Market Forces: Demand and Supply

Question 1

Market Demand Curve

Answer 1

Definition:

• Illustrates the relationship between the total quantity and price per unit of a good all consumers are willing and able to purchase, holding other variables constant.

Law of Demand:

• The quantity of a good consumers are willing and able to purchase increases as the price falls and decreases as the** price rises.**

Question 2

Changes in Quantity Demanded vs. Changes in Demand

Answer 2

Changes in Quantity Demanded:

• Changes due to price changes, represented by movement along the demand curve.

Changes in Demand:

• Changes due to factors other than price, represented by a shift of the entire demand curve.

Question 3

Demand Shifters

(5/2,2,2,1,1)

Answer 3

Income:

Normal Good:

• Demand increases as consumer income increases.

Inferior Good:

• Demand decreases as consumer income increases.

Prices of Related Goods:

Substitute Goods:

• Demand increases as the price of a substitute rises.

Complement Goods:

• Demand decreases as the price of a complement rises.

Advertising and Consumer Tastes:

Informative Advertising:

• Provides information about a product, increasing demand.

Persuasive Advertising:

• Alters consumer tastes, increasing demand.

Population:

• More consumers increase demand.

Consumer Expectations:

• Expectations of future prices or income can affect current demand.

Question 4

Consumer Surplus

What is the definition?
How to calculate?

Answer 4

Definition:

• The extra value that consumers derive from a good but do not pay for.

Calculation:

• The difference between what consumers are willing to pay and what they actually pay.

Question 5

Market Supply Curve

Definition?
What is the law of supply?

Answer 5

Definition:

• Summarizes the relationship between the total quantity all producers are willing and able to produce at alternative prices, holding other factors constant.

Law of Supply:

• The quantity supplied of a good rises as the price rises
• and falls as the price falls

Question 6

Changes in Quantity Supplied vs. Changes in Supply

Answer 6

Changes in Quantity Supplied:

• Changes due to price changes, represented by movement along the supply curve.

Change in Supply:

• Changes due to factors other than price, represented by a shift of the entire supply curve.

Question 7

Market Equilibrium

Definition?
Characteristic?

Answer 7

Definition:

• The price and quantity at which the market demand and market supply are equal.

Characteristics:

• No shortage or surplus in the market; forces of demand and supply are balanced.

Question 8

Supply Shifters (7)

Answer 8

Input Prices:

• Higher input prices decrease supply.

Technology:

• Improvements increase supply.

Government Regulation:

• Can either increase or decrease supply.

Number of Firms:

• More firms increase supply.

Substitutes in Production:

• Higher prices of substitutes decrease supply.

Taxes:

• Higher taxes decrease supply.

External Factors:

• Events like war, weather, and natural disasters can affect supply.

Question 9

Producer Surplus

Definition?
Importance?

Answer 9

Definition:

• The amount producers receive in excess of the amount necessary to induce them to produce the good.

Importance:

• Indicates the benefit producers get from selling at a market price higher than their minimum acceptable price.

Question 10

Comparative Statics

Definition?
Useful because?

Answer 10

Definition:

• The study of the movement from one equilibrium to another.

Applications:

• Analyzing the effects of changes in demand, supply, or both on market equilibrium.