Unit 2: Supply and Demand

Question 1

Demand “Schedule”

Answer 1

Prices and quantities listed in a chart

(1) specific time period
(2) other factors contrast

Question 2

Law of Demand

Answer 2

Inverse relationship with price (p) + quantity demanded (qd)

(1) As prices ↓ ; quantity demanded ↑
(2) As prices ↑ ; quantity demanded ↓

Question 3

Reasons for Demand Curve

Answer 3

(1) Diminishing marginal utility (decrease in additional satisfaction from each successive product)
(2) Income effect (how much someone can buy with income/purchasing power)
(3) Substitution effect (as price rises, “substitute is looked for”)

Question 4

Determinants of Demand (TIMER)

Answer 4

Tastes and Preferences
Income 
Market Size - Number of Buyers
Expectation of Prices
Related Good Prices (substitutes and complements)

Question 5

Two Types of Income Goods

Answer 5

(1) Normal Good (superior): income up, demand up

(2) Inferior Good: income up, demand down

Question 6

Law of Supply

Answer 6

A direct relationship exists between price and quantity supplied
As price rises, Quantity supplied rises
As prices falls, Quantity supplied falls

Question 7

Determinants of Supply (RATNEST)

Answer 7

Resource Prices
Alternative output price changes
Technology
Number of sellers
Expectations of future prices
Subsidies to suppliers
Taxes on suppliers

Question 8

Government Set Prices

Answer 8

Price Ceiling and Price Floors

Question 9

Price Ceilings

Answer 9

(1) Help low income consumer (rent controls)
(2) BELOW EQUILIBRIUM
(3) Create shortage (inevitable consequences)

Question 10

Price Floors

Answer 10

(1) Help low income producers (agricultural products, minimum wage)
(2) ABOVE EQUILIBRIUM
(3) Creates surpluses