Module 4 - Demand, Supply and Equilibrium

Question 1

When supply and demand move in the same direction, ___ is known and ___ is unknown (indeterminate).

Answer 1

Quantity traded is known
Price is unknown (indeterminate)

I.e., both demand and supply increase, quantity traded ↑/↓ (known) and price ↑/↓/same (unknown)

Question 2

When supply and demand move in opposite directions, ___ is known and ___ is unknown (indeterminate).

Answer 2

Quantity traded is unknown (indeterminate)
Price is known

I.e., supply and demand move opposite, quantity traded ↑/↓/same (unknown) and price ↑/↓ (known)

Question 3

___ is the price at which the quantity supplied of a G, S, R equals the quantity demanded; the price at which the demand and supply curves intersect.

Answer 3

Equilibrium price; also market-clearing price

Question 4

___ is the quantity traded when the quantity supplied of a G, S, R equals quantity demanded.

Answer 4

Equilibrium quantity

Question 5

Equilibrium is when ___ = ___; also market cleared.

Answer 5

Quantity supplied = quantity demanded

Question 6

___ is a situation in which quantity demanded is greater than the quantity supplied at the current market price; excess demand.

Answer 6

Shortage

S-D < 0

Question 7

___ is a situation in which the quantity supplied is greater than the quantity demanded at the current market price; excess supply.

Answer 7

Surplus

S-D > 0

Question 8

___ is the lack of equilibrium resulting in increased scarcity and inefficiency.

Answer 8

Disequilibrium

Question 9

Surplus and shortages = ___ =/= ___.

Answer 9

Units of output NOT dollars

Question 10

___ is an increase or decrease in quantity demanded of a G, S, R at every price.

Answer 10

Change in demand

Question 11

___ is a characteristic of the demand for a G, S, R other than it’s own price.

Answer 11

Nonprice determinant; also non-own-price determinant

Question 12

On a graph, a shortage would cause ___ pressure on price.

Answer 12

Upward until supply and demand were at equilibrium

Question 13

On a graph, a surplus would cause ___ pressure on price.

Answer 13

Downward until supply and demand were at equilibrium

Question 14

When demand increases, ___ increase.

Answer 14

Both equilibrium price and equilibrium quantity

Question 15

___ is an increase or decrease in quantity supplied of a G, S, R at every price.

Answer 15

Change in supply

Question 16

A ___ is a maximum legal price at which a G, S, R can be sold.

Answer 16

Price ceiling

Question 17

A ___ is a maximum legal price that is set above the existing equilibrium price.

Answer 17

Nonbinding price ceiling

Equilibrium price is lower than the price ceiling, the ceiling has no effect on market and is nonbinding

Question 18

A ___ is a maximum legal price that is set below the existing equilibrium price; prevents the price from increasing to equilibrium.

Answer 18

Binding price ceiling

Equilibrium price is higher than the price ceiling, the ceiling restricts trade and is binding.

Question 19

A ___ is a minimum legal price for which a G, S, R can be sold.
I.e., minimum wage for labor

Answer 19

Price floor

Question 20

A ___ is a minimum legal price that is set below the existing equilibrium price.

Answer 20

Nonbinding price floor

Market equilibrium is greater than price floor, there is no effect and is nonbinding.

Question 21

A ___ is a minimum legal price that is set above the existing equilibrium price; prevents the price from falling to equilibrium

Answer 21

Binding price floor

Question 22

___ is the lowest wage firms can legally pay employees in labor markets.

Answer 22

Minimum wage

Question 23

When a price floor is imposed on a market, it is binding only if it is ___ the equilibrium price.

Answer 23

Above
When the market price is above equilibrium price, market forces try to drive it lower, but it can’t go lower than the floor… as minimum wage increases, more people want to work, but jobs are limited due to only being able to afford less workers.

Question 24

If equilibrium price is $6 (24 employees demanded, 24 employees supplied), but minimum wage is set to $9 (15 employees demanded, 30 employees supplied), what is the surplus of labor?

Answer 24

15 employees (unemployed)
The surplus of labor caused by minimum wage is not the decrease in employees firms are willing and able to hire, it's the increased number of people willing and able to work at higher wages.

Question 25

For firms, a tax doesn’t increase or decrease the quantity supplied at each price, instead it increases/decreases the cost of each unit – shifting the supply curve ___.

Answer 25

Up/Down

Not left or right

Question 26

An ___ is a tax based on the number of units purchased, not the price paid for a good or service.
I.e., a tax on cigarettes sold

Answer 26

Excise tax

Question 27

For firms, if the government imposes a tax on each unit sold, a shift in the supply curve would move ___ to intersect the demand curve.

Answer 27

Up

Question 28

Tax Revenue = ___

Answer 28

Tax (quantity traded)

I.e., $6 tax (30,000 bottles wine) = 180,000 tax revenue

Question 29

Taxes are imposed to do two things:

1. ___
2. ___

Answer 29

1. Raise revenue for government actives

2. Discourage people from consuming a particular good or service

Question 30

What are the implications of imposing taxes?

1. ___
2. ___

Answer 30

1. They can be overestimated – overestimated revenue

2. If taxes are too high, consumers will be less likely to purchase G, S which reduces revenue

Question 31

___ are the suppliers of labor.

Answer 31

Households

Question 32

___ are the demanders of labor.

Answer 32

Firms

Question 33

___ causes a shortage in the market.

Answer 33

Binding price ceiling

Question 34

___ causes a surplus in the market.

Answer 34

Binding price floor

Question 35

A shortage exists when ___.

Answer 35

Price is not allowed to adjust upwards

Question 36

A surplus exists when ___.

Answer 36

Price is not allowed to adjust downwards