Topic 1 - Demand and Supply

Question 1

What is the demand relationship

Answer 1

the relationship between the price of a good and the total quantity demanded

Question 2

what is the demand function

Answer 2

Q(p) - takes a price and returns a quantity Q

Question 3

What is the inverse demand function

Answer 3

p(Q) - maximum willingness to pay of consumers on the margin

Question 4

Difference between changes along the intensive margin and extensive margin

Answer 4

Intensive margin: Changes in the amount purchased by each buyer
Extensive margin: Changes in the number of buyers

Question 5

Why do we a assume a negative relationship betwen P and Q

Answer 5

Changes along thr intensive margin:
 Income and substitution effects
 Diminishing marginal utility
Changes along extensive margin:
- consumer heterogeneity (diff in tastes and incomes)

Question 6

exceptions to downward sloping demand

Answer 6

• giffen goods
• veblen goods (prices of a good is attractive to buyer i.e luxury watches)

Question 7

Market demand depends on

Answer 7

• endogenous variable: price of good
• exogenous variable: prices of other goods in economy and incomes of buyers

Question 8

What does market demand in the cobb-douglas case depend on

Answer 8

total income across all consumers, weight (alpha) on cereal and price

Question 9

what does positive xed and negative xed mean

Answer 9

positive XED = substitutes
negative XED = complements

Question 10

What happens when price is set below equilibrium

Answer 10

• excess demand = shortage
• buyers willing to offer a slightly higher prices so they have a better chance of buying the goods
• sellers raise rpices as buyers have inelastic demand for the good

Question 11

What to bear in mind with Qd and Qs functions

Answer 11

e.g Qd = 100 -1/3p,
Qs = -20 +p

• the intercepts 100 and -20 actually go on the horizontal axis rather than vertical becuase horizontal axis is Q and vertical is pric

Question 12

What are comparative statics

Answer 12

how does equilibrium change if we change the parameters

Question 13

Informal methods of comparative statics

Answer 13

heuristic, appropriate in most simple cases, gives qualitative effect of change

Question 14

formal method of comparative statics

Answer 14

• slower, technically more demanding
• quantitative answer
• dep on validity of underlying model

Question 15

What is the effect of change in paramerter on equilbrium prices? How can we check

Answer 15

• solve the system of equation for p directly
• use implicit differentation to determine effetc