intro to supply and demand

Question 1

does the price shift the supply and demand curve?

Answer 1

Question 2

when the price is below equillibrium, there is a

Answer 2

shortage in demand

Question 3

when the price is above equillibrium, there is a

Answer 3

surplus in supply

Question 4

businesses are supply in

and demand in

individuals are supply in

and demand in

Answer 4

supply in the product market

demand in the resource market

individuals are supply in the resource market

demand in the product market

Question 5

the government

Answer 5

demands in the product and resource market

and supplies public goods and services

Question 6

what is the law of demand?

Answer 6

there is an inverse relationship between the price and quantity of demanded

e.g. price goes up, qty goes down - vice versa

Question 7

3 reasons why the line of demand is sloping downwards?

Answer 7

1. the substitution effect
2. the income effect
3. law of dimininshing marginal utility

Question 8

describe the substitution effect

Answer 8

changes in price motivate consumers to purchase relatively cheaper substitutes

Question 9

describe the income effect

Answer 9

changes in price affect the purchasing power of consumers’ income

purchasing power increases when the price falls

purchasing power decreases when the price rises

Question 10

what is the law of diminishing marginal utility?

Answer 10

as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

Question 11

a change in price will cause a

Answer 11

change in the quantity demanded and supplied

Question 12

any factor other than price, such as the 5 shifters, can

the new demands are labelled as

Answer 12

cause changes in demand eg. increase or decrease

D₁ , D₂

Question 13

list the 6 shifters of demand

Answer 13

1. tastes/ preferences
2. number of consumers
3. price of related goods (e.g. substitutes and complements i.e. price of cereal falls, increases demand for milk)
4. income
5. expectations
6. consumers’ information

Question 14

will change in price affect demand for necessities?

Answer 14

generally no

Question 15

describe how income will cause shift in demand curve, in regards to normal and inferior goods

Answer 15

normal goods: income and demand for product are directly related (increase in income, increase in demand- vice versa)

inferior goods: income and the demand for produce are inversely related (Increase in income, decrease in demand)

Question 16

what happens to the demand for a product when the price goes down?

Answer 16

the demand stays the same but the quantity demanded increases

Question 17

what is the law of supply

Answer 17

there is a direct relationship between the price and quantity supplied

Question 18

list the 5 shifters of supply

Answer 18

1. price of inputs (e.g.increase in labour price)
2. number of producers (increased competition –> causing increase in supply –> decrease in price)
3. technology
4. government taxes & subsidies, regulations
5. expectations
6. weather conditions

Question 19

how can expectations shift supply?

Answer 19

if a producer thinks they can make more profit later, they will reduce their supply now

Question 20

what is the market equillibrium/ market clearing price and qty?

Answer 20

qty supplied = qty demanded

Question 21

what happens when there is a disequillibrium?

Answer 21

when the price is too high, qty supplied > qty demanded, causing surplus

Or

price is too low, qty demanded > qty supplied causing shortage

Question 22

what is a price ceiling?

Answer 22

when government imposes a cap on a price of a product, that is the maximum legal price

a price is set below equillibrium, as the government believes the market equilibrium price is too high

in theory, trying to help consumers, in response to consumer compalints by keeping the price low

Question 23

what is a price floor?

Answer 23

minimum legal price

price set above the equillibrium price, government believes the market equilibrium price is too low

in theory trying to help producers, in response to complaints by producers by keeping the price high

Question 24

distinguish between normal and inferior good

Answer 24

normal good: a good for which demand increases when income rises and decreases when income falls

i_nferior good:_ a good for which demand decreases when income rises and increases when income falls

Question 25

supply curve shows

Answer 25

Supply is a relationship between two variables:

(1) the price of a particular good and
(2) the quantity of the good that firms are willing to sell at that price

Question 26

what are government price controls?

Answer 26

a government law or regulation that sets or limits the price to be charged for a particular good. e.g. price ceiling and floor

Question 27

what are the effects of price ceilings

Answer 27

• shortage in supply
• reduction in quality of good sold (this allows producer to reduce costs, thereby reducing price)

Question 28

effect of price floors

Answer 28

• surplus in supply
• divert resources from other productive activities
• in effort to reduce surplus, government will purchase the excess production
• the price floor may not help those who it intended to benefit (e.g. higher price benefits wealthy farms, minimum wage benefiting someone from a wealthy family)