CH4: Changes in Demand & Supply

Question 1

How are consumer and producer surplus shown at equilibrium?

Answer 1

Consumer surplus is the triangle above the equilibrium price and below the demand curve (DP1E); producer surplus is the triangle below the equilibrium price and above the supply curve (SP1E).

Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. It represents a gain to consumers.

Producer surplus is the difference between the price producers receive for a good and the minimum price at which they are willing to supply it.

Question 2

What are the effects of an increase or decrease in demand on the equilibrium price and quantity?

Answer 2

An increase in demand shifts the demand curve to the right, raising both the equilibrium price and the equilibrium quantity, ceteris paribus. A decrease in demand shifts the demand curve to the left, leading to a lower equilibrium price and quantity, ceteris paribus.

Question 3

What causes shifts in the supply curve and what are the effects?

Answer 3

An increase in supply shifts the supply curve to the right, resulting in a lower equilibrium price and a higher equilibrium quantity. / A decrease in supply shifts the supply curve leftward, leading to a higher equilibrium price and a lower equilibrium quantity.

Rising costs of production, lower productivity, and increases in prices of alternative or joint products.

Question 4

what are simultaneous changes in demand and supply?

Answer 4

They occur when both demand and supply shift at the same time. The effect on price or quantity depends on the direction and magnitude of each shift. For example:

If demand rises and supply falls, price increases.

If both increase, quantity rises but price is uncertain.

Question 5

what causes shifts in the demand curve?

Answer 5

Factors include an increase in the price of substitute goods, higher consumer income, positive changes in consumer preferences, or expectations of future price increases.

Question 6

what is a price ceiling and what are its effects?

Answer 6

A government-imposed maximum price for a good or service, set below equilibrium to make essentials affordable (e.g. rent control).

Effects of a ceiling:
Shortages (demand > supply)
Black markets
Reduced quality or supply
Discourages investment in the affected sector

Cause for ceiling:
High prices hurting consumers

Question 7

what is the interaction between related markets?

Answer 7

When changes in one market affect another due to relationships between goods.

E.g., a cost increase in motorcar production reduces quantity, which lowers demand for tyres, decreasing their price and quantity.

Question 8

which factors can increase supply?

Answer 8

Conditions that cause producers to supply more at every price (rightward shift of the supply curve).
Key Factors:

↓ Production costs (e.g. cheaper inputs)
↑ Technology efficiency
↓ Taxes or ↑ subsidies
More suppliers enter the market
Expectations of lower future prices