5

Increase in price- causes an extension in demand to reach equilibrium

Question 6

What does an increase in supply look like on a graph?

Answer 6

rightward shift of supply from S1 to S2, creating a surplus at the original price- as a result the price is discounted downwards.

As the price falls, some consumers enter the market due to their willingness to pay lower prices causing a movement down the demand curve.

Question 7

what should you be careful of when explaining price changes?

Answer 7

get the order of events right- an increase in demand will cause a rise in price AND THEN an extension in supply to reach equilibrium

Question 8

what does the impact on the market depend on if both demand and supply conditions change at the same time?

Answer 8

not only the direction of changes but the size of changes

Question 9

Whats an example of demand curve and supply curve shifting at the same time?

Answer 9

A report may come out that eating apples is good for peoples health and at the same time, weather contributes to a record harvest.

The effect on price will depend on relative strengths of shifts in demand and supply.

if demand for apples increases more than supply,

Question 10

Effect of demand increasing more than supply

Answer 10

price rises

Question 11

Effect of supply increasing more than demand

Answer 11

price decreases

Question 12

price vs. cost

Answer 12

Price: The amount a consumer pays for a good or service.

Cost: The expense incurred by a firm to produce a good or service.