Module 2

Question 1

What dictates demand?

Answer 1

What the consumer is willing and able to buy
Substitution & Income effects

Question 2

What is the law of demand

Answer 2

As P^, Q decreases, & vice versa, ceteris paribus, for normal goods, and opposite for inferior goods.

Question 3

What is the substitution effect?

Answer 3

When P rises consumers will substitute other products for it or vice versa, for normal and inferior goods both the same.

Question 4

What’s the income effect?

Answer 4

People have limited income so when the price of a good rises or falls it changes their purchasing power. Opposite effect on normal vs inferior goods.

Question 5

What shifts the demand curve?

Answer 5

• Changes in buyer income
  ○ If it’s an inferior good, buyer income rising will actually lower the amount purchased
  
  • Change in the price of a substitute or complementary good (“associated good”)
  • Consumer tastes
  • Population / demographic changes
    
    • Expected future prices

Question 6

Define perfect competition

Answer 6

• Many buyers and sellers
• All firms sell identical products
• No barriers to new firms entering the market

Question 7

What’s the law of supply?

Answer 7

When P ^, Q ^, ceteris paribus, & vice versa

Question 8

What moves the supply curve?

Answer 8

Change in:
- The price of inputs
- Technology
- Prices of related goods in production
- Number of firms
- Expected future prices

Question 9

What is market equilibrium?

Answer 9

• When the quantity supplied = the quantity demanded
• Where the supply and demand curves intersect

Question 10

How do markets naturally move?

Answer 10

Towards equilibrium.