Week 2 - Where Prices Come From: The Interaction of Demand and Supply

Question 1

What is the ceteris paribus condition?

Answer 1

The requirement that when analysing the relationship between two variables such as price and quantity demanded, other variables must be held constant.

Question 2

What is quantity demanded?

Answer 2

The amount of a good or service that a consumer is willing and able to buy at a given price.

Question 3

What is a demand schedule?

Answer 3

A table showing the relationship between the price of a product and the quantity of the product demanded.

Question 4

What is a demand curve?

Answer 4

A curve that shows the relationship between the price of a product and the quantity of the product demanded.

Question 5

What is market demand?

Answer 5

The demand by all the consumers of a given good or service.

Question 6

What is the law of demand?

Answer 6

When holding everything else constant,
- When the price of a product falls, the quantity demanded will increase.
- When the price of a product rises, the quantity demanded will decrease.

Question 8

What is a change in quantity demanded?

Answer 8

A change in the quantity of a good that people plan to buy that results from a change in the price of the good.

Question 9

How is a change in quantity demanded shown?

Answer 9

Shown as a movement alone the demand curve (up or down).

Question 10

What is a change in demand?

Answer 10

A change in the quantity that people plan to buy when any influence other than the price of the good changes.

Question 11

How is a change in demand shown?

Answer 11

A change in demand means that there is a new demand schedule and a new demand curve.
- When demand decreases, the demand curve shifts left.
- When demand increases, the demand curve shifts right.

Question 12

What variables shift market demand?

Answer 12

Income (normal and inferior goods), prices of related goods (substitutes, complements), tastes/preferences, population and demographics (number of buyers), expected future prices.

Question 13

What is the difference between a change in demand and change in quantity demanded?

Answer 13

• A change in demand refers to a shift in the demand curve. (Occurs due to a change in the variables, other than the product’s own price, that affect demand.)
• A change in the quantity demanded refers to a movement along the demand curve as a result of a change in the product’s price.

Question 14

What is quantity supplied?

Answer 14

The amount of a good or service that a firm is willing and able to supply at a given price.

Question 15

What is a supply schedule?

Answer 15

A table showing the relationship between the price of a product and the quantity of the product supplied.

Question 16

What is a supply curve?

Answer 16

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

Question 17

What is market supply?

Answer 17

The supply by all the firms of a given good or service.

Question 18

What is the law of supply?

Answer 18

When holding everything else constant,
- An increase in the price of a product causes an increase in the quantity supplied.
- A decrease in the price of a product causes a decrease in the quantity supplied.

Question 19

What is a change in quantity supplied?

Answer 19

A change in quantity supplied is a change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good.

Question 20

How is a change in quantity supplied shown?

Answer 20

Shown as a movement along the supply curve (up or down).

Question 21

What is a change in supply?

Answer 21

A change in supply is a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes.

Question 22

How is a change in supply shown?

Answer 22

A change in supply means there is a new supply schedule and new supply curve.
- When supply decreases, the supply curve shifts left.
- When supply increases, the supply curve shifts right.

Question 23

What variables shift supply?

Answer 23

Prices of inputs (resources), technological change (productivity), prices of substitutes in production, number of firms in the market, expected future prices (including future prices of resources).

Question 24

What is the difference between a change in supply and a change in quantity supplied?

Answer 24

• A change in supply refers to a shift in the supply curve. (Occurs due to a change in the variables, other than the product’s own price, that affect supply.)
• A change in quantity supplied refers to a movement along the supply curve as a result of a change in the product’s price.

Question 25

What is a competitive market equilibrium?

Answer 25

A market equilibrium with many buyers and many sellers.

Question 26

What is a market equilibrium?

Answer 26

A situation in which quantity demanded equals quantity supplied.

Question 27

What is equilibrium price?

Answer 27

The price at which the quantity demanded equals the quantity supplied.

Question 28

What is equilibrium quantity?

Answer 28

The quantity bought and sold at the equilibrium price.

Question 29

What is a surplus?

Answer 29

A situation in which the quantity supplied is greater than the quantity demanded. When there is a surplus, the price falls.

Question 30

What is a shortage?

Answer 30

A situation in which the quantity demanded is greater than the quantity supplied. When there is a shortage, the price rises.