Supply & Demand

Question 1

Competitive market

Answer 1

Market with many buyers and sellers of the same good or service

None can directly influence price

Question 2

Supply and demand model

Answer 2

Model of how a competitive market behaves

Question 3

Demand

Answer 3

Behavior of buyers

Quantity demanded: quantity buyers are willing (and able) to purchase at a particular price

Question 4

Demand curve

Answer 4

Graphic representation of quantity demanded at different prices

As prices fall, quantity demanded rises, more people have access to cheaper goods

Question 5

Change in demand ≠ change in quantity demanded

Answer 5

Change in demand is change of the entire line, new line

Change in quantity demanded is just going from one point to another in the same line

Question 6

Law of demand

Answer 6

Higher price for a good or service leads people to demand a smaller quantity, vice-versa

Question 7

Shifts of the demand curve

Answer 7

Decrease in demand: leftward shift (lower willingness to pay for the same quantity/less quantity demanded at the same price)

Increase in demand: rightward shift (greater willingness to pay for the same quantity/greater quantity demanded at the same price)

Question 8

Demand shifters

Answer 8

1. Changes in prices of related goods or services
   a. cheaper substitutes
2. Changes in income and nature of goods
   a. normal good - increase in income = increase in demand
   b. inferior good - increase in income leads to a decrease in demand
3. Change in tastes (subjective and vary among customers)
4. Changes in expectations (buyers change current spending in anticipation of future prices)
5. Changes in number of consumers

Question 9

Market demand curve

Answer 9

Combination of individual demand curves

Ex: If A wants to buy 10 jeans at $4, and B wants to buy 15 jeans at $4, the market demand curve will say that people want to buy 25 jeans at $4.

Question 10

Supply

Answer 10

Behavior of sellers

Quantity supplied: quantity that producers are willing and able to sell at particular price

Question 11

Supply curve

Answer 11

Graphic representation of quantity supplied at various prices

As price rises, quantity supplied rises

Question 12

Increase in supply

Answer 12

Movement of the entire line along the curve

As opposed to an increase in quantity supplied, which is a move upwards from one point to another along the supply line

Question 13

Shift of supply curve

Answer 13

Increase in supply means rightward shift

Decrease in supply means leftward shift

Question 14

Supply Shifters

Answer 14

1. Input prices (decrease in price of an input decreases production cost, increases profit and encourages more supply)
2. Prices of related goods or services (less supply if profitability falls)
3. Technology (innovation lowers cost and increases supply)
4. Expectation (sellers bound to adjust their supply in anticipation of the direction of future prices [panic selling])
5. Number of producers

Question 15

Market supply curve

Answer 15

Combination of individual supply curves

If A is willing to sell 3 beans at $2 and B is willing to sell 1 bean at $2, the market is willing to sell 4 beans at $2

Question 16

Market Equilibrium

Answer 16

When Q(s) = Q(d)

The amount consumers would purchase at a price is exactly the amount producers wish to sell

Question 17

Equilibrium shown graphically

Answer 17

Where supply and demand curves meet/intersect

Question 18

Different prices vs. uniform price

Answer 18

When consumers do not have time to compare prices, stores have different prices
Ex: tourist trap

In well-established markets, there is a uniform price

Question 19

What happens when market price is above equilibrium price?

Answer 19

Falls

There is a surplus (supply>demand), which can only occur when market price is above equilibrium level in the first place

Surpluses do not last, sellers will reduce price back down to ensure sales

Question 20

What happens to market price when it is below the equilibrium price?

Answer 20

Rises

There is a shortage (demand>supply), which can only occur when the market price is below equilibrium level in the first place

Shortages do not last, sellers will increase price to ensure proper revenue

Question 21

Example of surplus (also works for shortage if you flip supply and demand)

Answer 21

If at $7 quantity supplied is 20 and quantity demanded is 15, there is a surplus of 5 units.

supply - demand = surplus

20 - 15 = 5

Question 22

Equilibrium when demand curve shifts (rightwards, if demand curve shifts leftwards opposite)

Answer 22

New demand line

Movement along supply line (upwards)

Higher equilibrium price and quantity

Makes sense because if demand (NOT QUANTITY DEMANDED) for something rises, sellers will likely make more of it and sell it at a higher price

Question 23

Equilibrium when supply curve shifts (leftwards, if it shifts rightwards opposite)

Answer 23

New supply line

Upwards negative movement along demand line

Higher equilibrium price and lower quantity

Makes sense because if supply for something falls, there will be less of it in the market (thus lower quantity) and it will be more rare (thus higher price)

Question 24

Consumer surplus

Answer 24

When the price you are willing to pay for something is higher than the equilibrium price

Ex: I would be willing to pay $200 for a TV and they sell it at at $170. My consumer surplus is $30.

Question 25

Producer surplus

Answer 25

When the price a seller is willing to sell somehting at is lower than the equilibrium price.

Ex: I am willing to sell my apples for $5 and the equilibrium price is $8. My producer surplus is $3.