Supply and demand - Chapter 2/Chapter 3

Question 1

Define demand

Answer 1

A consumers desire, willingness, and ability to purchase goods and services

Question 2

Define Quantity demanded

Answer 2

The quantity demanded is the amount of a good or service a consumer is willing to
buy at a given price, holding other factors constant.

Question 3

Describe a demand schedule

Answer 3

This is a chart showing the quantity demanded at different prices

Question 4

Define Law of demand

Answer 4

Consumers demand a higher quantity of a good or service when the price is lower
(and a lower quantity of when the price is higher), holding all other factors that
influence the amount consumers want to consume constant.

Question 5

What does the demand curve show you

Answer 5

Tells us how the change in price of a good or service affects the quantity demanded

Question 6

How do you get the total quantity demanded at a given price

Answer 6

this is equal to the sum of the individual consumer demands at that price (only at that particular price!)

• this is horizontal summation

Question 7

Define quantity supplied

Answer 7

The amount of good or service that producers want to sell at a given price, holding other factors that influence supply decisions constant

Question 8

Define Law of supply

Answer 8

Producers will normally offer more for sale at higher prices and less at lower prices when holding other factors constant

Question 9

How do you obtain total market supply

Answer 9

By adding up the quantities supplied at that particular price

Question 10

Define market equilibrium

Answer 10

The market is in equilibrium when all market participants are able to buy or sell as much as they want, no participant wants to change their behavior given what other market participants are doing

Question 11

Define market price

Answer 11

The equilibrium price is the p at which demand equals supply, consumers can buy as much as they want and sellers can sell as much as they want

Question 12

Define market quantity

Answer 12

The equilibrium quantity is the q such that the quantity demanded equals the quantity supplied

Question 13

What happens when there is an increase in demand and a decrease in supply

Answer 13

This could lead to increase price, but the effect on quantities is ambiguous

Question 14

What happens when demand and supply both increase

Answer 14

equilibrium quantities will increase but the effect on price is ambiguous

Question 15

What happens when supply decreases and demand increases

Answer 15

price increases but the effect on quantity is ambiguous

Question 16

When demand and supply shift at the same time, what two things determine the outcome

Answer 16

The sizes of the shift and the price elasticities of demand and supply determine the outcome

Question 17

Describe inelastic demand or supply

Answer 17

This means that elasticity is less than one

Question 18

Perfectly inelastic demand or supply has an elasticity of

Answer 18

0

Question 19

Perfectly elastic demand has

Answer 19

undefined elasticity

Question 20

The more elastic demand is the more

Answer 20

responsive customers are

Question 21

Governments use what three approaches to shift curves

Answer 21

1. Limits on who can buy
2. Restrictions on imports or exports
3. Government purchases

Question 22

Import restrictions do what

Answer 22

They shift the importing countries supply curve to the left

Question 23

Restrictions on exports do what

Answer 23

They shift the exporting countries demand curve to the left

Question 24

What effect does government purchases have

Answer 24

Governments can buy good directly, this increases the quantity demanded at each price shifting the demand curve to the right

Question 25

What are the two forms of price controls that governments can enact in the market

Answer 25

1. Price ceiling - policy in which government sets a maximum price that can prevail in the market
2. Price floor - policy where the government sets a minimum price that can prevail in the market

Question 26

If the government intervenes in the market, does supply still need to equal demand

Answer 26

No, in the absence of government intervention, supply will equal demand and the market will then clear. But with government intervention, the quantity demanded and quantity supplied need not equal the actual quantity that is bought and sold

Question 27

The supply and demand model works in what type of markets

Answer 27

in perfectly competitive markets

Question 28

What are the 5 characteristics of perfectly competitive markets

Answer 28

1. Many buyers and sellers
2. Consumers believe all firms produce identical products
3. all market participants have full information about price and product characteristics
4. transaction costs are negligible
5. firms can easily enter and exit the market, so competition is high

Question 29

Describe elastic demand

Answer 29

elasticity larger than 1

Question 30

How does a perfectly elastic demand curve look

Answer 30

• Horizontal demand curve
• If the price increases even slightly, demand falls to zero
• consumers may view this good as identical to another good and do not care which one they buy

Question 31

What does a perfectly inelastic demand curve look like

Answer 31

• Vertical demand curve
• If the price goes up, the quantity demanded is unchanged
• this is for essential goods - goods that people feel they must have and will pay anything to get it

Question 32

Describe income elasticity, what is it for normal goods and inferior goods

Answer 32

• Income elasticity is the percentage change in quantity divided by the percentage change in income
• Normal goods have positive income elasticity, such as coffee
• Inferior goods have negative income elasticity, such as instant soup and ramen noodles

Question 33

Describe cross price elasticity for complement goods and substitute goods

Answer 33

• Compliment goods have negative cross price elasticity, such as cream and coffee
• substitute goods have positive cross price elasticity, such as cotton and wool

(so if cross price elasticity is positive - then goods are substitute, etc.)