Supply and Demand

Question 1

Only applies to _________ markets

Answer 1

-Competitive

Question 2

Perfectly Competitive

Answer 2

-Many sellers and many buyers, so that no seller or buyer is able to influence the price

Question 3

Price takers

Answer 3

-When suppliers and demanders take the price the market says

Question 4

Imperfectly Competitive Markets

Answer 4

• Can’t be analyzed using supply and demand curves
• Ex. A monopoly does not have a supply function because there’s no relationship between the price of the product and the quantity the monopoly firm is willing to supply to the market

Question 5

Quantity Demanded

Answer 5

• The amount of the commodity that consumers are willing to buy
• Flow variable (the quantity the consumers are willing to buy per time period)

Question 6

Demand is the relationship between __________

Answer 6

-Quantity demanded and the price of the quantity

Question 7

Quantity Supplied

Answer 7

• The amount of the commodity that firms are willing to sell

- Flow variable

Question 8

Supply is the relationship between ___________

Answer 8

-Quantity supplied and the supply of the commodity

Question 9

As the price of the commodity _________, quantity demanded __________

Answer 9

• Increases

- Decreases

Question 10

Law of Demand

Answer 10

-Demand curve has a negative slope; when the price of a commodity increases, consumers are willing to buy less of it

Question 11

Normal Good

Answer 11

• The quantity demanded of a normal good increases as income increases
• Ex. Healthcare, Education, Chanel Handbags, Restaurant meals

Question 12

Inferior Good

Answer 12

• The quantity demanded of an inferior good decreases as income increases
• Ex. Used clothing, payless shoes, store brand bologna

Question 13

When the price of a commodity increases, consumers are more likely to _______________

Answer 13

-Substitute that commodity with other things

Question 14

For Normal Goods

Answer 14

-Substitution/Income effects enforce the Law of Demand

Question 15

For Inferior Goods

Answer 15

-Income effect works against the Law of Demand

Question 16

The _____________ dominates the demand curve, has a negative slope, even for inferior goods

Answer 16

-Substitution effect

Question 17

Giffin Goods

Answer 17

• Ex. Poor people in Ireland who spent their money buying potatoes (inferior good)
• Very rare
• Has to be an inferior good and have to be spending a large part of income on the good as well

Question 18

Movement Along the Curve

Answer 18

-When you go from one point on the curve to another

Question 19

Shift of the Curve

Answer 19

-A third variable causes a change in the relationship, causing the whole curve to shift

Question 20

Demand Shifters

Answer 20

• Income
• Prices of complements (consumed together)
• Prices of substitutes (consume one or the other)
• Expectations about the future (future prices)
• Changes in tastes or information
• Changes in number of consumers (population or demographics)

Question 21

Graphing Supply

Answer 21

-Slope is positive, as the price increases, sellers are willing to offer more for sale

Question 22

Supply Shifters

Answer 22

-Changes in input prices

• Changes in profitability of alternative outputs :
• -Changes in the price of alternative outputs (substitutes in production)
• -Change in cost of production of alternative output
• -Change in price of complement production
• Changes in technology
• Changes in expectations (future prices)
• Changes in the number of producers

Question 23

Equilibrium

Answer 23

-A state in which it will tend to remain unless some factor from outside the system pushes it away from that state

Question 24

Stable Equilibrium

Answer 24

• If an outside factor pushed the system out of equilibrium, the system automatically moves back to equilibrium once that factor is removed
• Ex. Set of Scales

Question 25

Unstable Equilibrium

Answer 25

- If an outside factor pushes the system out of equilibrium, the system will not return to the original equilibrium once the outside factor is removed - Ex. Cone balanced on its tip

Question 26

Equilibrium in a competitive market is achieved when _______________

Answer 26

-The price makes the quantity supplied equal to the quantity demanded

Question 27

Market Clears

Answer 27

-When equilibrium is reached; only ONE price makes the quantity supplied equal the quantity demanded

Question 28

Surplus

Answer 28

-Sellers are willing to offer more of the product for sale than buyers are willing to buy (QS>QD)

Question 29

Shortage

Answer 29

-Buyers are willing to buy more of the commodity than sellers are willing to offer for sale (QD>QS)

Question 30

Stable Market

Answer 30

-Market forces push you back towards equilibrium

Question 31

Arbitrage

Answer 31

- A commodity being sold for different prices in two markets provides incentives to buy the product in the lower priced market in order to sell it in the higher market - Profiting from price differentials by buying at the low and selling at the high price - Shifts the demand curve to the right in the lower priced market, which pushes up the price in the market - Shifts the supply curve to the right in the higher-priced market, which pushes down the price in that market - Eventually the price of the markets equalize, and there is no incentive for arbitrage

Question 32

Price Ceiling

Answer 32

- Price not allowed to be higher than a specified price - Ceiling higher than equilibrium has no impact - Ceiling lower than equilibrium creates a shortage - Ex. Rent Control

Question 33

Price Floor

Answer 33

- Price not allowed to be lower than a specified price - Floor lower than equilibrium has no impact on the market - Floor higher than equilibrium creates a surplus in the market

Question 34

Neither ____________ shift with price floors/ceilings

Answer 34

-Supply or Demand

Question 35

Who benefits from price ceilings?

Answer 35

-Buyers

Question 36

Who benefits from price floors?

Answer 36

-Sellers

Question 37

A shift in the supply curve causes a movement along the ______________

Answer 37

- Demand Curve | - Ex. Market for cars, price of steel (input) increases

Question 38

A shift in the demand curve causes a movement along the ________________

Answer 38

- Supply Curve | - Ex. Market for coffee, price of tea (substitute) rises