Unit 2: Supply and Demand

Question 1

Competitive market

Answer 1

A market where there are many buyers and sellers, so each has a negligible (insignificant) impact on the market price, since the other sellers are offering similar products

• many buyers and sellers
• unorganized

Question 2

Non-competitive market

Answer 2

• One seller
• monopoly
• organized

Question 3

Why do competitive markets work?

Answer 3

They keep up with supply and demand

Question 4

Perfectly competitive markets

Answer 4

1. Goods being offered for sale are all the same
2. There are so many buyers and sellers that so individual has an impact on the market price
   Ex. The wheat industry

Question 5

Monopoly

Answer 5

Markets where there is only one seller, who sets the price

Ex. A town which only has one TV cable company

Question 6

Oligopoly

Answer 6

Few sellers that do not compete aggressively

Ex.airline routes

Question 7

Monopolistically competitive

Answer 7

Many buyers and sellers, who offer slightly different products
Ex. Magazine companies

Question 8

What determines the value of something?

Answer 8

• how much it’s worth to make
• the skill involved in making it
• how much someone is willing to pay for it
• quantity
• quality
• popularity
• competition
• OC for people making it

Question 9

Fundamental value

Answer 9

How much something is really worth

Question 10

Quantity demanded

Is QD positively or negatively related to price?

Answer 10

The amount of a good buyers are willing and able to purchase

NEGATIVELY related to price because as the price rises, QD decreases and as QD rises, the price falls

Question 11

Law of demand

Answer 11

Other things equal, when the price of a good rises, the QD falls and when the price decreases, QD increases

Question 12

Why the demand curve slopes down

Answer 12

1. Income effect: as prices rise, people can’t afford as much
2. Substitution: when the price of one thing rises, people will find substitutes
3. Marginal utility per dollar: as the price increases, people feel less satisfaction from paying

Question 13

Endogenous variable

Answer 13

A variable inside the model

Ex. Price

Question 14

Exogenous variable

Answer 14

Variable outside the model

Ex. Taxes, rent, war,

Question 15

Things that will shift the demand curve to the RIGHT

Answer 15

• increased preference
• increased income (normal good)
• decreased income (inferior good)
• increased population
• increase in price of substitute good
• decrease in price of complements
• expectations of consumers

Question 16

Things that shift the demand curve LEFT

Answer 16

• decrease in preference
• decrease in income (normal good)
• increase in income (inferior good)
• decrease in population
• decrease in price of substitute goods
• increase in price of complements
• expectations of consumers

Question 17

Shifts on QD

Answer 17

Change in price

Moves ALONG the curve

Question 18

Normal good

Answer 18

All things equal, a good where and increase in income leads to and increase in demand

Question 19

Inferior good

Answer 19

All things equal, a good where an increase in income leads to a decrease in demand

Question 20

Complements

Answer 20

Goods where an increase in price of one leads to an increase in price for the other
Goods are consumed together
Ex. PB and J

Question 21

Substitutes

Answer 21

2 goods where an increase in price of one leads to a decrease in demand for the other
2 goofd that provide similar purpose or utility

Question 22

Quantity supplied

Answer 22

The amount sellers are willing and able to sell

Question 23

Law of supply

Answer 23

All things equal, the quantity supplied of a good rises when the price rises and falls when the price falls

Question 24

Are QS and price positively or negatively related?

Answer 24

POSITIVELY

Question 25

Things that shift the supply curve to the RIGHT

Answer 25

• increase in technology
• decrease in input prices
• producer expectations
• government policies (increase in subsidies)
• increase in number of suppliers

Question 26

Things that shift the supply curve to the LEFT

Answer 26

• decrease in technology
• increase in input prices
• producer expectations
• government policies (taxes)
• decrease in number of suppliers

Question 27

Shifts in quantity supplied

Answer 27

Change in price (usually due to a shift in demand)

Moves ALONG the curve

Question 28

Subsidy vs. Tax

Answer 28

Financial assistance given by the government
Shifts curve to the RIGHT
Tax shifts curve to the LEFT

Question 29

Joint production

Answer 29

2 goods that are usually produced together
Usually a function of a buy product
ex. sugar and molasses
As the QS of one increases, the supply of the other good also increases

Question 30

Giffen good

Answer 30

Any good for which consumption increases as its price increases
Goes against the law of demand

Question 31

Veblen good

Answer 31

A good for which a person’s quantity demanded increases with price
price shows greater status

Question 32

If demand and supply both increase, what happens to price and quantity?

Answer 32

Pride: indeterminate
Quantity: increase

Question 33

If demand and supply both decrease, what happens to price and quantity?

Answer 33

Price: indeterminate
Quantity: decrease

Question 34

If demand decreases and supply increases, what happens to price and quantity?

Answer 34

Price: decrease
Quantity: indeterminate

Question 35

If demand increases and supply decreases, what happens to price and quantity?

Answer 35

Price: increase
Quantity: indeterminate

Question 36

If nations specialize according to their CA and engage in international trade with each other, each nation can…

Answer 36

Consume outside of its production possibilities curve
PPF is a limit of production based on LLC of a nation, it can’t produce outside of its curve but with trade it can consume