Econ 101 Practice Questions #2

What could cause a DECREASE in demand?

A decrease in demand could be caused by any of the following individually or in combination: a decrease in income (normal good); an increase in income (inferior good); an increase in the price of a complement; a decrease in the price of a substitute; an expectation of lower income (normal good); an expectation of a lower price; a negative change in consumer tastes; and a decrease in the number of consumers.

How is a decrease in demand graphed?

A decrease in demand is graphed as a leftward shift of the demand curve, in contrast to a decrease in quantity demanded, which is shown a movement up/left along the demand curve. Price is shown on the vertical axis, and quantity is shown on the horizontal axis.

What could cause a DECREASE in supply?

A decrease in supply could be caused by any of the following individually or in combination: a decrease in productivity; an increase in the cost of an input; an increase in taxes; an increase in the price of a substitute in production; an decrease in the price of a complement in production; an expectation by firms of a higher price; and a decrease in the number of firms in an industry.

What is true when there is a surplus?

A surplus is the opposite condition to a shortage. With a surplus, the quantity supplied is larger than the quantity demanded, and there is a downward pressure on the price.

Assume there is a decrease in supply. What will be the ending result?

The supply curve will shift to the left causing an increase in the equilibrium price and a decrease in the equilibrium quantity.

Assume there is an increase in taxes. Which curve moves, which way does it move, and what is the result?

The supply curve will shift to the left causing an increase in the equilibrium price and a decrease in the equilibrium quantity.

Assume there is an increase in supply. What will be the ending result?

The supply curve will shift to the right causing a decrease in the equilibrium price and an increase in the equilibrium quantity.

Assume there is an increase in the number of firms in an industry. Which curve moves, which way does it move, and what is the result?

The supply curve will shift to the right causing a decrease in the equilibrium price and an increase in the equilibrium quantity.`

When there is a shortage, which is larger, quantity demanded, or quantity supplied?

When there is a shortage, quantity demanded is larger than quantity supplied. This causes an upward pressure on the price.

An increase in income will cause the _______ to shift to the _______.

demand curve; right This assumes a normal good. Always assume a normal good unless told otherwise.

A decrease in the price of a substitute will cause the _______ to shift to the _______.

demand; left Note: In this case "in production" does not appear, so we must be looking at the demand side.

If you are told there is a decrease in the price of Coca-Cola this would cause a(n) _______ in the _______for Coca-Cola and a _______ in the _______ for Pepsi.

increase; quantity demanded; decrease; demand NOTE: The change in the price of Coke causes a change in the quantity demanded for Coke and a change in the demand for Pepsi.

A decrease in productivity will cause the _______ to shift to the _______.

Correct words in order: supply curve; left

What causes a decrease in quantity demanded?

Only one thing causes a decrease in quantity demanded and that is an increase in the price of that good or service.

What causes an increase in quantity supplied, and how is it graphed?

Only one thing causes an increase in quantity supplied and that is an increase in the price of that good or service. It is graphed as an up/right movement along the supply curve.

Assume there is an increase in income in the case of an inferior good. Which curve moves, and which way does it move?

The demand curve will shift to the left causing a decrease in the equilibrium price and a decrease in the equilibrium quantity. Note: In this case you are told the good is inferior. This causes income and demand to change in opposite directions.

Assume there is a decrease in demand. What will be the ending result?

The demand curve will shift to the left causing a decrease in the equilibrium price and equilibrium quantity.

Assume there is a negative change in consumer tastes. Which curve moves, which way does it move, and what is the result?

The demand curve will shift to the left causing a decrease in the equilibrium price and equilibrium quantity.

Assume there is a decrease in the price of a complement. Which curve moves, which way does it move, and what is the result?

The demand curve will shift to the right causing an increase in the equilibrium price and equilibrium quantity.

Assume there is an increase in demand. What will be the ending result?

The demand curve will shift to the right causing an increase in the equilibrium price and equilibrium quantity.

In the demand/supply graphs, _______ is on the vertical axis and _______ is on the horizontal axis.

price, quantity

An increase in the price of a substitute in production will cause the _______ to shift to the _______.

supply curve; left Note: The words "in production" tell us that we must be looking at the supply side.