Supply and Demand

Question 1

Producer

Answer 1

• Making a product/service for sale to a consumer
  – incentive to produce is to maximize profits.

Question 2

Consumer

Answer 2

• Someone who purchases a good or service.
• Consumers have incentive to economize by getting as much as they can for the money they
  spend (we want to save)

Question 3

Movement vs. shift:

Answer 3

1. Movement is changing a point on the curve.
2. Shift is a new curve moving either right or left of the original

Question 4

Law of Supply

Answer 4

as price goes up, so does production (see supply curve) because the producer has an incentive to produce more – more profit!
An upward sloping supply curve proves the law of supply. At higher prices, more is supplied.

Question 5

Law of Demand

Answer 5

as price goes up, demand goes down (see demand curve) because consumers have an
incentive to buy more when it is on sell, lower price. We have less of an incentive to buy when items are
full price because we have to pay more money.

Question 6

Substitution effect

Answer 6

we substitute products to save money (we buy the cheaper similar
item)

Question 7

Law of Diminishing marginal utility

Answer 7

as we consume more, each additional unit becomes
less useful. So, producers usually must provide us with incentives to buy more (ex. Buy one,
get one free)

Question 8

Income effect

Answer 8

the change in prices effect our purchasing power (how much we must spend in the market) and that will affect our demand

Question 9

A downward sloping demand curve shows the law of demand. Demand increases as price decreases,
vice versa.

Answer 9

A downward sloping demand curve shows the law of demand. Demand increases as price decreases, vice versa.

Question 10

Reasons for changes in demand (or Determinants of supply and demand) in curves

Answer 10

All of the shifters
listed below can increase (shift right) or decrease (shift left) demand.

Question 11

Determinants of demand
TIME

Answer 11

1. T – Taste – our preferences
2. I – Income – how much money we make influences to buy or not to buy.
3. M – Market size – influences to consumer to buy (ex. Announcements, advertisements,
   producers trying to differentiate)
4. E – expectations – what consumers foresee in the future

Question 12

The supply determinants are:
each can cause a shift
4

Answer 12

1. Cost of resources – the input/factors of production used to make the good or service.
2. Government
   a. Subsidy – government payments
   i. Increased payments = more supply
   ii. Less payments = less supply
   b. Taxes – payments to the government
   i. Increased taxes = less supply
   ii. Decreased taxes = more supply
   c. Regulations – Government rules
   i. Increased rules = less supply
   ii. Decreased rules (deregulation)= more supply
3. Technology – machines used in production
   a. New machines = more supply
   b. Broken/old machines = less supply
4. producer expectations

Question 13

Market Equilibrium

Answer 13

occurs when the quantity supplied and the quantity demanded are both equal at
the same price and quantity (see supply and demand curve). Also called equilibrium point and market
clearing price

Question 14

Surplus

Answer 14

exists when the quantity supplied exceeds the quantity demanded at the price offered.

Question 15

Shortage

Answer 15

exists when the quantity demanded exceeds the quantity supplied at the price offered. The
government can ration during a shortage of national importance (ex. During war)

Question 16

price ceilings

Answer 16

USED IN SHORTAGE
government imposed maximum price that can be charged for a good or service

Question 17

price floor

Answer 17

USED IN SURPLUS
government imposed lowest price that can be charged a good or service