ECON210 Chapter 3—Supply & Demand

List the important demand shifters. (6)

1. Income 2. Population 3. Price of substitutes 4. Price of complements 5. Expectations 6. Tastes

List the important supply shifters. (5)

1. Technological innovations + changes in the price of inputs 2. Taxes and subsidies 3. Expectations 4. Entry or exit of producers 5. Changes in opportunity costs

What does a subsidy do?

A subsidy will lower costs of production, so supply increases. This is represented by a downward shift of the supply curve.

As technology advances, will supply increase or decrease?

Technological advances that improve production efficiency will increase supply (shift the supply curve to the right). The cost of production goes down, and consumers will demand more of the product at lower prices. (a decrease in costs increases supply)

A _____ curve shows quantity demanded over a range of prices, while quantity demanded is the quantity that buyers are willing and able to buy at a particular price.

demand (curve)

Which will cause a decrease in the demand for iPhones? a. a decrease in the prices of comparable smartphones b. an increase in the minimum wage of workers c. a decrease in the prices of iPhone accessories d. an increase in the prices of inputs used to make iPhones

a. a decrease in the prices of comparable smartphones (some sales will be lost to price competition)

Total producer surplus is measured by the area _____ and below the price.

above the supply curve (the height of the supply curve is the minimum price that a seller would be willing to accept. When the market price is higher than that, producers earn surplus)

As the price of a good rises, the quantity of the good supplied...

also rises (this is the law of supply)

Which is NOT a pair of substitutes? a. coca-cola and pepsi b. bread and wheat c. margarine and butter d. oranges and grapefruit

b. bread and wheat (Wheat is an input into the production of bread, so its price affects the supply of bread. When a store is out of bread, you don't replace it with wheat like you can with coke and pepsi)

Which factor decreases demand for a normal good? a. a decrease in input prices b. a decrease in natural resources c. an increase in the price of a complement d. an increase in income

c. an increase in the price of a complement (ex: peanut butter and jelly. if you're in the store and see that the price of peanut butter is now 20 bucks, you're not gonna want to buy the peanut butter or the jelly now)

Which does NOT shift the supply curve? a. technological innovation b. changes in expectations c. changes in the price of a substitute d. changes in taxes and subsidies

c. changes in the price of a substitute (this is a demand shifter, not a supply shifter)

John owns a candy shop and believes that he will be able to charge higher prices as Valentine's Day approaches. He, therefore, decreases his supply now. Which of the following is true? a. John is reacting to the fact that more candy shops have opened near him. b. John's costs have declined. c. John has adopted new technology. d. John's price expectations have changed.

d. John's price expectations have changed. (John decreases his supply now so that he has more to sell on Valentine's Day when he can sell it for higher prices knowing the demand for chocolate will be very high that day)

If consumers expect the price of ovens to increase next week, then the demand for ovens this week will _____.

increase (If you expect the price of a product to increase, you'll want to buy it now while the price is lower, increasing the current demand for it)

If the people living on the Florida coast know that a hurricane is coming, the demand for groceries will _____, and the demand curve will shift outward, up, and to the right.

increase (an outward shift of a demand curve shows an increase in demand)

The _____ is the producer's gain from exchange.

producer surplus (it is equal to the market price minus the minimum price that sellers would have been willing to accept.)

If the price of inputs increases, what happens to the supply curve?

the supply curve will shift up and to the left (supply will go down) because sellers are less willing or able to sell goods at any given price. (decrease in costs increases supply, increase in costs decreases supply).