2.1 Supply & Demand

Why do substitutes work?

Because most consumers are willing to shift their purchase from one to the other good when prices change.

Why do complements work?

Because these two products interrelate with each other, such as cars and petrol.

How do we distinguish between a movement along the curve and a shift of the demand curve?

Change in demand refers to shifts in the demand curve. Change in the quantity demanded refers to a movement along the demand curve.

How do we distinguish between a movement along the curve and a shift of the curve?

Change in the quantity supplied is a movement along the curve. Change in supply refers to shifts in the supply curve.

What happens if production costs rise?

If production cost rise, firms can produce less quantity at the same price. Thus, the supply curve shifts to the left (inwards).

What happens if production costs fall?

If production costs fall, firms can produce the same quantity and a lower price or a larger quantity at the same price. The supply curve shifts to the right.

What happens to the demand curve if income levels increase?

If the market price were held constant, quantity demanded would increase at any price, thus the result would be a shift to the right of the entire demand curve.

What other variables affect demand?

Income is especially important.

How does falling cost (of raw material) affect the supply curve?

Lower cost of any kind make production more profitable, encouraging existing firms to expand production and enabling new firms to enter the market.

What other variables beside price affect the quantity supplied?

Production cost such as wages, interest charges, and the cost of raw materials.

What does the basic supply and demand model explains?

The basic model of supply and demand helps to understand why and how prices change, and what happens when the government intervenes in a market.

What is the demand curve?

The demand curve is a relationship between the quantity of a good that consumers are willing to buy and the price of the good.

What does the demand curve shows?

The demand curve shows how much how a good consumers are willing to buy as the price per unit changes. We can write this relationship as Qd = Qd(P)

In which direction slopes the demand curve and why?

The demand curve slopes downwards because consumers are usually ready to buy more of the price is lower. A lower price may motivate consumers who already have been buying the good to consumer larger quantities. A lower price also attracts new customers, which were previously unable to afford the good.

What does the horizontal axis of the supply curve shows?

The horizontal axis shows the total quantity supplied, Q, measured in the number of units per period.

How does supply respond to price changes?

The response of quantity supplied to changes in price represents a shift along the supply curve.

How does supply respond to changes in other variables?

The response of supply to changes in other supply-determining variables is shown graphically as a shift of the supply curve itself.

What is the relationship illustrated in a supply curve?

The supply curve is a relationship between the quantity supplied and the price. We can write this relationship as Qs = Qs(P)

What does the supply curve shows?

The supply curve shows the quantity of a good that producers are willing to sell at a given price, holding constant any other factors.

In which direction slopes the supply curve and why?

The supply curve slopes upward because, the higher the price, the more that firms are able and willing to produce and sell. A higher price motivates existing firms to expand production, or new firms to enter the market

What does the supply-demand model combines?

The supply-demand combines two important concepts: a supply curve and a demand curve.

What does the vertical axis of the supply curve shows?

The vertical axis shows the price of a good, P, measured in dollars per unit. This is the price sellers receive for a given quantity supplied.

What are complements?

Two goods for which an increase in the price of one leads to a decrease in the quantity of the other.

What are substitutes?

Two goods for which an increase in the price of one leads to an increase in the quantity of the other.