Unit 3 Supply and Demand

Question 1

Do people buy more at lower prices?

Answer 1

yes

Question 2

Do sellers want to sell more at higher prices?

Answer 2

yes

Question 3

Why is it good to care about supply and demand?

Answer 3

• understand what is being consumed, how much, and how that might change
• helps to understand, depict, and quantify what is wrong with the system

Question 4

Why does the demand curve normally slope downward?

Answer 4

As the price of a good decreases, the demand for that good increases

People consume more when it’s cheaper

Decreasing marginal utility: as you get more of the good, you value the next (marginal) unit less

Question 5

How does change in quantity demand differ from change in demand?

Answer 5

change in quantity demand refers to the change in the quantity of units purchased due to an increase or decrease in price
change in demand refers to increase or decrease in demand of a product due to various determinants of demand while keeping the price constant
on the graph, this is represented in a shift of the line or the change in slope

Question 6

Identify 3 situations where the demand curve might shift.

Answer 6

• number of buyers
• preferences/taste of the consumer
• incomes
• price of other goods
• consumer expectations (price and income)

Question 7

Why does the supply normally curve slope up?

Answer 7

reflects the higher price required of the product needed to cover increased marginal cost of production

Question 8

Identify 3 situations where the demand curve might shift.

Answer 8

• Technology
• Number of sellers
• Input (resource) price
• Taxes and subsidies
• Expectations of costs

Question 9

What is market equilibrium? what causes equilibrium?

Answer 9

Where market supply meets market demand.

equilibrium is caused by buyers and sellers bargaining with each other until everyone is happy. (no excess of supply or demand)

Question 10

Is the demand curve = Marginal willingness to pay = Marginal benefit curve?

Answer 10

yes

Question 11

True/False

WTP is the best measure of value.

Answer 11

False.

It doesn’t consider income, challenges of monetization, inherent uncertainty, and consumer preferences.

Question 12

What is elasticity of demand and how is it calculated?

Answer 12

it is the change in quantity demanded resulting form a price change.

it is calculated as the
% change in quantity demanded / % change in price

Question 13

Why is the demand for gasoline considered to be inelastic?

Answer 13

as the price changes, there is little change in quantity demanded as many people require gas to travel

Question 14

Why is the demand curve also called a willingness to pay curve?

Answer 14

because its a measure of how much the consumer is willing to give up to obtain a good

Question 15

Why is the supply curve also called the marginal cost curve?

Answer 15

because marginal cost is the additional cost to produce one more unit.

Question 16

What is consumer surplus?

Answer 16

the benefits of the product outweigh the cost of the product (would pay more for the same product)

Question 17

What is producer surplus?

Answer 17

the total amount that a producer benefits from producing and selling a quantity of a good at the market price.

Question 18

What is a negative externality? what is an environmental externality?

Answer 18

when a transaction between a buyer and seller negatively affect a third party

when a transaction affects the environment

Question 19

How does the presence of externality impact “efficiency”?

Answer 19

positive and negative externalities both decrease market efficiency through profit reduction or decreased goods production, respectively.

Question 20

What is the Pigouvian tax and how is it suppose to work?

Answer 20

a per unit tax set equal to the external damage caused by an activity
it is set to make the private cost of a good equal to the social cos by increasing tax on it
eg. carbon tax

Question 21

define coase theorem.

Answer 21

if property rights are well defined and there are no transactions costs, an efficient allocation of resources will result even if externalities exist

Question 22

what are some limits to coase theorem?

Answer 22

equity, strategic behaviour, lacking info, and transaction costs

Question 23

what is considered common property?

Answer 23

a resource that is available to everyone, but use of the resource may diminish the quantity or quality available to others.
eg. groundwater

Question 24

What are some examples of public goods?

Answer 24

clean air, highway system, national parks

Question 25

How do public goods differ from common property resources?

Answer 25

public goods can be consumed without reducing availability for others, common property is affected in quantity and or quality available to others.

Question 26

What is free ridership?

Answer 26

incentive for people to avoid paying for a resource when the benefits they obtain from it are unaffected by whether they pay.

Question 27

how is free ridership important for the public good problem?

Answer 27

free market will not result in optimum allocation of goods.

Question 28

define market elasticity

Answer 28

change in quantity demanded resulting from a price change

Question 29

if the price is elastic, then…

Answer 29

quantity demanded changes significantly with price changes. (substitutes available, luxury goods)

Question 30

if the price is inelastic, then…

Answer 30

quantity demanded doesn’t change significantly with price changes. (no substitute eg. gasoline)

Question 31

define short run

Answer 31

the period of time during which a firm is unable to change at least one of its inputs, usually its capital stock

Question 32

define long run

Answer 32

the period of time during which a firm is able to change all of it’s inputs

Question 33

what are three types of market failure?

Answer 33

Externality
Common property resource
Public good