AP Review - Supply and Demand

Question 1

Law of Demand

Answer 1

There is an inverse relationship between price and quantity demanded

Question 2

Demand

Answer 2

Different quantities consumers are willing/able to buy at different prices

Question 3

Why does the Law of Demand occur?

Answer 3

1. Substitution effect - price up = consume down = buy substitute
2. Income effect - price down = purchasing power of consumers up = demand up
3. Law of Diminishing Marginal Utility - consume up = satisfaction from consumption down

Question 4

Does price shift the demand curve?

Answer 4

No, it only moves to different points on the curve

Question 5

5 determinants of demand

Answer 5

1. Tastes and preferences
2. # of consumers
3. Price of related goods (coke vs pepsi)
4. Income
5. Future expectations

Question 6

Complementary goods

Answer 6

Goods that are bought and used together (milk + cereal; cereal on sale = milk demand up)

Question 7

What does higher income mean in terms of the brands of goods someone buys?

Answer 7

Higher income means more likely to buy name-brand goods

Question 8

Supply

Answer 8

Different quantities of goods that sellers are willing/able to produce at different prices

Question 9

Law of Supply

Answer 9

Price directly relates to the quantity produced (up = up)

Question 10

5 shifters of supply

Answer 10

1. Price/availability of resources (inputs) [change in worker stuff counts as input]
2. # of sellers
3. Technology
4. Govt. action like taxes and subsidies
5. Expectations of future profit

Question 11

What do shortages do to prices? Surpluses?

Answer 11

Shortages force prices to up, surpluses mean producers lower prices

Question 12

Double Shift Rule (Graphs)

Answer 12

When the two curves (supply and demand) shift simultaneously, either price or quantity will be indeterminant (intersection point will more parallel to one axis)