Supply and Demand

Subsidy

free money to produce

Price floor

A minimum price fixed by the government a. At or above = legal b. Below = illegal

Goods X and Y are complements. A decrease in the price of A will cause the demand for B

to increase

Law of supply

As price rises, the quantity supplied rises; as price falls, the quantity supplied falls Positive/Direct Relationship Price represents revenue High price = high incentive = high supply Prices rise because marginal cost increases as more are produced Price goes up à firms want to make more of it

If an increase in the price of one good increases the demand for another good, then these two goods are

Substitute goods

Which of the following best describes a change in the quantity demanded?

The change in the quantity consumed based on a change in price

The table above shows the demand schedules for Jill and for all other consumers, as well as the market supply schedule for the same good. The equilibrium price in this market is

$7

Which of the following would shift the demand curve to the right?

A 4% rise in consumer income.

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

A change in demand causes the demand curve to shift, a change in quantity demanded causes a movement along the price and is a price change.

5 demand shifters

· Causes of a shift in the demand curve · Consumer Tastes (Preferences) · Number of Consumers (Buyers) · Consumer Incomes (Income Effect) o Normal Goods: Things you can buy when income is normal; (direct relationship tohigh income: steaks, luxury goods) o Inferior Goods: ramen, hot dogs, SPAM · Prices of Related Goods o Substitute Goods- Coke and Pepsi, Crest and Colgate (Price goes up; Demand goes up)

Consumer surplus

· Difference between what consumers and willing to pay for a good or service and what they actually do pay on top

Producer surplus

· Difference between what price producers are wiling to sell for good or service and what price they actually sell it for. bottom

What three concepts explain why demand curves are downward sloping?

· Law of Diminishing Marginal Utility · Income Effect · Substitution Effect: if prices increase; we will find a substitute

Deadweight loss

· Loss of economic efficiency · Lost consumer and producer surplus · Represents a lack of ALLOCATIVE EFFICIENCY à price = marginal cost · Occurs when the market is not at the competitive equilibrium · Primarily arise from the following: · Inefficient allocation of resources

Which of the following would cause the shift pictured above? SUPPLY INCREASE

An improvement in technology

Which of the following will shift the demand curve for steaks to the right? Assume steaks are considered a normal good.

An increase in income around the country

Which of the following would shift the supply of a good or service to the left?

An increase in the cost of production

Assume the market is in equilibrium for the graph above. Which of the following letter combinations shows producer surplus? ON THE BOTTOM

CFD

A change in the supply of cucumbers can be caused by all of the following EXCEPT:

Change in price of the cucumbers

Which of the following would cause the shift pictured above? DEMAND INCREASE

Consumer expectations that a shortage will occur in the future.

Goods A and B are substitutes. An increase in the price of A will cause the demand for B to

increase

Which of the following appropriately describes the reason for the downward slope of the demand curve?

Diminishing Marginal Utility

Assume that consumers consider popcorn and pretzels to be substitutes. A significant decrease in the supply of popcorn will affect the pretzel market by

Increasing the demand for pretzels and therefore the price of pretzels

When a consumer's income increases, and the quantity demanded for Good A decreases, we can assume that Good A is this type of good.

Inferior Good

Why is the market supply curve upward-sloping?

It is upward sloping because price and quantity have a direct relationship to supply

Assume that the current market equilibrium price for milk is $2.80 per gallon and that 5 million gallons are sold per day. If the government sets a price ceiling of $2.00 per gallon, which of the following is true?

Less than 5 million gallons of milk will be sold.

Price ceiling

Maximum legal price a seller may charge for a product or service a. At or below = legal b. Above = illegal

Assume the market for Red Bull. What would happen to the Equilibrium Price and Quantity if workers for the Red Bull Corporation went on strike. At the same time, Monster Energy Drinks lowered their prices by 50%.

Price effect will be indeterminate, quantity will decrease

What will be the effect on equilibrium price and equilibrium quantity if the supply increases and the demand increases?

Price effect will be indeterminate, quantity will increase

The apple market is in equilibrium. Suppose we observe that apple growers are using more presticides to increase apple production. At the same time, we hear that the price of pears, a substitute for apples is rising. Which of hte following is a reasonable prediction for the new price and quantity of apples?

Price is indeterminate, but quantity rises

Assume the market for Red Bull. What would happen to the Equilibrium Price and Quantity if the government created a tax on all companies that make energy drinks. At the same time, a scientific study is released on CNN that energy drinks increase cardiovascular health.

Price will increase, quantity effect will be indeterminate

What will be the effect on equilibrium price and equilibrium quantity if the supply decreases and the demand increases?

Price will increase, quantity effect will be indeterminate

5 supply shifter

Resource prices Technology Taxes and Subsidies- (free money to produce) à increase supply- more subsidies/less=less a. Cut tax à increase supply (companies have to pay less taxes) b. Tax increase à decrease supply (more money has to go to taxes) Prices of other goods à increase in price of steal (steal is used to make cars) à decrease in supply because steal is used to make cars Price expectations à company expects price to go up in 6 months; wait till prices go up so you decrease supply (if you're a company you want to wait for price to go up to produce) Number of sellers in the market à more companies to produce = increase in supply Government regulation à more govt. reg. = decrease supply (companies can't do what they want) WAGES à SUPPLY SHIFTER

If shirts and ties are complements and the price of shirts increases due to an increase in the price of cotton, which of the following is most likely to occur in the market for ties in the short run?

The equilibrium price and quantity of ties will decrease

Which of the following will most likely happen in the market for good X if the price of good X decreases?

The quantity demanded for good X will increase

Law of Demand

There is an inverse relationship between price and quantity demanded a. Ex: Price Goes Up, Our Quantity Demanded Goes Down Things become more unattractive as they get higher in price to consumers and vice versa

Assume the government imposes a price floor above the current equilibrium price in the market for a good. Which of the following will occur?

There will be an excess supply of the good.

Assume that the market demand for a good is perfectly inelastic, the market supply for the good is perfectly elastic, and the market is in equilibrium. If there is a decrease in the price of a key input used in the production of the good, which of the following will occur?

There will be no change in the producer surplus.

A good is classified as inferior if the demand for it increases when

consumers incomes decrease.

Good N is a normal good. A decrease in income will cause the demand for N to

decrease

Good R is an inferior good. A decrease in income will cause the demand for R to

decrease

The competitive market provides the best outcome for society because

the total economic surplus is maximized.