Economics Test 2 - Demand, Supply, and Equilibrium

The demand schedule for a commodity illustrates how the consumption of a commodity changes with changes in:

its price.

Negatively related

if the two variables move in opposite direction.

Two variables are positively related

if the variables move in the same direction.

Which of the following was an effect of the price ceiling placed on gasoline in the U.S. in the 1970s?

Gas stations ran out of gas as the quantity of gas demanded exceeded the quantity supplied.

Which of the following pairs of goods are likely to be considered complements?

Pens and writing pads

Supply Curve

Plots the quantity supplied at different prices.

Suppose the market for cement is one where there are a large number of buyers and sellers, and everyone conducts transactions at a common market price. Which of the following statements is true about the structure of the cement market?

The cement market is free and competitive.

Aggregation

The process of adding up individual behaviors.

Which of the following could explain why there was a stampede at the Richmond International Raceway where 1,000 laptops were being sold at $50 each?

The quantity of laptops demanded at $50 was higher than the quantity supplied.

Law of Supply

The rule that, holding everything else constant, increases in price causes increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

Define the term "market demand." If these four consumers constitute the entire market, calculate the market demand for notebooks at $1, $4, $6, and $8.

The term "market demand" refers to the sum of the individual demands of all potential buyers in a market. Market demand at $1 = 22 + 17 + 24 + 27 = 90 units Market demand at $4 = 20 + 13 + 21 + 24 = 78 units Market demand at $6 = 16 + 10 + 15 + 18 = 59 units Market demand at $8 = 8 + 6 + 9 + 10 = 33 units

Aggregation of Supply Schedules

To calculate the total quantity supplied at a particular price, add up the quantity supplied by each supplier at that price. Repeat this for each price to derive the total supply curve.

Suppose you have a flashlight that takes three batteries to power it. If you buy the batteries one at a time, for which purchase will diminishing benefits set in?

When you buy the forth battery

Which of the following examples best describes the Law of Diminishing Marginal Benefit?

With each additional pen Jill buys, her willingness to pay for another pen decreases.

An increase in the demand for a good is represented by

a right shift to a new demand curve.

Other things remaining same, a right shift in the demand curve will lead to:

an increase in the equilibrium price and the equilibrium quantity.

A "left" shift in the demand curve

because a lower quantity demanded for a given price corresponds to a leftward movement on the horizontal axis. An example would be a lower quantity demanded for a given price of oil.

If widespread unemployment leads to a drop in incomes, then the demand for the Toyota Rav4 SUV would _____

decrease

The concept of diminishing marginal benefits ________ __________ for goods that you like a lot.

holds true

A fall in the price of flour, used in making cakes, is likely to:

increase the supply of cakes.

The only reason for a movement along the demand curve

is a change in the price of the good itself.

The supply curve

plots the relationship between the market price and the quantity of a good supplied by sellers. It plots the quantity supplied at different prices and plots the supply schedule.

A surplus occurs in a market when:

price is higher than the equilibrium price.

Which of the following pairs of goods are likely to be considered substitutes?

A Ford car and public transportation

Diminishing marginal benefit

As you consume more of a good, your willingness to pay for an additional unit declines.

Which of the following statements correctly describes perfectly competitive market equilibrium?

Deviations from equilibrium are temporary and equilibrium is automatically restored.

Competitive markets

converge to the price at which quantity demanded are the same. In a competitive market, the market price is the point at which the demand curve intersects the supply curve.

The demand curve for most goods is normally:

downward sloping.

Properties of Indifferent curves

- Indifference Curves don't cross! - They are always parallel - The lower the Indifference curves are associated with lower level of utility. - Any two bundles on the same Indifference Curve give the same level of utility.

The equilibrium quantity in a perfectly competitive market is determined:

at the point of intersection of the demand and supply curves.

The market supply curve

is the sum of the individual supply curves of all the potential sellers. It plots the relationship between the total quantity supplied and the market price, holding all else equal.

Inferior good

is when rising income shifts the demand curve for a good to the left (holding the good's price fixed). It describes a negative relationship between increases in income and leftward shifts in the demand curve.

A demand curve for anti-venom serum is _____________.

near vertical, since even if the price rises, bite victims will be willing to buy the same quantity.

A seller's willingness to accept is the same as his:

marginal cost of production.

Which of the following is likely to lead to an increase in the quantity supplied of steel?

A rise in the market price of steel

Which of the following is likely to cause the demand curve for cars to shift to the left?

A rise in the price of gasoline

Shifts of the Supply Curve Occur when one of the following changes:

1. input prices 2. technology 3. number and scale of sellers 4. sellers' expectations about the future

Sifts of the supply curve occur when on of the following changes:

1. input prices 2. technology 3. number and scale of sellers 4. sellers' expectations about the future

Shifts of the Demand Curve occur when one of the following changes:

1. tastes and preferences 2. income and wealth 3. availability and prices of related goods 4. number and scale of buyers 5. buyers' expectations about the future

Shifts of the Demand Curve occur when one of the following changes:

1. tastes and preferences 2. income and wealth 3. availability and prices of related goods 4. number and scale of buyers 5. buyers' expectations about the future

There are 10 kids in front of an Italian ice stand. Each kid's willingness to pay for a cup of Italian ice is $0.50, $1, $1, $1,$2, $2, $2, $3, $5, $6. If the price of a cup of ice is $3, how many cups will these kids demand?

3

Which of the following is likely to cause the supply curve for steel window frames to shift to the right?

A decrease in the cost of production of steel due to a new subsidy

Which of the following factors is likely to lead to an increase in the quantity demanded of pens?

A fall in the price of pens

Which of the following statements correctly describes a perfectly competitive market?

All participants in a perfectly competitive market are price takers.

What is meant by holding all else equal and how is this concept used when discussing movements along the demand curve?

All variables can affect the demand for the good are held constant.

In a competitive free market:

the government does not impose price controls.

Which of the following is a feature of a perfectly competitive market?

Each seller is too small to influence the market price.

Which of the following correctly explains the role of economic agents in a free market?

Economic agents allocate goods to those buyers who value the goods the most.

A movement along the demand curve

If goods's own price changes and its demand curve hasn't shifted, the own price change produces a movement along the demand curve.

A right shift in the supply curve will lead to

a decrease in equilibrium price and an increase in equilibrium quantity

Other things remaining the same, a right shift in the supply curve will lead to ____________

a decrease in the equilibrium price and an increase in the equilibrium quantity.

Prices

act as a selection device that encourages trade between the sellers who can produce goods at low cost and the buyers who place a high value on the goods.

A change in income or wealth

affects your ability to pay for goods and services.

Economists refer to the process of adding up the individual curves to find the market demand curve as __________

aggregation.

For an inferior good

an increase in income causes the demand curve to shift to the left - holding the good's price fixed.

A price ceiling imposed by the government:

can create situations of excess demand.

Given the supply and deman curves on the right, when the the price of the good is $20, we say that the market is in __________ ___________. At this price, we know that the quantity supplied is __________ ___ the quantity demanded.

competitive equilibrium; equal to

Suppose the price of cofee increases and the demand for sugar decreases. You determine that the goods must be __________.

complements

This policy of imposing a minimum price for alcohol as a way to reduce binge drinking is likely to be __________, since the increase in price will cause the quantity demanded of alcohol to _____________.

decrease

If the government sets a minimum wage for seasonal workers, then the supply curve for sparkling wine would __________

decrease - shift left.

If the number of sparkling wine decreases significantly, then the supply curve for sparkling wine would __________

decrease - shift left.

If people began to believe that SUVs were causing global warming, then the demand for the Toyota Rav4 would ________

decrease, shift left.

The willingness to pay for a commodity:

decreases as consumption of the commodity increases.

The ________ plots the relationship between prices and the quantity that buyers are willing to purchase.

demand curve

Consider weather the Law of Demand holds in the following situations. The price of anti-venom serum, sold to those with snakes bites, increased from $45 to $52, but consumption has still remained the same. In this situation, the Law of Demand ________________.

does not hold, since the product sold is required for survival , so increasing the price did not affect consumption.

In 1999, the Coca-Cola Company developed a vending machine that would raise the price of Coke in hot weather. Coca-Cola's decision to have vending machines raise prices in hot weather ______________ make sense, since as a result of the change in demand for soft drinks, the equilibrium quantity demanded ________________ and the equilibrium price companies can charge ________________.

does; increase; increases

The concept of diminishing marginal benefits means that _______________.

each additional unit consumed is worth less to you than the previous one.

The demand curve shifts

only when the quantity demanded changes at a given price.

The market demand is the ________ of the individual demand of all the potential buyers.

sum

A seller who is a price taker charges:

the market price.

A change in factors reduces

the quantity demanded at a given price, causing the demand curve to shift left.

A change in factors increases

the quantity demanded at a given price, causing the demand curve to shift right.

At the competitive equilibrium:

the quantity demanded is equal to the quantity supplied of a good.

In a perfectly competitive market

1) Sellers all sell an identical good or service 2) Any individual buyer or any individual seller isn't powerful enough on his or her own to affect the market price of that good.

Which of the following statements is correct about the concept of willingness to pay?

If a consumer is consuming 10 units of a commodity and he is ready to pay $2 for the eleventh unit, his willingness to pay for the eleventh unit is $2.

Consumer Equilibrium Condition: (5.2 slide)

If not equal, you can hypothetically relocate A DOLLAR from the lower one to the higher one and be better off. MBs/Ps = MBj/PJ "Equal bang for your buck rule"

Which of the following is not one of the four major factors that shifts the supply curve when it changes?

The income of consumers.

If the demand and supply curves for a commodity shift to the right by the same amount, then in comparison to the initial equilibrium, the new equilibrium will be characterized by:

a higher quantity and the same price.

With real-world examples, explain the various factors that can cause a shift in the supply curve of a commodity.

The supply curve of a commodity can shift for the following reasons. a) The price of inputs used to produce the good: The price of inputs plays an important role in a producer's decision of how much of a good to supply. For example, a fall in the price of plastic is likely to increase the supply of plastic cups, at every price level. b) The technology used to produce the good: Technology plays an important role in determining supply. If a new innovation increases labor productivity, it is likely that firms will start supplying more. For example, a new method of manufacturing cars can increase the number of cars supplied to the market at every price level. c) The number and scale of sellers: The number and scale of sellers also determines the market supply. For example, if new firms enter the market for cigarettes, the supply of cigarettes will increase at every price level. d) Expectations about the future: Expectations about the future greatly influence producers' decisions. For example, if producers of winter coats expect the next winter to be colder than normal, they will increase the production of winter coats.

A free market can be defined as a market structure where all exchanges are voluntary, and prices are free to fluctuate. Does a perfectly competitive market qualify as a free market?

There is very little government control or coercion in such a market and hence the government does not tell market participants what to do. In a perfectly competitive market, the equilibrium price and quantity are determined through the forces of demand and supply, and without any government intervention. Hence, perfectly competitive markets qualify as free markets.

Assume that a seller in a perfectly competitive market charges more than competitors are charging. It is likely that this seller will:

lose almost all of his buyers.

A second way of looking at Consumers Equilibrium Condition (5 appendix)

Utility. Utility is represented graphically by a series of curves: Indifferent curves.

Both the Demand Curve and the Supply Curve Shift Left

When both supply and demand shift left, the competitive equilibrium quantity will always decrease -Q2 is always less than Q1. On the other hand, the competitive equilibrium price may decrease - P2 less than P1, stay the same - P2 equal to P1, or increase - P2 greater than P1.

If the only change in the market was that the price increased to $30, then we know that the quantity supplied will be ____________ ________ the quantity demanded, resulting in ___ __________ __________, which is also know as a __________.

greater than; an excess supply, surplus

The quantity supplied of a good:

is the amount of the good that sellers are ready to supply at a given price.

If the price of a substitute good increases. how would the demand for a normal good be impacted?

the demand curve would shift to the right.

A supply schedule is a table that reports:

the different quantities of a good that producers are willing to sell at different prices.

The Law of Demand states that:

the quantity demanded of a commodity varies inversely with the price of the commodity.

The Law of Supply states that:

the quantity supplied of a good rises when the price rises.

Two goods are substitutes

when the fall in the price of one leads to a left shift in the demand curve for the other.

Define marginal cost. Is it different from the concept of willingness to accept

Marginal cost in production refers to the extra cost incurred in producing an additional unit of a commodity. Willingness to accept is the lowest price that a firm is willing to receive to sell an additional unit. In a competitive market, marginal cost is the same as a seller's willingness to accept. This is because the lowest price that any seller is willing to accept for an additional unit will equal the marginal cost of production of that unit. If he asks for a higher price, he will lose almost all of his buyers, and if he asks for a lower price, his cost of producing an additional unit will exceed the revenue he makes from selling it.

If there is excess demand in a perfectly competitive market, does the government need to intervene to restore the equilibrium price and quantity?

No, in a perfectly competitive market, no government intervention is required to restore equilibrium as equilibrium is automatically restored. A situation of excess demand occurs when the market price is below the equilibrium price. Because quantity demanded exceeds quantity supplied in the market, some consumers will be willing to pay higher prices to buy goods. This will act as an incentive for suppliers to supply more, eliminating the shortage in the market.

Jenny likes chocolates. One day, a friend offers her a chocolate bar and she is extremely happy on receiving it. As the day progresses, many other people also buy her chocolate. As she gets more and more chocolates, her excitement on receiving each bar is seen to gradually lessen. Which economic principle is reflected in this example?

The Law of Diminishing Marginal Benefit

Quantity Supplied

The amount of a good that sellers are willing to sell at a given price.

Why is the competitive equilibrium price often referred to as the market clearing price?

The competitive equilibrium price is determined at the point of intersection of the market demand and the market supply curve. At the point of intersection, the quantity demanded is equal to the quantity supplied in the market, which implies that there is no excess supply or excess demand in the market. Because quantity demanded equals quantity supplied and markets clear at the competitive equilibrium price, the price is also referred to as the market clearing price.

The demand curve shifts when these 5 major factors change

1) Taste and preferences 2) Income and wealth 3) Availability and prices of related goods 4) Number and scales of buyers 5) Buyers' beliefs about the future

Which of the following examples best describes the Law of Supply?

When the market price of pens increased, sellers started supplying more pens.

Which of the following examples best describes the Law of Demand?

When the price of bread doubles, John's consumption of bread halves.

The buyers of a good will want to purchase it as long as their willingness to pay for the good is:

greater than or equal to the price.

A drought in the grape growing regions of the country increases the cost of producing jelly. At the same time, we see the price of peanut butter falls. Suppose that after both of those events the consumption of jelly is left unchanged. In this situation, the Law of Demand ______________.

holds, since the demand curves for both jelly and peanut butter are downward-sloping; it is their shifts that are determining the impact on the quantity consumed.

Holding all else equal

implies that everything else in the economy is held constant. The Latin phrase ceteris paribus means "with other things the same" and is sometimes used in economic writing to mean the same thing as "holding all else equal.

The entire utility function of an individual can be represented by

indifferent curves, in which each curve corresponds to a different total utility level.

A price-taker

is a buyer or seller who accepts the market price - buyers can't bargain for a lower price and sellers can't bargain for a higher price.

An input

is a good or service used to produce another good or service.

A market

is a group of economic agents who are trading a good or service, and the rules and arrangements from trading. In a perfectly competitive market, 1) Sellers all sell an identical good or service 2) Individual buyers or individual sellers aren't powerful enough on their own to affect the market price of that good or service.

A market

is a group of economic agents who are trading a good or service. and the rules and arrangements for trading.

A demand schedule

is a table that reports the quantity demanded at different prices, holding all else equal.

In a perfectly competitive market, the market clearing price:

is always equal to the equilibrium price.

Normal good

is an increase in income that causes the demand curve to shift to the right.

Market price

is referred to when all the sellers and buyers face the same price.

Shift in Demand (or Supply) curve

is regarded as "Increase or Decrease in Demand (or Supply)

Movement along the Demand (or supply) curve

is regarded as "Increase or Decrease in Quantity Demanded (or Supplied).

Quantity supplied

is the amount of a good or service that sellers are willing and able to supply at a given price.

Quantity supplied

is the amount of a good or service that sellers are willing to sell at a given price. A supply shcedule is a table that reports the quantity supplied at different prices, holding all else equal. A supply curve plots the supply schedule. The Law of Supply states that in almost all cases, the quantity supplied rises when the price rises, holding all else equal.

Quantity demanded

is the amount of a good that buyers are willing to purchase at a given price.

Quantity demanded

is the amount of good that buyers are willing to purchase at a given price. A demand schedule is a table that reports the quantity demanded at different prices, holding all else equal. A demand curve plots the demand schedule. The Law of Demand states that in almost all cases, the quantity demanded rises when the price falls, holding all else equal.

The competitive equilibrium

is the crossing point of the supply curve and the demand curve.

The competitive equilibrium

is the crossing point of the supply curve and the demand curve. The competitive equilibrium price equates quantity supplied and quantity demanded. The competitive equilibrium quantity is the quantity that corresponds to the competitive equilibrium price.

Willingness to pay

is the highest price that a buyer is willing to pay for an extra unit of a good.

Willingness to accept

is the lowest price that a seller is willing to get paid to sell an extra unit of a good. It is the same as the marginal cost of production.

The competitive equilibrium price

is the quantity that corresponds to the competitive equilibrium price.

The slope of the budget line

is the relative price or ratio of the prices. -P / P

Utility

is the same concept as Benefit, but we don't have to measure it in $; instead we measure it in "utils". - If you like chocolate ice cream more than vanilla ice cream, it means you get more Utils from it. - Utility is represented graphically by a series of curves: Indifferent curves.

The market demand curve

is the sum of the individual demand curves of all the potential buyers. It plots the relationship between the total quantity demanded and the market price, holding all else equal.

Market Supply Curve

is the sum of the individual supply curves of all the potential sellers. It plots the relationship between the total quantity supplied and the market price, holding all else equal.

Excess supply

is when the market price is above the competitive equilibrium price, quantity supplied exceeds quantity demanded.

Excess demand

is when the market price is below the competitive equilibrium price, quantity demanded exceeds quantity supplied.

Movement

is when the price changes from one value to another value.

Shift

is when you have a change in Q in every price level.

Layla bakes a cake at home. In a given given day, it costs her $12 to bake the first cake. It costs her $19 to bake a second cake, and it costs her $45 to bake a third cake. Price of cake Quantity supplied $10 x $20 y $30 z $40 w

x=0

Buyer's Optimal Choice

- Slope of the Budget Line: -P room / P meal = -MU room / MU meal MU room / P room = MU meal / P meal Equal bang for the last buck rule!

The supply curve shifts when these variables change

- Prices of inputs used to produce the good - Technology used to produce the good - Number and scale of sellers - Sellers' beliefs about the future

There are 10 kids in front of an Italian ice stand. Each kid's willingness to pay for a cup of Italian ice is $0.50, $1, $1, $1,$2, $2, $2, $3, $5, $6. If the price of a cup of ice is $2, how many cups will these kids demand?

6

Differentiate between a change in demand and a change in quantity demanded.

A change in demand refers to the change in the quantity of a good purchased due to changes in any factors other than price. These factors may include a change in income, tastes and preferences, future expectations, or a change in the number and scale of buyers. A change in demand is graphically represented by a shift of the demand curve. On the other hand, a change in quantity demanded refers to a change in the quantity of a good purchased due to a change in the good's price, other things remaining the same. Graphically, a change in quantity demanded is represented by a movement along the same demand curve.

Which of the following factors will NOT cause a shift in the demand for a good?

A change in the market price of the good

Which of the following best describes the difference between a demand curve and a demand schedule?

A demand curve is a graphical representation of the relationship between the quantity of a good and its price, whereas a demand schedule is a tabular representation.

Which of the following factors is expected to cause the demand curve for coffee to shift to the right?

A higher tax on the sale of tea, a substitute for coffee

Supply Schedule

A table that reports the quantity supplied at different prices.

Supply schedule

A table that shows the relationship between the price of a product and the quantity of the product supplied. It is a table that reports the quantity supplied at different prices, holding all equal.

Law of Diminishing Marginal Benefit

Although consuming one more of any good will add to the Benefit, Marginal Benefit of consuming one more is decreasing.

Which of the following is likely to lead to a right shift in the supply curve of cotton?

An increase in labor productivity due to training programs

Which of the following is likely to shift the market demand curve for school textbooks to the right

An increase in the enrollment rates in high schools

What will happen to the equilibrium price and quantity of cars if there is an increase in the price of gasoline?

An increase in the price of gasoline will cause a left shift in the demand for cars, keeping supply unchanged. With supply unchanged and a left shift in the demand for cars, both the equilibrium price and quantity of cars will decrease.

At a price of $1 per table, the quantity supplied of tables is 100 units whereas the quantity demanded is 70 units. Given this information, which of the following statements is true?

At $1 per table, there is a surplus in the market.

Suppose the government decides that a particular commodity is a luxury and decides to fix its price above the market-determined price. What implications could this policy have?

If the government fixes the price of a commodity above the market-determined price, it will provide an incentive to sellers to supply more. This will result in an excess supply of the commodity.

The Law of Supply

If the price of a good increases, the quantity supplied of the good increases, and If the price of a good decreases, the quantity supplied of the good decreases, given nothing else changes.

The Law of Demand

If the price of a good increases, the quantity demanded of the good decreases, and vice versa, given nothing else changes.

The Law of Demand

If the price of a good increases, the quantity demanded of the good decreases, and vice-versa, given nothing else changes.

Law of Demand

In almost all cases, the quantity demanded rises when the price falls - holding all else equal.

In a market for apples, a consumer purchases 30 pounds when the price of apples is $1 per pound and the consumer's income is $5,000 per month. When the price of apples increases to $2 per pound, without any change in the consumer's income, he decides to purchase only 15 pounds of apples. Suppose, after a given period of time, the consumer's income falls to $3,000 per month. His consumption of apples also decreases to 10 pounds. Using a graph, illustrate the difference between change in quantity demanded and the change in demand for apples.

Initially, the consumer purchases 30 pounds at a price of $1 per pound, and his income is $5,000. Eventually, due to an increase in the price of apples, the consumer reduces his consumption by 15 pounds. Because the change in consumption is owing to a change in the price of apples, it represents a change in quantity demanded. A change in quantity demanded due to an increase in the price of apples is shown by an upward movement along the same demand curve. The change in quantity demanded is 15 units in this case. The decrease in the consumption of apples due to a decrease in the consumer's income, the price of apples remaining unchanged, indicates a change in demand for the apples. The change in the demand for apples in this case is shown by a leftward shift of the demand curve.

Which of the following is not one of the five major factor that shifts the demand curve when it changes?

Prices of inputs used to produce the good.

Shift versus Movement

Shift is when you have a change in Q in every price level. Movement is is when the price changes from one value to another value

Z is a normal good. The equilibrium price and equilibrium quantity of Z in the year 2011 was $25 and 60 units, respectively. In 2014, the equilibrium price of Z had decreased to $15 and the equilibrium quantity had also decreased to 50 units. Other things remaining the same, which of the following could explain this change?

Shift of the demand curve for Z to the left

Z is a normal good. The equilibrium price and quantity of Z in the year 2011 was $25 and 60 units, respectively. In 2014, the equilibrium price of Z had increased to $35 and the equilibrium quantity had increased to 70 units. Other things remaining the same, which of the following could explain this change?

Shift of the demand curve for Z to the right

Z is a normal good. The equilibrium price and quantity of Z in the year 2011 was $25 and 60 units, respectively. In 2014, the equilibrium price of Z had increased to $35 but the equilibrium quantity had decreased to 50 units. Other things remaining the same, which of the following could explain this

Shift of the supply curve of Z to the left

Z is a normal good. The equilibrium price and equilibrium quantity of Z in the year 2011 was $25 and 60 units, respectively. It was seen that, in 2014, the equilibrium price of Z had decreased to $15, but the equilibrium quantity had increased to 70 units. Other things remaining the same, which of the following could explain this change?

Shift of the supply curve of Z to the right

With real-world examples, illustrate the various factors that can cause a shift in the demand curve of a commodity.

The demand curve of a commodity can shift for the following reasons. a) Tastes and preferences: A change in the tastes and preferences of individuals can lead to a change in demand without any change in the commodity's price. For example, if new research proves that caffeine can be very harmful to regular consumers, it is likely that the demand for coffee might decrease, even though the price of coffee may not have increased. b) The income and wealth of consumers: Income and wealth of individuals plays an important role in determining demand. For example, a consumer who goes on vacation only once a year might start taking more vacations if his income increases. Thus, as income increases, the demand curve for a commodity, say movie tickets or vacations, shifts to the right. c) The availability and prices of related goods: Related goods are of two types, substitutes and complements. Two goods are substitutes if an increase in the price of one good leads to an increase in the demand for the other good and vice versa. On the other hand, two goods are complements if an increase in the price of one good leads to a decrease in the demand for the other good. For example, if the price of public transport decreases, the demand for cars is likely to fall. These two goods are substitutes. On the other hand, if the price of gasoline goes up, the demand for cars is likely to fall. Gasoline and cars are complements. d) The number and scale of buyers: The market demand for a commodity greatly depends on the number and scale of buyers. For example, if the enrollment rates in schools go up, the demand for textbooks is likely to increase, regardless of a change in price. e) Expectations about the future: Expectations about the future also plays an important role in determining the demand for a commodity. For example, if consumers expect the price of refrigerators to increase substantially in the near future, consumers may demand more refrigerators in the present.

Suppose the equilibrium price and quantity of bicycles is determined at $40 and 200 units, respectively. For some reason, the market price of the bicycles initially increases to $60, and then decreases to $20. How will these deviations from the equilibrium price be corrected in a perfectly competitive market?

The equilibrium in a perfectly competitive market is determined at the intersection of the demand and supply curves of bicycles, or in other words, at the point where the quantity supplied of bicycles equals the quantity demanded. The equilibrium price is $40 and the equilibrium quantity is 200 units.

How would the equilibrium price in a market be affected if there were a large decrease in demand and a small decrease in in supply?

The equilibrium price decreases

How would the equilibrium price in a market be affected if there were a small increase in demand and a large increase in supply?

The equilibrium price decreases.

How would the equilibrium price in a market be affected if there were a large increase in demand and a small increase in supply?

The equilibrium price increases

How would an increase in demand affect the equilibrium price in a market?

The equilibrium price increases.

How would the equilibrium price in a market be affected if there were a small decrease in demand and a large decrease in supply?

The equilibrium price increases.

Which of the following statements correctly describes a competitive market

The market price is determined by the interaction of demand and supply.

Movement along the supply curve

The own price change if a good's own price changes and its supply curve hasn't shifted. This is the only reason for a movement along the supply curve.

Other things remaining the same, a right shift in the supply curve will lead to:

a decrease in the equilibrium price and an increase in the equilibrium quantity.

Other things remaining same, a left shift in the demand curve will lead to:

a decrease in the equilibrium price and the equilibrium quantity.

If the demand and supply curves for a commodity both shift to the left and the shift in demand is less than the shift in supply, then in comparison to the initial equilibrium, the new equilibrium will be characterized by:

a higher price and a lower quantity.

Assume that the supply curve for a commodity shifts to the left and the demand curve shifts to the right, and the shift in demand is greater than the shift in supply. Then, in comparison to the initial equilibrium, the new equilibrium will be characterized by:

a higher price and quantity.

If the demand and supply curves for a commodity shift to the right and the shift in demand is greater than the shift in supply, then in comparison to the initial equilibrium, the new equilibrium will be characterized by:

a higher price and quantity.

Assume that the supply curve for a commodity shifts to the left and the demand curve shifts to the right, both by the same degree. Then, in comparison to the initial equilibrium, the new equilibrium will be characterized by:

a higher price and the same quantity.

Assume that the supply curve for a commodity shifts to the right and the demand curve shifts to the left, and the shift in demand is greater than the shift in supply. Then, in comparison to the initial equilibrium, the new equilibrium will be characterized by:

a lower price and quantity.

Assume that the supply curve for a commodity shifts to the right and the demand curve shifts to the left, both by the same degree. Then, in comparison to the initial equilibrium, the new equilibrium will be characterized by:

a lower price and the same quantity.

How are the following events likely to affect the market supply of rice in an economy? a) A fall in the wage rate of farm labor b) An increase in the productivity of farm capital due to better technology c) An increase in the use of agricultural land for non-agricultural purposes

a) A fall in the wage rate of farm labor will lower the cost of producing rice, allowing farmers to supply more at the same market price. As such there will be an increase in the supply of rice, and this will be represented by a right shift in the market supply curve. b) An increase in the productivity of farm capital implies a fall in the cost of production. This will allow farmers to supply more at a given price. This will be represented by a right shift in the market supply curve for rice. c) An increase in the use of agricultural land for non-agricultural purposes will imply a fall in the scale and size of producers. As such there will be a decrease in the supply of rice, and this will be represented by a left shift in the market supply curve of rice.

Explain how the following will affect the supply curve of coffee. a) A fall in the wages paid to coffee workers b) An increase in the availability of high-yielding coffee plants c) A decrease in the quantity of land under coffee cultivation

a) A fall in wages paid to workers will shift the supply curve of coffee to the right. This implies an increase in the supply of coffee. b) An increase in the availability of high-yielding coffee plants will shift the supply curve of coffee to the right. This implies an increase in the supply of coffee. c) A decrease in the quantity of land under coffee cultivation will shift the supply curve of coffee to the left. This implies a decrease in the supply of coffee.

How would the following events affect the market demand for laser printers? a) A recession in the economy leading to a fall in income levels b) A five-fold increase in the price of printing paper

a) A recession in the economy that causes a fall in income levels will cause a fall in the overall demand in the economy including a fall in the demand for laser printers. This will be represented by a left shift in the demand curve for laser printers. b) Printing paper and laser printers are complements. Therefore, a fivefold increase in the price of printing paper will make printing more expensive and subsequently reduce the demand for laser printers. This will be represented by a left shift in the market demand for laser printers.

For a normal good

an increase in income causes the demand curve to shift to the right - holding the good's price fixed.

Other things remaining the same, a left shift in the supply curve will lead to:

an increase in the equilibrium price and a decrease in the equilibrium quantity.

Demand curves

are downward-sloping - the height of the curve falls as we move from left to right along the horizontal axis.

In a perfectly competitive market, situations of surplus or shortage of a good:

are self-corrected due to the competitive nature of the market.

A taste change

could also shift the demand curve to the right, corresponding to an increase in the quantity demanded at a given market price.

The competitive equilibrium price

equates the quantity demanded and the quantity supplied.

Two goods are said to be substitutes when a fall in the price of one good

leads to a left shift in the demand for the other good.

Two goods are said to be complements when a fall in the price of one good:

leads to a right shift in the demand for the other good.

Assume that the economy is in a recession and consumers are expecting a fall in their income levels. This will cause a(n):

left shift in the market demand for all goods.

Suppose instead that the price of the good dropped below the competitive equilibrium price to a price of $15 per unit. If this were to occur, then the quantity supplied would be ____ _____ the quantity demanded, resulting in __ _________ ________demand, which is also known as _ __________.

less than; an excess demand; a shortage

A(n) ________ is a group of buyers and sellers who are trading goods and/or services.

market

When prices are not free to fluctuate

markets fail to equate quantity demanded and quantity supplied.

Aggregating quantity demanded

means fixing the price of the good and adding up the quantities that each buyer demands. It is important to remember that quantities are being added together, not prices.

We make the assumption of holding all else equal when considering demand curves since we want to focus on the changes in the quantity demanded that result from changes in

only the price of a good.

The supply curve shifts

only when the quantity supplied changes at a given price. If a good's own price changes and its supply curve hasn't shifted, the own price change produces a movement along the supply curve.

The demand curve

plots the relationship between the market price and the quantity of a good demanded by buyers. It plots the quantity demanded at different prices and plots the demand schedule.

A shortage occurs in a market when:

price is lower than the equilibrium price.

Aggregation consists of fixing the ____ __ __ ___ and adding up the _______ _______ by each buyer.

price of the good; quantity demanded.

A left shift in the supply curve

raises the equilibrium price and lowers the equilibrium quantity.

A change in the quantity demanded of a good is:

represented by a movement along the demand curve.

When one of the four major factors changes, causing an increase in supply, the curve shifts ____________

rightward.

Which one of the five main factors changes, causing an increase in demand, the demand curve shifts ________

rightward.

The Law of Supply states that, in most cases, the quantity supplied of a good ________ when the price of the good rises. This means we would expect a typical supply curve to be _________

rises; upward-sloping

For an inferior good

rising income shifts the demand curve to the left. No insult intended to Spam lovers.

An expected increase in the market price of oil in the coming year is likely to:

shift the supply curve of oil to the left in the current year.

Assume that a worker in a technology firm can produce 3 circuit boards in an hour. Due to subsequent innovation, he is now able to produce 6 circuit boards per hour. Other things remaining the same, the firm's supply curve is likely to:

shift to the right.

The market supply is the ________ of the individual supplies of all the potential sellers.

sum

Demand curves are aggregated by

summing the quantity demanded at each price on the individual demand curves.

Demand schedules are aggregated by

summing the quantity demanded at each price on the individual demand schedules.

The market supply can be estimated by

summing the quantity supplied of each seller at the different price levels.

The ________ plots the relationship between prices and the quantity producers are willing to sell.

supply curve

A competitive market is one:

that operates with little or no government control.

A free market is a market:

that operates with little or no government control.

The quantity demanded of a good is:

the amount of a good that buyers are willing to purchase at a given market price.

In a competitive free market:

the government does not impose price control.

Willingness to accept is:

the lowest price that a producer is willing to receive to sell an extra unit of a good.

If the demand and supply curves for a commodity both shift to the left by the same amount, then in comparison to the initial equilibrium, the new equilibrium will be characterized by:

the same price and a lower quantity.

The Law of Diminishing Marginal Benefit states that:

the willingness to pay for an additional unit declines as more of a good is consumed.

A shift happens when

there is a decrease or increase in quantity demanded at EVERY PRICE LEVEL.

Layla bakes a cake at home. In a given given day, it costs her $12 to bake the first cake. It costs her $19 to bake a second cake, and it costs her $45 to bake a third cake. Price of cake Quantity supplied $10 x $20 y $30 z $40 w

w=2

Two goods are compliments

when the fall in the price of one, leads to a right shift in the demand curve for the other.

The demand curve shifts only

when the quantity demanded changes at a given price. If a good's own price changes and its demand curve hasn't shifted, the own price change produces a movement along the demand curve.

The supply curve shifts only

when the quantity supplied changes at a given price.

The lowest price that a seller is willing to receive to sell an extra unit of a good is called _______

willingness to accept.

The highest price that a buyer is willing to pay for an extra unit of a good is called ___________

willingness to pay.