Chapter 3: Demand, Supply and Price

Question 1

What is the difference between quantity demanded and quantity bought/exchanged?

Answer 1

Q demanded refers to desired quantity

Q bought refers to actual purchases

Question 2

What are some factors which can influence demand?

Answer 2

A product's price
Consumer's income
Prices of other products
Tastes
Population
Expectations about the future

Question 3

What does “ceteris paribus” mean?

Answer 3

Hold all other variables constant

Question 4

A basic hypothesis is that - Ceteris Paribus - the price of a product and the quantity demanded are ________ correlated

Answer 4

Negatively

Question 5

How will changes in variables OTHER THAN PRICE afect the demand curve?

Answer 5

They will shift the demand curve to a new position
Leftwards - increase in demand
Rightwards - decrease in demand

Question 6

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

Answer 6

Change in demand: shift of entire curve

Change in Q demanded: Movement from one point to any other point (could be on same curve or a new one)

Question 7

How does demand change when income rises for a normal good? For an inferior good?

Answer 7

Normal good: demand increases with income
Inferior good: demand decreases with income

People will buy Grey Goose instead of Smirnoff if they get a raise

Question 8

What are complementary goods?

Answer 8

Goods that are consumed together, eg Milk and Cereal

Question 9

What are substitute goods?

Answer 9

Goods consumed en lieu of each other, eg coffee and tea

Question 10

What is quantity supplied?

Answer 10

The amount of a product that firms DESIRE to sell in some time period

Not necessarily the same as quantity actually sold

Question 11

A basic hypothesis is that - Ceteris Paribus - the price of a product and the quantity supplied are ________ correlated

Answer 11

Positively

Producers are interested in making profits. If a product is more expensive, selling it is more profitable for them

Question 12

A change in what variable is necessary to shift the entire curve of supply?

Answer 12

Any variable besides price

Question 13

What is the difference between a change in supply and a change in quantity supplied?

Answer 13

Change in supply: shift of entire curve

Change in Q supplied: Movement from one point to any other point (could be on same curve or a new one)

Question 14

What happens to the Supply and Demand curves of a product if its substitute good increases in price?

Answer 14

Demand: shifts right (more demand)
Supply: Shifts left (less supplied)

Question 15

What happens to the Supply and Demand curves of a product if its complement good increases in price?

Answer 15

Demand: shifts left (less demand)
Supply: Shifts right (more supplied)

Question 16

How can we define a market?

Answer 16

Any situation in which buyers and sellers negotiate the transaction of some goods or services
Markets can differ in the degree of competition

In a perfectly competitive market, buyers and sellers are price takers

Question 17

What happens at equilibrium price?

Answer 17

Every buyer finds a seller and every seller finds a buyer - the market “clears”

ABOVE this price, there is an excess supply
BELOW this price, there is an excess demand

Question 18

What happens above the equilibrium price?

Answer 18

Q supplied exceeds Q demanded, “downwards” pressure on prices

Question 19

What happens below the equilibrium price?

Answer 19

Q demanded exceeds Q supplied, “upwards” pressure on prices

Question 20

If Quantity Demanded is defined as Q = a -bP
and Q supplied is defined as Q = c + dP
How do you calculate equilibrium price?
What about equilibrium quantity?

Answer 20

Substitute equations and solve for P
P = (a-c)/(b-d)

Plug back into either equation for Q:
Q = (ad + bc)/(b+d)

Question 21

An increase in demand causes a(n) ______ in both equilibrium price and quantity, whereas a decrease in demand causes a(n) ________ in equilibrium price and quantity

Answer 21

Increase

Decrease

Question 22

An increase in supply causes a(n) ______ in both the equilibrium price and quantity, whereas a decrease in demand causes a(n) _______ in equilibrium price and quantity

Answer 22

Decrease

Increase

Question 23

If the demand function for good X is defined as
Q = 400 - 0.25 P(x) + 0.01 P(z) - 0.001Y
Where 
P(x) is the price of good X
P(z) is the price of good Z
and Y is the average income,

What type of good is X? What is the relation of X and Z

Answer 23

X is an inferior good, substitute to Z

Question 24

What is the difference between absolute and relative price?

Answer 24

Absolute price: The amount of money that must be spent to acquire one unit of that product
Relative price: The price of one good in terms of another

Demand and supply curves are drawn in terms of relative prices