Lecture 3 - Supply and Demand

Question 1

What factors does the demand for a good depend on?

Answer 1

-Price
-Prices of related goods
-Income
-Other factors (information, tastes, government regulation…)

Question 2

What effect do changes in price have on demand curves?

Answer 2

Changes in price cause movement along the demand curve

Question 3

What variables go on the axes for a supply and demand diagram?

Answer 3

Price and quantity go on the axes for a supply and demand diagram

Question 4

What factors does the supply of a good depend on?

Answer 4

-Price
- Prices of inputs
- Conditions of production
- Other factors such as government regulation

Question 5

What effect do changes in price have on supply curves?

Answer 5

Changes in price cause movement along supply curves

Question 6

What determines the equilibrium price and quantity of a good?

Answer 6

The intersection of the demand and supply curves determines the equilibrium price Pe and quantity Qe

Question 7

What is comparative statics?

Answer 7

Comparative statics is a method economists use to analyse how variables controlled by consumers and firms react to a change in environmental variables (also called exogenous variables) that they do not control

Question 8

How do we calculate the equilibrium price and quantity given the supply and demand equations

Answer 8

Equilibrium occurs when supply is equal to demand so make the two equations equal to each other and solve for price

Question 9

What does the supply and demand model focus on?

Answer 9

The supply and demand model focuses on a good’s price, holding all other factors constant

Question 10

When only is the basic supply and demand model appropriate?

Answer 10

The basic supply and demand model is only appropriate when markets are perfectly competitive